Fiction as Truth

One thing I've learned through the years is that people often stretch the truth -- occasionally to the breaking point -- where money is involved.

Call it greed or call it survival (or, perhaps, human nature): the more that is at stake, the greater the risk that you won't get the straight scoop from those who stand to win or lose based on what comes out of their mouths.

As it happens, I once worked with a (very) cynical fund manager who refused to meet with corporate executives -- who have a vested interest, of course, in a rising share price -- because "they are all liars."

While I wouldn't go that far -- aside from anything else, I thinlk that many leaders achieve that standing because they use their skills to create a reality that matches a powerfully optimistic inner vision -- I do think people need to maintain a healthy level of cynicism, especially during unsettled times like the present.

In a New York Times Dealbook blog post, "What Goes Before a Fall? On Wall Street, Reassurance" Andrew Ross Sorkin explores the issue in light of recent developments.

“Jim, we have a great future as an independent company,” Robert K. Steel, Wachovia’s chief executive, told James Cramer on CNBC’s “Mad Money.” “We’re also focused on very exciting prospects when we get things right going forward. I didn’t have time today to talk about the good things going on at Wachovia.”

That interview wasn’t last month or last year — it took place, amazingly, two weeks ago. Wachovia’s shares closed at $10.71 that day. On Monday, Citigroup bought the company for $1 a share.

What was Mr. Steel thinking? Did he think he could “spin” his way to survival?

It is a conundrum that C.E.O.’s of troubled companies seem always to face. In an effort to bolster public confidence in their businesses, they give interviews and try to put on a happy face — right before their companies go off a cliff.

We’ve seen it over and over again, especially during this latest chapter being written about the financial industry, a world that is predicated on betting billions of dollars of paper on little else than the confidence that the guy on the other side of the bet will be in business tomorrow. A rumor that a company is in trouble can turn into a self-fulfilling prophesy unless it’s stamped out quickly, or at least that’s the thinking on Wall Street.

Just rewind the tape: Days before Bear Stearns was sold to JPMorgan Chase, as speculation swirled about Bear’s stability, Alan D. Schwartz, Bear’s chief executive, went on television to say: “We don’t see any pressure on our liquidity, let alone a liquidity crisis.”

That same month, Erin Callan, then Lehman Brothers’ chief financial officer, confidently told analysts that the firm had raised enough capital. “We took care of our full-year needs at that point,” Ms. Callan said in a conference call before exchanging high-fives with her colleagues; her performance moved Lehman’s shares higher even though the company reported miserable numbers.

Of course, after the fact, we point fingers. Were they lying? In hindsight, it always seems that way no matter how they rationalize away their comments.

On Yahoo’s chat boards, a chorus of Wachovia investors, some of whom bought stock after Mr. Steel’s appearance, were raging on Monday. Quoting one poster verbatim: “He should be put in JAIL!!! I saw him on CNBC in the last few weeks & I thought he said “EVERYTHIBG was OK.”

It didn’t help that Mr. Cramer later told his TV audience to buy Wachovia, calling it one of only a few potential “winners” in the $700 billion bailout being proposed, and said that Mr. Steel’s background as the former Treasury under secretary meant he had “a better handle on how this process works than anyone else.”

On Mr. Cramer’s show Monday night, he spent an entire segment apologizing to his viewers about having Mr. Steel on the program and for his own bullish call on Wachovia’s stock. “I screwed up,” he said, referring at one point to Mr. Steel as a friend for 25 years. “I believed in the guy. Did he take advantage of me? Perhaps yes.”

A spokeswoman for Mr. Steel defended his appearance, saying, “The environment we were operating in dramatically changed” between then and now. She added, “If you look at his comments, he tempered them by saying ‘We always do what’s right for shareholders.’ ”In fairness, she’s right about that. Mr. Steel said on the same program that, “We’re a public company. So we’re going to do what’s right for shareholders, I can promise you that.” And at times, he seemed to show some self-restraint, resisting talking directly about Wachovia, instead spending much of the program talking in generalities about the troubles in the market.

But at $1 a share, it wasn’t much of a promise. And to those in the takeover game, Mr. Steel’s promise seemed like a vague hint that he might sell the company, at a premium no less. Shareholders piled in on speculation of a deal, possibly with Morgan Stanley. (A week later, Mr. Steel hired his former employer, Goldman Sachs, to shop the firm.)

But by all accounts, Mr. Steel is a pretty smart guy. He had to know that going on television the same day that Lehman Brothers went bankrupt, Bank of America bought Merrill Lynch and A.I.G. was on the brink of collapse was just asking for trouble. And it’s hard to imagine he didn’t appreciate the precarious state of his own company given the carnage around him. He knew how fast a bank’s fate can turn. Worse, he and all the other happy-talk executives put themselves in legal jeopardy.

It is hard to imagine that taxpayers would spend $700 billion (or any amount) to bail out Wall Street and the economy without some big-name executive going to jail. For better or worse, it is the way our society works. Michael Milken can tell you all about it.

More likely than not, when we start seeing pictures of C.E.O. perp walks, the crime won’t be theft or some other kind of financial chicanery, it will be some kind of fraud — probably lying to the investing public.

“If there are ways people in this room go to jail, it’s probably through crimes of upholstery — the cover-up will kill you,” Joseph A. Grundfest, a professor of law at Stanford University who is a former commissioner of the Securities and Exchange Commission, said at a class for directors of the nation’s Fortune 500 that I attended in 2002 in the aftermath of Enron’s collapse. It’s a great line that I’ve never forgotten.

Comments

[HDJ]

Jim Cramer is the worst. How many bottoms has he called so far?

[malabar]

Unlike the public demanding heads after Enron, Worldcom, Tyco - they are very quiet this time.

[Fu]

The fiction-as-truth starts at the top. Bernanke and Paulson should be locked up for the false statements that they have made. (I thought their statements were laughable at the time, but a lot of investors might have believed them.)

[Independent Accountant]

I don't care what Paulson, Bernanke or any of these other clowns say. No bailout, no way, hell no. Let Goldman, Morgan, Citigroup, etc., fail. You might be surprised. The Republic will survive without them.

[MichaelN]

Mr. Ponzner,

Just reread your book, Financial Armageddon. I was impressed and stunned in my first reading, but the second reading, prompted by one of your daily posts, left me utterly speechless - your economic and financial analysis of the first 75 or so pages makes me wonder if you actually do own a crystal ball.

Having written this, I'd be very grateful if you could use that same grey matter to give us readers your personal opinion of the "Bailout Bill" (now being resurrected).

I am personally conflicted on this important issue. So much of me is opposed for reasons expressed in this post (I simply don't trust Wall St and DC politicians to do anything right - and then they'll only make it worse. Then, if it passes in to law - what happens if it doesn't work "as promised" or things worsen?), but I'm well aware that things are bad regarding credit.

Your book did not anticipate that the Fed, etc. would be so aggressive, so early. I actually believe that your book and similar efforts are influencing the Fed's thinking and actions.

What are YOUR thoughts today? NOT what other writers are discussing or thinking?

Respectively,

Michael Nevins

[roger]

Criticizing & making statements are easy,backing them up is a little
harder.In 29 the monetary machine was thrown into into wild motion
and everybody bought the idea that they could become infinitely
rich with the availability of infinite credit. How quickly we forget
that it is not wise to inflate money,credit & debt beyond a certain
ratio of manufactured wealth. Capts. of finance & industries don't
have the self discipline to resist the lure of infinite wealth.
This is one of the reasons I say depressions are unavoidable