Trend: Government and corporate leaders tend to describe what they want to happen instead of what is happening — we shouldn't confuse their vision with the reality of investing.
John McCain said "the economy is strong" until the Paulson Plan was proposed. Many CEOs and CFOs have reassured investors about their companies right until the end.
Michael Panzner says that many leaders use their skills to create a reality that matches a powerfully optimistic inner vision.
Andrew Ross Sorkin, who writes the Dealbook column at NYTimes.com, describes recent examples. Excerpts below.
Link: Dealbook - What Goes Before a Fall? On Wall Street, Reassurance - NYTimes.com.
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.
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