Wednesday, January 14, 2009
Werewolves of Wall Street: Why Capitalism Collapsed
I saw a werewolf drinking a pina colada at Trader Vic’s
His hair was perfect.
—Warren Zevon, Werewolves of London
I saw a werewolf at an investor conference recently. His hair was perfect.
He’s the CEO of what is now a fairly large company thanks to a dozen or two acquisitions he and his CFO engineered over the years when their company was a Wall Street Darling and the Dynamic Due could do no wrong.
Having recently done wrong—at least, in the eyes of Wall Street—he seemed like a different guy than during the glory days.
Oh, he had the bling of all High-Flying CEOs: the perfect hair, the pin-striped suit, great tie and French cuffs. But what he didn’t have was the body language. He sat at the head of the table, rigid, dour, with his arms crossed, like a linebacker ready to block somebody’s head off.
All around him sat his team, including the loyal CFO with whom he had rolled up an industry and created what had once been a perpetual motion machine of deal, higher stock price, deal, and higher stock price, etc....
But those days are over, and our CEO had the look of an unhappy man, a man under great stress.
The reason was not hard to find: he had announced his final Big One, the type of deal CEOs call “transformative” when they mean “really super expensive,” just a couple of months before the credit markets collapsed.
And it is obvious, in hindsight, that he paid way too much. And we’re not talking millions too much. We’re talking many many millions too much.
So here was, seated sat at a conference table ready to take questions in a room crowded with anxious shareholders who had bought the dream only to see it turn into a nightmare.
The first question from the disillusioned crowd was, as it always seems to be, about earnings guidance and whether the company had changed its mind about “the number.” A reasonable question, in light of, you know, like, the economic collapse going on outside the window at the end of the room—but not really the issue here.
The real issue is this: Mr. Werewolf here made a deal for the wrong price at the wrong time, and he knows it and we know it and the waiter clearing glasses at the end of the room probably knows it too, but nobody wants to come right out and say it, least of all Mr. Werewolf.
So Mr. Werewolf says there’s no change to the earnings—the number is staying the same. It could be higher, it could be lower, he adds stiffly, before glowering at the audience. “Not that the stock price reflects the earnings number anyway.”
The man who piled, literally, billions of dollars of debt onto his shareholders’ backs at precisely the wrong time is castigating the audience for penalizing his company’s stock price!
A hand goes up: “So why not buy your stock back?”
Mr. Werewolf responds—he’s ready for this: “You mean personally? I’ve been buying it back when the window opens.”
The hand stays up: “No, I mean the company. If you really believe the share price is too low relative to the earnings, shouldn’t the company buy it back?”
The background to the question, as everybody in the room knows, is that Mr. Werewolf and his CFO used to buy stock back with abandon during the glory days, at far higher prices than the current Too-Low-Price, in order to satisfy all the Return-Value-To-Shareholder types now waiting for the answer.
Mr. Werewolf responds by rote, straight out of the current Credit-Crisis Manual of Capital Preservation: “We’re using our excess cash flow to pay down debt. That’s the right thing to do.”
The hand stays up: “But isn’t that irrational? If your share price is too low, shouldn’t you be buying back the stock and keeping the debt outstanding? Isn’t paying down debt exactly the opposite of what you should do?”
Mr. Werewolf looks at Mr. Rational like he wants to say something about how Mr. Rational should you-know-what-and-die. The CFO crains his neck to see who, exactly, is asking such a question.
Mr. Werewolf finally answers, slowly, “It’s the right thing to do.”
The implication behind the words and the CFO's neck-craining is clear: Mr. Rational should shut up with the question about buying stock. Mr. Rational shuts up.
Now, to quote that great philosopher, Robert Plant, it made me wonder.
And what it made me wonder was this: why is it that CEOs take offense at good questions?
Why is it that a shareholder or an analyst or even that lowliest of low-lifes, the short-seller, is made to feel like a pariah for merely asking a good, rational question in public?
And I wondered if this wasn’t why capitalism crashed: CEOs who make boneheaded decisions taking offense at being asked about the consequences of those boneheaded decisions in front of other human beings.
And not merely taking offense for their own insecure reasons, but being encouraged to take offense by all the hangers-on—the investment bankers and the brokers and the mutual fund managers—who benefitted in the short-run from those boneheaded decisions, even though in the long run they were nothing but boneheaded decisions.
After all, if a CEO can live the dream during the good times—wallowing in the Attaboys and the bonuses and the private jets and the closing dinners that came with every deal they made—why can’t CEOs sit down at a table and take the hit during the bad times?
How will boneheaded behavior ever change if it is not questioned, examined, argued and debated in public?
Further good questions from Mr. Rational discouraged, I left the room, humming Warren Zevon to myself:
You better stay away from him, he’ll rip your lungs out, Jim.
Huh, I’d like to meet his tailor.
Aaaahoo, werewolves of London!
—Warren Zevon, Werewolves of London
I Am Not Making This Up
© 2008 NotMakingThisUp, LLC
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Posted by Jeff Matthews at 8:43 AM