Every Thursday, Francis Storrs will take an inside look at high-stakes finance and dealmaking. This week: Counting down the five worst predictions of the financial crisis.
Okay, I get it: The financial big guns need to project confidence in these uncertain economic times, lest their empires crumble in a cloud of vicious rumors and worthless stock certificates. Confidence is one thing, wishful thinking is quite another. Lately, we’ve been seeing far too many examples of the latter.
Consider Bear Stearns, the 85-year old investment bank that fell apart in a matter of days this spring. On March 12, CEO Alan Schwartz appeared on CNBC to address rumors that the firm was running out of cash. “We don’t see any pressure on our liquidity,” he said, straightfaced. “Let alone a liquidity crisis.”
In a move that demonstrates nothing if not a liquidity crisis, Bear averted bankruptcy just a few days later by selling itself to JPMorgan at the fire-sale price of $236 million (for those of you keeping track, that meant paying $2 a share for a company that had traded at $170 a year earlier).
Schwartz wasn’t the first person who made a ridiculous prediction when he should have known better. After the jump, my five picks for this year’s most wrong-headed prognosticators.
5) Barney Frank on Fannie Mae and Freddie Mac
“I don’t think it’s going to be necessary,” the chairman of the House Financial Services Committee said last month of a potential government bailout of mortgage giants Fannie Mae and Freddie Mac. Three weeks later, the Treasury announced it would, in fact, bail them out.
4) David H. Ellison on American International Group
“The too-big-too-fail mantra or concept or government policy is, in my opinion, off the table,” the president of mutual-fund company FBR said this week, speaking in part about AIG. “They are not going to save these companies.” Two days later, the Federal Reserve agreed to loan AIG up to $85 billion in one of the largest bailouts in history. (Congratulations fellow taxpayers, we’re now the proud owners of an insurance company!)
3) Richard Fuld on Lehman Brothers
“Do we have some stuff on the books that would be tough to get rid of? Yes.” Lehman Brothers chief executive Richard Fuld said last summer. “Is it going to kill us? Of course not.” This week, Lehman filed for bankruptcy protection. (Honorable mention in the Lehman category should go to Miami-based analyst Richard Bove: “They screwed up,” he said of Lehman in June. “But the fact of the matter is that this firm is sound, it’s well managed and will survive.”)
2) John Thain on Merrill Lynch
Early this year, Merrill Lynch announced a $10-billion loss, but that didn’t stop CEO John Thain from looking on the bright side. “The problem is not a zero, but it is for the most part behind us,” he told the Wall Street Journal. Last Sunday, Thain agreed to sell Merrill to Bank of America for $50 billion.
1) Henry Paulson on the Economy
Even in the worst of times, though, there’s room for optimism. “I think we’re on the right path,” Treasury Secretary Henry Paulson said. “There’s progress.” Of course, Paulson said that back in May–the week before Bear fell. And Bear proved to be first in a long line of dominoes. Talk about progress.
Do you have a favorite ill-timed, ill-conceived prediction? Email it to me at [email protected]