Regrettable Comments by Bank CEOs
Friday, August 1, 2008
A look back at nine unforgettable statements by bank chief executives who would strike them from the record if they could.
It’s not easy being a bank C.E.O. these days. Just ask John Thain. Nearly every promise he’s made to investors since he took the helm at Merrill Lynch has been broken. With the uncertainty in these turbulent credit markets, banking C.E.O.’s would be thankful if they never had to say another word to investors and reporters. But fortunately for us, that’s not the case. Let’s take a trip down memory lane of the most outrageously regrettable comments by some of the best paid executives in the country.
1. John Thain: Repeating It Won’t Make it True
“We’re very confident that we have the capital base now that we need to go forward in 2008.” – January 18, 2008.
“…Today I can say that we will not need additional funds. These problems are behind us. We will not return to the market.” – March 8, 2008
“We have more capital than we need, so we can say to the market that we don’t need more injections. We can confirm that we have tackled the problem.” – March 16, 2008
John Thain learned the hard way that saying the same thing over and over won’t necessarily make it come true. The truth is, Merrill was far from finished tapping the markets. Earlier this month, it raised $8 billion by selling stakes in Bloomberg and Financial Data Services. And on Monday it announced plans to sell $8.5 billion of new shares.
2. Dick Fuld: Do I Believe Myself? No.
“Do we have some stuff on the books that would be tough to get rid of? Yes. Am I worried about it? No. If you have some repricing of these things will we lose some money? Yes. Is it going to kill us? Of course not.”
—Richard Fuld, Lehman Brothers C.E.O. last summer, according to the Financial Times.
In fact, the jury’s still out on whether or not this credit crisis will eventually kill Fuld or Lehman, but it sure killed Fuld’s top two deputies, former C.F.O. Erin Callan and former C.O.O. Joseph Gregory, who were fired earlier this year.
Fuld keeps his on-the-record comments to a minimum, but he made another one in April he may have come to regret. “The worst is behind us.” In April? If only.
3. Kerry Killinger: The Mother Lode of Losses
“The mother lode of this company is performing awfully well with record growth numbers coming out of the second quarter. The home-loans business had a challenging first half of the year, but I note that the losses in the second quarter were dramatically less than the first quarter and we think we’re on track to get that unit back to profitability before the end of the year even in these challenging conditions.”
—Washington Mutual chief executive Kerry Killinger on August 12, 2007 in the San Francisco Chronicle.
Washington Mutual shares were valued at $35 that day. Today they hover around $4 and change. In the second quarter this year alone, it lost more than $3 billion. Killinger hit the mother lode with this one, alright.
4. Ken Thompson: Mortgages Are Great!
“The mortgage market is going to be a great market in this country for a long time. We’ve got population growth. We’ve got people who are always going to want to live in homes that they own. It’s going to be a great market.”
—Wachovia C.E.O. Ken Thompson on CNBC trying to convince Maria Bartiromo that its $25 billion of Golden West Financial was a smart move, May 15, 2006.
There’s nothing quite like buying at the top of the market is there? The Golden West deal, of course, turned into an absolute disaster for Wachovia’s balance sheet and the deal eventually led to the ouster of Thompson earlier this summer.
5. Martin Sullivan: How to Get Yourself Fired
“But because this business is carefully underwritten and structured with very high attachment points to the multiples of expected losses, we believe the probability that it will sustain an economic loss is close to zero.”
—AIG chief executive Martin Sullivan, speaking to investors on December 5, 2007 about the firm’s portfolio of credit default swaps.
Rule number one for finance chiefs: Never try to estimate potential losses on your investments. Rule number two: Never say the losses will be zero, or close to zero. AIG went on to report $13 billion in losses before Sullivan’s probability of remaining chief executive became less than zero. He left in June.
6. John Mack: Bring It On, Risk.
“Well, number one, I think this firm has the capacity to take a lot more risk than it has in the past. So from that aspect, we’re really using our talent in a more productive way than we have had in the past. I am comfortable with the risk…I think we probably have one of the best overall risk managers in Tom Daula, who oversees all firm risk, and also Zoe growing up on the sales and trading side, mainly trading side risk management, it’s a very strong combination. So I’m comfortable with it. Do we take a lot of risk? Yes.”
—Morgan Stanley chief John Mack at the April 2007 shareholder meeting.
Careful what you wish for there, Mack. Zoe Cruz’s group ended up taking on so much risk it lost $3.6 billion on a single trading desk in 2007. Mack’s confidence in Cruz also fizzled, and she lost her job as part of Mack’s effort to clean house earlier this year.
7. Ken Lewis: Seeing Value Where There’s None
“We believe that in the current turmoil the stock market has been underestimating the value in Countrywide’s operations and assets. This investment reflects our confidence in their business and recognizes the importance of the company in providing home financing across the country. We hope this investment will be a step toward a return to more normal liquidity in the mortgage markets.”
—Bank of America chief executive Ken Lewis in an August 22, 2007 press release announcing a $2 billion investment in Countrywide Financial.
But sometimes Mr. Market is right, Mr. Lewis. Countrywide continued its downward spiral until Bank of America announced plans in January to rescue it by acquiring it for $4.1 billion in stock. When the deal finally closed six months later, the troubled mortgage lender was valued at just $2.5 billion.
8. Vikram Pandit: I Love My New Job
“The first priority of risk has been to make sure that our legacy portfolio of assets in the sub-prime and mortgage areas are separated and managed to be optimized, and we have done that. We have also made sure they are well-capitalized.”
—Vikram Pandit on his first earnings call as the new C.E.O. of Citigroup on January 15, 2008.
We’re sure investors appreciated hearing from the troubled bank’s new boss, but we’re sure they’d have appreciated it more if what he said was true. Three months later, Citi wrote down $12.1 billion ($6 billion from subprime) in losses. Three months after that it wrote down another $7 billion. All told since Pandit’s inaugural comments, Citigroup has raised some $20 billion in new capital. How’s that for well-capitalized?
9. Alan Schwartz: May As Well Have Said It in Pig Latin
“Bear Stearns‘ balance sheet, liquidity, and capital remain strong.”
—Alan Schwartz, chief executive of Bear Stearns, on CNBC, March 12, 2008.
Yes, yes. We saved the best for last, of course. Bear’s balance sheet and liquidity position was so strong it was forced into a fire sale to JP Morgan and the Federal Reserve just days later. The rest is history, and so is Schwartz.
Lately, it seems like everywhere you turn, someone is crowing that they saw the current financial crisis coming. George Soros. John Paulson. Steve Eisman. Armando Falcon. There are so many of them, you wonder who didn’t see it coming. The answer is, well, most people. After the jump, have a look back at some of the stocks chosen in the annual investment guides of some leading publications (including, alas, this one) as smart buys in 2008.
Jon Birger, senior writer, Fortune’s Investors Guide 2008
What he said then: “Question: What do you call it when an $8 billion asset write-down translates into a $30 billion loss in market cap? Answer: an overreaction … Smart investors should buy [Merrill Lynch] stock before everyone else comes to their senses.”
What we know now: Merrill agreed to sell itself Bank of America to avoid a Lehman-like flameout in a deal closing in January. Meanwhile, Merrill’s shares plummeted 77 percent.
Elaine Garzarelli, president of Garzarelli Capital, in Business Week’s Investment Outlook 2008
What she said then: “Garzarelli is advising investors to buy some of the most beaten-down stocks, including those of giant financial institutions such as Lehman Brothers, Bear Stearns, and Merrill Lynch. What would cause her to turn bearish? Not much. ‘Our indicators are extremely bullish.’”
What we know now: As of January 1, none of these firms will still exist. Lehman went bankrupt. JPMorgan and Chase bought Bear Stearns in a fire sale. We all know Merrill’s fate.
Sarah Ketterer, CEO of Causeway Capital Management in Fortune’s Investors Guide 2008
What she said then: Q: “Sarah, where to you see value?” A: “There are [financial firms] that have been tainted by this huge credit problem … Fannie Mae and Freddie Mac have been pummeled. Our stress-test analysis indicates those stocks are at bargain basement prices.”
What we know now: The federal government placed these two lenders under “conservatorship” in September. By then, shares of Fannie and Freddie had lost 90 percent of their value.
Jon Birger, senior writer, in Fortune’s Investors Guide 2008
What he said then: “CEO Jeffrey Immelt has been leading a successful makeover at General Electric, though you wouldn’t know it from GE’s flaccid stock price. Our bet is that in a stormy market investors will gravitate toward the ultimate blue chip.”
What we know now: GE’s stock price has tumbled 55 percent percent this year and it’s on the verge of losing its triple-A credit rating. Analysts are nervous about its financial-services division, which provides about half of GE’s earnings.
Archie MacAllaster, chairman of MacAllaster Pitfield MacKay in Barron’s 2008 Roundtable
What he said then:“A lot of people think Bank of America will cut its dividend, but I don’t think there’s a chance in the world. I think they’ll raise it this year; they have raised it a little in each of the past 20 to 25 years. My target price for the stock is $55.”
What we know now: BofA may not have gone the way of Lehman. But investors who sold when MacAllaster told them to buy were shrewd. The bank’s share price now hovers around $14, and it has slashed its dividend in half.
One of our own: James J. Cramer, contributing editor, in his “Future of Business” column in New York Magazine
What he said then: “Goldman Sachs makes more money than every other brokerage firm in New York combined and finishes the year at $300 a share. Not a prediction — an inevitability.”
What we know now: In mid-December, Goldman Sachs’ share price was $78. The firm also announced a $2.2 billion quarterly loss, its first since going public nine years ago.