On Wall St: A little less conversation

By Francesco Guerrera

Published: October 3 2008 16:18 The Financial Times

For evidence of the financial industry’s much-vaunted ability to reinvent itself as cycles turn, look no further than Wall Street’s language.

Bankers’ argot has changed dramatically over the past year or so.

Gone are the bull market cliches’ on “win-win situations” and “truly transformational” deals (as opposed to “falsely transformational”, I guess).

Financial titans and regulators these days cannot stop talking about “strong headwinds” and “1,000-year-floods”.

Borrowing methaphors from the Weather Channel and the Bible has a crucial advantage for Wall Street executives: it enables them to deflect the blame for the current mess.

If, as the Street’s received wisdom goes, the financial storm of the past year was both unprecedented and unforeseen, there is little the captains could have done to steer their ships out of trouble (I, too, have read the Weather Channel’s book of cliches).

A corollary of this argument is that crafting a regulatory system capable of withstanding a crisis of this magnitude would make the banking industry too risk-averse and choke off profits and innovation.

I tend to agree.

Although the bubble in credit and housing markets had been steadily inflating for years, it is hard to fault Wall Street firms for wanting to make money until the music stopped.

The returns on what turned out to be toxic assets were just too good to miss.

Any banking chief who had dared pull out of the market for, say, leveraged loans or mortgage-backed securities in 2005 and 2006 would have been lynched by investors for destroying shareholder value.

Nor could watchdogs have done much to prevent the turmoil when many of the incriminated securities were triple-A rated and banks met all the regulatory yardsticks.

Criticism of Wall Street and its regulators for failing to forecast the 1,000-year flood is largely misplaced.

What I do object to, however, is that once the storm began, financial chiefs were incredibly slow in realising they were getting soaked.

Re-reading the confident statements made by leaders of companies that subsequently got into trouble would be hilarious if it were not so tragic.

Alan Schwartz of Bear Stearns, Dick Fuld of Lehman Brothers, Robert Steel of Wachovia, the Washington Mutual management and AIG’s upper echelons all expressed panglossian reassurances about their companies’ health just before they imploded.

Even General Electric’s Jeffrey Immelt, the darling of management gurus, fell into a similar trap.

Three working days before announcing a $15bn share offering (including a $3bn cash injection from Warren Buffett), he replied to an analyst’s question on the need for new capital with a categorical: “We just don’t see it right now.”

Remarks such as these are more than embarassing. They show that some of corporate America’s most respected and better-paid leaders are stuck in the past and unable to understand this crisis has radically changed their role.

Messrs Schwartz, Fuld, Steel, Immelt and others did not lie.

They just thought they had more time to fix their companies’ problems than the markets allowed them.

The panicky state of capital markets and investors’ visceral desire to cut their losses means that companies are being thrust into a crisis faster than you can say “collaterised debt obligation”.

The days when a chief executive had the time to do an internal study, draw up a rescue plan and then ask the markets for time to implement it are long gone.

As the grim fate of Lehman, WaMu and AIG illustrates, executives who strive to exude confidence are wasting time they should be spending in their situation rooms.

Did anyone hear or see Lloyd Blankfein a couple of weeks ago when Goldman Sachs’ stock was plunging?

He kept a low profile until he had a Federal Reserve lifeline and $5bn from Mr Buffett in his pocket.

And even then, he let his underlings do the talking. Silence is Goldman.

This may sound odd coming from a journalist, but in the current environment, executives who open their mouth ought to be sure of what they are talking about.

Which is why in a constructive, win-win, spirit I would like to suggest Wall Street add an Elvis line to its list of in-vogue phrases: “A little less conversation, a little more action, please”.

francesco.guerrera@ft.com

Copyright The Financial Times Limited 2008