Most boneheaded financial moves of 2008
We hardly know where to begin this year -- what with the rogue traders, megalomaniac CEOs, billion-dollar losses and utter financial meltdown -- but in the end, we think these 7 offenses, and their many practitioners, are the worst of the bunch.
By Catherine Holahan, MSN Money
This is part one of a year-end wrap-up package. To read Part 2, on the year's best moves, click here.
This year, many of the brightest minds in business made some truly boneheaded moves. Some may blame the messes they caused on bad luck. Some may blame it on fear. But investors should definitely blame some of it on greed. We do.
In fact, we blame billions of dollars in losses on greed, pride, sloth, gluttony and the rest of the seven deadly sins, to remind all that great wealth and power exist side by side with human frailties familiar to us all.
Here is MSN Money's staff-generated list of the biggest financial blunders of the year, together with our best shot at explaining how people could make mistakes this huge.
Tell us: Your pick for 2008's dumbest money moves
Jerome Kerviel, Société Générale's (SCGLF, news, msgs) rogue trader.
Kerviel, a former options trader at France's second-largest bank, is this year's poster boy for risk tolerance run amok. It didn't appear to bother Kerviel when risky positions collapsed. He doubled down, then doubled down again. Société Générale alleges the 31-year-old manipulated its systems to place as much as €50 billion (about $63 billion at today's exchange rate) on market bets, many of which went bad in the end.
In January, the bank blamed a nearly €5 billion loss on Kerviel. They said he had mocked up fraudulent hedges to conceal the all-or-nothing nature of the risk he had taken on, in essence treating bank funds like his own personal blackjack stash. Kerviel maintains the bank knew what he was doing and didn't care as long as he made money. Way to be greedy, Kerviel.
Also afflicted: mortgage-backed securities traders.
But let's not let the bank off the hook. Or Wall Street. Kerviel's alleged actions are emblematic of a trading culture that turned some of the world's biggest financial institutions into casinos. Obsession with quarterly profits encouraged too much risk taking, too much leverage and too little careful research and planning for the long term. The attitude on Wall Street seemed to be that as long as you're making money this quarter, the potential for disaster doesn't matter. Not to worry about those pesky cyclical real-estate downturns.
Jerry Yang, the departing CEO of Yahoo (YHOO, news, msgs).
Any observer who read the details on the negotiations between Jerry Yang and Microsoft (MSFT, news, msgs)CEO Steve Ballmer could see that something other than Yahoo's long-term earnings potential was behind Yang's dogged refusal to accept Microsoft's $33-per-share acquisition offer.
The problem was Yang's ego. Yang wanted to keep Yahoo -- the company he built from nothing with partner David Filo -- independent, so he could be the boss. His attitude seems to have changed after Yahoo's stock went into a nose dive last summer.
Now, Microsoft and Yahoo may be negotiating again for Yahoo's search business, according to London's Sunday Times. (Microsoft, the publisher of MSN Money, declined to comment on the news.)
You can bet that the offer on the table -- if there is one -- won't come close to what Microsoft was once willing to pay. Yahoo's stock was trading at less than $12 per share last time we checked, and its market capitalization was under $16 billion. When Microsoft made its initial offer in February, Yahoo was trading around $20 per share and had a market cap of $25.6 billion.
Also afflicted: Rick Wagoner, the CEO of General Motors (GM, news, msgs); Alan Mulally, the CEO of Ford Motor (F, news, msgs); and Robert Nardelli, the CEO of Chrysler.
Is coach really that bad? Why would the CEOs of America's three faltering auto manufacturers, on the eve of asking Congress to approve billions in taxpayer-supplied aid, in the midst of a recession, each fly a private jet to Washington to meet with lawmakers?
Talk about unapologetic pride. But they ain't too proud to beg. Now it seems they have learned their lesson. After Congress rejected initial appeals for aid, the CEOs returned to D.C. in a style more fitting for folks arguing to save American auto manufacturing. Mulally, Nardelli and Wagoner drove hybrid vehicles to Capitol Hill. Their entourages also traveled eco-friendly in ethanol-powered hybrids.
And while we're at it, CNBC's Jim Cramer belongs in this category for July comments about the financial press, whom he derided as uninformed for warning of financial disaster due to subprime-mortgage-backed securities and default insurance supplied by institutions such as American International Group (AIG, news, msgs). Three months later, he was telling his audience to pull out of the market altogether after the breadth of the subprime-fueled crisis had become clear.
"It is really important for journalists to look like they are in the room with the big boys, so you talk about CDOs (collateralized debt obligations), you talk about subprime -- it's a fascination with trying to prove that you know as much as the hedge fund managers," Cramer said in July. "Fortunately, I was a hedge fund manager . . . and so I know that the lack of importance it (bad paper) has versus U.S. Treasurys."
How's the hedge fund business lately, Cramer?
Angelo Mozilo, the former CEO of Countrywide Financial, now owned by Bank of America (BAC, news, msgs).
Mozilo is one of the most recognizable faces in the subprime-lending fiasco -- a glib, smug, fast-talking salesman to the bitter end, even as his company went up in flames around him.
Countrywide issued billions in loans to subprime borrowers whose ability to repay was in doubt, then packaged up the loans as securities and sold them off to banks, hedge funds and other large investors who would later wonder what was in the packages.
As CEO, Mozilo should have made it his business to know. That's where sloth comes in. Mozilo and all the others doling out subprime mortgages should have taken the time to ensure better risk management. But that's work.
Also afflicted: Joe Cassano, the president of American International Group's financial-products division, and plenty of other high-ranking Wall Street executives.
Here's the thing about getting paid millions of dollars to manage money: You're supposed to know what you're doing. You can't blame the credit-ratings companies for your bad bets. AAA-rated or not, you made the bet. It's your job to know the finer points of what you bet on.
The same goes for selling insurance protection. You'd better have a pretty complete and accurate risk profile on whatever you're insuring, whether it's an ocean liner or a bond. Clearly, Cassano and a lot of other executives who supervised trading in credit default swaps and mortgage-backed securities were not doing their homework.
Aubrey K. McClendon, the CEO of Chesapeake Energy (CHK, news, msgs).
A CEO's willingness to invest in his own company's stock is admirable. But CEOs need to stay aligned with the interests of stockholders. When you use margin to leverage your investment to the point where you have to liquidate shares in your own company during a vicious downturn, that's a case of biting off far more than you can chew. McClendon did exactly that, and he likely has a terrible stomachache as a result.
Also afflicted: all the speculators in corn futures and the hedge fund managers who believed Goldman Sachs (GS, news, msgs) analysts' assertions that oil would hit $200 a barrel this year.
This is a vast country with a well-established taste for gas-guzzling automobiles, but even Americans couldn't stomach $200-a-barrel oil in a recession. We're not that gluttonous. But a lot of traders in oil futures were. In hopes of pocketing huge profits, they foolishly bet that we wouldn't change our consumption habits.
Now they are getting their just deserts. The same goes for the speculators in corn who helped drive the price to all-time highs with bets that ethanol would become the fuel of the future -- this year. Now that corn has dropped 50% from its highs, their profits are history.
J. Terrence Lanni, the former chairman and CEO of MGM Mirage (MGM, news, msgs).
So maybe Lanni always wanted an MBA. Presumably, he was envious of those who had them. We're not sure why, as his ascendance to the top spot at MGM Mirage would seem to indicate some real ability.
Anyway, rather than go back to business school, Lanni just put an MBA on his résumé. He resigned in November after The Wall Street Journal reported he had never received that master of business administration degree from the University of Southern California, as claimed.
Lanni has since been quoted explaining that his decision to resign was based on his desire to be closer to his family in California.
"Mortgage sluts," the mortgage wholesalers who traded sex for loan applications.
While destroying trillions in financial value, the subprime-lending bubble was apparently turning soccer moms and manicurists into near prostitutes. In a Nov. 13 article, BusinessWeek finance and banking department editor Mara Der Hovanesian exposed the sex-for-mortgages scandal behind some subprime loans.
According to the article, female mortgage wholesalers had sex with mortgage brokers in exchange for loan applications, which the women then bundled and sold as securities to investment houses.
Said one mortgage wholesaler quoted in the story, "Women who had sex for loans were known very quickly."
Henry Paulson, Treasury secretary.
Paulson is not an angry man. But it seems he felt he had to punish somebody for the mortgage market meltdown, and Lehman Bros. (LEHMQ, news, msgs)happened to be first in line.
What Paulson hadn't realized was that this bit of retribution would plunge the world into downward spiral of doubt about the reliability of all credit instruments. If Lehman could go under, whom could we trust? Speaking of wrath, Paulson's flip-flop on bailout policy (he rode to the rescue of Bear Stearns creditors, then turned his back on those holding Lehman paper) made him a focus of fury among investors who got burned. In Paulson's defense, the mortgage market mess could not have occurred without the concerted efforts of hundreds of Wall Street traders and executives focusing single-mindedly on lining their own pockets. A mess that big cannot be blamed on the mistakes of one man.
Also afflicted: fiscal conservatives.
Another day, another multibillion-dollar bailout funded by you, the taxpayer.
P.S. Not that there's a gun to your head or anything, but if you don't sign up for this, we're probably looking at an outcome south of the Great Depression. If you're a fiscal conservative listening to that message, you've got a right to be enraged. But so far as we know, anger remains mostly a counterproductive behavior, and priority No. 1 has to be fixing this mess.