'Remain Calm! All Is Well!'
Nothing really surprises me anymore. I may shake my head in disgust and wonder -- Eliot Spitzer's horrific judgment, or the reality denial from wingnuts -- but by and large, I mostly mutter "Barely Monkeys!" under my breath and then move along. Having opposable thumbs and a big brain is meaningless if you don't bother to use 'em.
The latest subprime subprimate nonsense is the pushback on the "What bullshitters Bear's management are" meme. I rarely invoke this, but I am throwing down the too-inane-to-be-seen-linking-to flag -- you will have to go find the stupidity by yourselves (which we both know you won't bother doing, but trust me, its real, not a straw man).
This whole conversation does give me the opportunity to relate a story to you. I did a Street.com panel several years ago -- Jim Cramer moderated, and Jon Markman was on with me and a few other guys. At one point, I mentioned I almost never speak to senior management, don't listen to conference calls, don't read press releases, don't care what the CEO or CFO claim.
This amazed Jim Cramer -- he all but stopped the panel discussion, made me repeat it, asked me why -- I responded:
• Very few are truly forthcoming. (I make a mental note of those who are, and know I can go to them with very abstract questions).
• They are all salesman whose job it is to present their company in the best possible light. (Hence, whatever they say is mostly unverified assumptions, spin, and wishful thinking. What good does that do for any investor?)
• I'm gullible. Someone tells me something, I tend to believe them. Even more so when they look me in the eye, shake my hand and say it.
• Not speaking to management has enhanced my investor returns.
Along those lines, I came across a very interesting piece by Michael Rapoport. It was hidden away in the offline version of Dow Jones Newswires. (Hey Mike! Great Animal House reference). Rapoport discusses what happens when corporate management get revealed as untrustworthy: "So beyond the liquidity problems, at this point Bear would seem to have
a credibility problem. In fact, there's a lot of that going around
lately."
What's interesting to me about this is that its not just Bear: Thornburg Mortgage, CountryWide, S&P, Moody's all have lost much of their credibility. Think back to the originally announced write-downs of Citibank, BoA, Morgan Stanley, Merrill, UBS -- then look at what was actually written down: You get even more credibility issues. Nothing to see here, move along.
Here's a few paras from Rapoport's column:
"Within a couple of days after Bear Stearns Cos. (BSC) swore up and down that it didn't have any liquidity problems, it admitted Friday morning that it had a liquidity problem.
Bear Stearns announced it was getting an influx of financing from JPMorgan Chase & Co. (JPM) and the Federal Reserve Bank of New York -- a move that amounts to a bailout of Bear amid mushrooming concerns about its liquidity. The company said its liquidity had "deteriorated significantly" within the past 24 hours.
This despite the fact that Bear had insisted all week that its liquidity wasn't at risk, persistent market rumors notwithstanding. The company said Monday there was "absolutely no truth" to the rumors. On Wednesday, Chief Executive Alan Schwartz said, "Our liquidity position has not changed at all. Our balance sheet has not weakened at all." (A Bear spokeswoman couldn't immediately be reached for comment Friday.)
So beyond the liquidity problems, at this point Bear would seem to have a credibility problem. In fact, there's a lot of that going around lately.~~~
Still, it strains credulity to think that a bank as large and sophisticated as Bear Stearns detected no warning signs whatsoever that a liquidity problem might be in the offing. And even if the market has gotten panicky, and thus endangered companies which by all rights should be fine, this is something that's been building for months. Shouldn't a reasonable company have taken steps by now to reduce its exposure to these violent dips in the market?
In short, when companies contend they're blameless for the way things unfolded, and shouldn't be held responsible for things they said that turned out not to be true, they may not be entirely, uh, credible.
So in addition to "Animal House," let's haul out another pop-culture touchstone for advice. As they used to say on "The X-Files': Trust no one."
That's pretty good advice for even experienced investors . . .
>
Source:
Bear's 'Remain Calm! All Is Well!' Problem
MICHAEL RAPOPORT
DOW JONES NEWSWIRES COLUMN
March 14, 2008 3:28 p.m. EDT
No URL
Michael Rapoport is one of four "In the Money" columnists who take a sophisticated look at the value of companies, and their securities, and explore unique trading strategies.
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After a while, people can begin to believe their own bulls**t. Schwartz would probably have passed a lie detector on Wednesday. But talk is cheap, and at some point the rubber has to meet the road. The wink and nod can only go so far, as the Street smelled blood and went for the kill. But what can you expect from the CEO of one company when the President states that there is no recession, and the Secretary of the Treasury states that we have a strong dollar policy. I am not sure who these messages are geared to. Nobody believes them. Why not just come out and tell people the truth. I guess they feel we "can't handle the truth".
Posted by: njdoc | Mar 16, 2008 12:29:55 PM
Those who seek gain via making dishonest statements to a gullible public are exactly why what we are going through in the financial sector is truly a con game.
Until you are confident that they won't rip you off, they can't rip you off. The very minute you trust these folks is the very minute you get separated from your money. Even if they're caught, arrested, indicted, tried, and convicted, you'll never see your money again.
There was a discussion recently about the value of "good will" on a company's books. "Good will" is not quantifiable - its binary. Either you have it or you don't.
Good will has just gone to zero.
Posted by: Marcus Aurelius | Mar 16, 2008 12:33:53 PM
I know that some really smart people read this blog and I need some help. I have a shitload of money at Bear prime brokerage. No debit balances, small cash credit balance and the rest in listed stocks. My attorney tells me me I will be ok if Bear goes belly up, but
what I have been reading this morning is scaring me to death. Any thoughts anyone?
P.S. Don't bother telling me how stupid I am, I know I should have bailed weeks ago.
Posted by: dan in michigan | Mar 16, 2008 12:38:09 PM
Barry,
You speak directly to "symptoms of a disease," that a Harvard Business Review article calls "The Smart-Talk Trap:"
From the beginning of our educational experience, we are all taught to "talk smart" but are never required to "do" anything smart...
Business schools are especially guilty of praising students for "class participation" and even giving higher grades for making "smart" remarks in class but the students never really implement any of their so-called ideas into action...
Climbing the corporate ladder has more to do with talking smart than actually "doing" something smart...
There is a large gap between "knowing" and "doing." Similarly, there is a large gap between "inspiration" and "action."
It is interesting to see that most CEO's fall from grace once the "smart talk" loses its effectiveness and the rest of the world finally catches on that the CEO never really did anything but talk "smart."
I'm thankful everyday that I removed myself from the corporate world and started my own firm...
Posted by: The Financial Philosopher | Mar 16, 2008 12:38:25 PM
dan in michigan:
Posted by: mikkel | Mar 16, 2008 12:51:56 PM
dan in michigan:
I got this from their site directly:
"If the distributions from Customer Property are not sufficient to satisfy Customers' claims for the Net Equity in their accounts, SIPC protection would be available to satisfy Customer claims for any remaining shortfall in their Net Equity, up to $500,000 per Customer (of which up to $100,000 may be for cash claims)."
So it looks like that insurance is all they have. Several brokerages have $25 million per account insurance through probably Lloyds, but who knows if that insurance will actually last.
Posted by: mikkel | Mar 16, 2008 1:01:17 PM
cramer says you have to do your homework. how well has that worked.
just last week on mad money a caller asked him about pulling money out of bsc. cramer said no way bear is safe. so much for homework.
Posted by: vhehn | Mar 16, 2008 1:01:57 PM
Marcus Aurelius is right on. I will add that if there is one thing that terrifies marketers, it's losing name brand. We have a MASSIVE loss of name brand in government and wall street. People can't differentiate between government talk and corporate propaganda. People notice the quick reaction of the White House when the stock market is tanking versus "low priority" events like a tsunami or a hurricane in New Orleans. Two and two have been put together and the answer is negative return on investment for our taxes. Adding insult to injury, our taxes are obligatory. We expect business people to lie. However, we expect integrity to be a bottom line value, not acting skills. When our pocketbook gets hit by a depression, the veneer of civilized behavior quickly disappears.
The people responsible for all this shit are painfully aware of the need for an escape hatch. Becoming invisible is the next big thing for these Rasputins. If we let the press cover their tracks, they'll get away.
Posted by: AGG | Mar 16, 2008 1:10:33 PM
The word "wingnuts" is always a sign of sober, dispassionate analysis.
~~~
BR: I am "passionate" in identifying those who continually ignore reality, and attempt to mislead the investing public. Wingnut was "soberly" chosen as a word to describe those radicals who believe that ideology trumps reality. I have the same disdain for the moonbats on the other side of the crazy aisle.
Mark, are you denying that there are people who are reality challenged? There has been a parade of folks who challenge science, rail against empirical-based measurements and the scientific method.
The organization formerly known as the Republican party has seen a significant part of it taken over by religious zealots.
Posted by: Mark Ragowski | Mar 16, 2008 1:11:05 PM
One reason that this culture of bullshit, spin, and denial seems so pervasive in the business world and bureacratic world is that at many organizations those individuals with the integrity and foresight to speak up when bad decisions are being made by senior management are routinely marginalized. Over the past 25 years I've worked at a number of professional consulting firms of small, middling, and large size, and at each company the top management issued a lot of noise about valuing employees who are independent thinkers. Unfortunately, nothing could have been farther from the truth; those individuals who made the mistake of suggesting alternative decisions about both trivial and important matters—regardless of how diplomatically expressed—were never the individuals who received promotions; they were generally shunted aside and frequently shown the door. Those who did rise up the corporate or management ladder, even if nominally competent in their jobs, were invariably cheerleading yes-men and women who made a big show of enthusiastically praising the decisions of their superiors.
Once such a culture becomes well-established, it's self-perpetuating and self-distilling, and inevitably the company or organization will come to be headed by a pathologically-insecure egomaniac who requires servile obeisance from everyone who works directly with them.
I've hammered this experience home with my recent college-graduate daughter, who's now making her way in the working world. I've told her that maintaining personal integrity is invaluable, and that when the circumstances require, she needs to have the courage to speak up. I've also told her that doing so is likely to result in an unfavorable evaluation, so she should not have any rosy illusions about the result. She should be very, very skeptical when an employer states he wants truly independent thinkers. Based on my experience, the large majority of business owners and senior managers who state this are lying to themselves and to their employees. The ones that are truthful are generally the best people to work with.
Posted by: bluestatedon | Mar 16, 2008 1:12:39 PM
Seems to me the only thing left stamped "Made in U.S.A" is bullshit.
Posted by: Winston Munn | Mar 16, 2008 1:16:46 PM
Makes one wonder why Visa's IPO, is being moved up? Talk about a risky bet.
Posted by: JustinTheSkeptic | Mar 16, 2008 1:18:47 PM
Barry,
I know you probably have been thinking about the daisy chain of events wich continue to cascade along in a growing crescendo, but I want to bring to your attention the Captive Insurance problem. Capitalizaltion is weak because of off shore leverage plays. The leverage is unwinding and the triggers for Capitive Insurance claims are activating as we speak. The problem is that there is no there. This is big and there is no oversight.
Posted by: AGG | Mar 16, 2008 1:24:51 PM
Sometimes on conference calls they will throw out a number that will allow you to complete an equation based on numbers already in their Qs or Ks.
Why you would want to listen to any of the other blather is beyond me.
Posted by: russell120 | Mar 16, 2008 1:34:08 PM
When a business like Bear Sterns is levered at 20 to one, eventually, something will knock them out. Then, it doesn't take much of a loss in confidence to crush them. Consistent, outsize risk taking is not a long-term successful business model.
Re. 'Remain calm all is well,' today Paulson said, He'll `Do What It Takes' to Calm Markets.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aAYpMR95jhiY&refer=home
A few days ago, and for some time, he's been saying there will be no bailout.
http://latimesblogs.latimes.com/laland/2008/02/paulson-no-bail.html
So there's no philosophy in this White House, just expediency. Their ideology is sloganeering (think Medicare drug benefit... think 2004 Zero-down mortgage rules... think 9.4T debt etc..)
Cramer's philosophy of education is good, but his success was during the pre-Reg FD days when big spenders at their prime brokers - like him - would get the first call on earnings etc... (aka insiders get rich, you get screwed. Reg FD was one of Clinton's best initiatives.) So the fact that he's memorized a bunch of stocks is irrelevant to today's market. As Warren Buffet says, "If past history was all there was to the game, the richest people would be librarians."
Posted by: VennData | Mar 16, 2008 1:38:41 PM
bluestatedon,
Well put. I wish you well. I did the same with my daughter and she figured it out and went the wrong way because of the money. I hope that in the present environment, she'll come to her senses.
Posted by: AGG | Mar 16, 2008 1:39:26 PM
Barry, You share a common practice with an investor who Buffet admires greatly. Walter Schloss. From 1956-2000 he and his son Edwin had a 15.3% compound annual return.*
*Book by Bruce Greenwald-"Value Investing, From Graham to Buffet and Beyond".
Speaking of great books, just re-read parts of "When Genius Failed". During the LTCM bailout meetings guess who refused to pony up $$$ to mitigate that financial crisis...Mr. James Cayne of....drum roll....Bear Stearns. Bear had the least exposure of the consortium and opted to seek out its own self-interest...
Posted by: Dave Darcy | Mar 16, 2008 1:55:01 PM
bluestatedon,
Your comments are dead on the mark. After working in the startup world, I decided to shift to a large corporation for a spell. The waste of resources and lack of utilization of the talent in the corporate workforce is appalling. The vast majority of the inefficiency stems from the problems which you aptly describe: insecure management that does not value talent objectively, or is incapable of recognizing talent.
Posted by: TP | Mar 16, 2008 2:01:23 PM
As someone who really all too rarely here's anyone anywhere identifying with being 'reality based' and intent on not being influenced by spin, first I want to say hats off to you barry, and thanks for giving hope that it's possible to survive in this crazy america and still be interested in 'facts'. You are definitely a stand out member of the 'what's real' crowd, in my book.
but... (:)) you are being way, way, way too nice to the CEO's/management/marketers of US corporations. Anyone with a 'fact based approach' has known for a long time that CEO's etc. have been shooveling horse hockey in their public pronouncements as a general modus operandi for decades now. No this current event shows something much worse -- two things really.
1) it shows that most of them have no idea what they are doing. It's one thing to talk a good game to the pols and day traders, it's another thing to pull down massive salaries making decisions about things you do not comprehend. That takes real stones. And, it makes the rest of us not just suckers for believing your spin, but losers because we are going to get taken down with your titanic... which brings up number two....
2) Actually they aren't idiots sinking the ship -- they are very effectively manipulating the social/political/economic reality for their own personal benefit. That doesn't make them 'untrustworthy', it makes them con-men to the corporations they were supposedly 'running'. Having now effectively taken control of the lifeboats, they have left the plebes stuck on the ship.
to say 'don't trust them' is closing the barn door too late. The issue isn't trusting a bunch of con-men who just got paid 500 million dollars to destroy the economy of the once most powerful country on earth. The issue is what to do about it. There is the retribution side -- which no one is yet talking about -- and there is the looking forward side: just exactly how do we expect someone who has no actual consequences for failing have any probability what so ever of giving a damn about the consequences of his decisions? private control of public corporations... wow neat. Pass the parachutes please.
Posted by: VoiceFromTheWilderness | Mar 16, 2008 2:05:20 PM
How can a market function when credibility is in question? Numbers from corporations, analysts, the FED, and Government are in question. We went from Dot Com bubble to Housing bubble to Uncertainty bubble.
Posted by: Lars | Mar 16, 2008 2:24:38 PM
Barry,
It's all about accountability. If noone pays the price for poor performance, bad judgement, and outright criminality, the "system" starts to disintegrate. You know the examples but a small beginner list would be:
1. Giving medals to the guys that screwed up the war in Iraq.
2. Still not prosecutoing a La congressman who was found to have 90K in cash in his freezer.
3. Giving huge exit bonuses to Wall St execs as their companies lose billions of dollars and swhareholder equity sinks.
Until people start paying the price, there will be continuing chaos and a declining dollar. I will not be holding my breath anytime soon.
Posted by: larster | Mar 16, 2008 2:26:17 PM
Pretty good discussions.
Leverage of 20x, 30x or more plus a market down turn of less than 20% gets you to exactly where we find ourselves right now.
The control of leverage is totally off when $1 million bonuses can be given out by the firm to Investment Bankers on the upside and tax payer bail-outs are given back to the firm on the downside.
Plus free market concepts on the upside; but government bail-outs on the downside. This financial methodology must be soundly broken; otherwise, the entire financial system will fail.
Posted by: BG | Mar 16, 2008 2:26:25 PM
Agree with 90% of what was said above. That said, it was just a run on a bank.
George Bailey "but Elmer, your money is invested in Walter's house" and so on and so on.
Too little leverage can be as bad as too much. The Golden Mean is out there for each company and individual. I'll tell you a secret....I've got debt and I'm damn proud of it. Matter of fact, I could use some more. The problem now is that credit standards are going to get so tight that it will be impossible for the worthy to borrow a farthing!
Debt money became a commodity and inspired a 'tragedy of the commons.'
Posted by: Ross | Mar 16, 2008 2:48:04 PM
MBSs for treas. bonds tells me bernanke is tripping
Posted by: rawdawgbuffalo | Mar 16, 2008 3:01:30 PM
Quotes before the Great Depression;
"There is nothing in the situation to be disturbed about." - Secretary of the Treasury Andrew Mellon, Feb 1930
"I have no fear of another comparable decline."- Arthur W. Loasby (President of the Equitable Trust Company), quoted in NYT, Friday, October 25, 1929
"There will be no interruption of our permanent prosperity."- Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928
"This crash is not going to have much effect on business."- Arthur Reynolds, Chairman of Continental Illinois Bank of Chicago, October 24, 1929"
"This is the time to buy stocks."- R. W. McNeel, market analyst, New York Herald Tribune, October 30, 1929
"...good stocks are cheap at these prices."- Goodbody and Company market letter quoted in The New York Times, Friday, October 25, 1929
Etc..Etc..Etc..Etc..
Etc..Etc..Etc..Etc......
Posted by: David | Mar 16, 2008 3:05:54 PM
