A Canadian on Wall Street

Interesting article by Joe Nocera (the editor of Smartest Guys in the Room) about Carl Icahn’s reputation as “an activist investor” and his dealings at XO Communications. “Activism” in this case meaning to the benefit of the bulk of shareholders, which I find a somewhat degraded version of the word already.

Guys like Carl Icahn like net operating losses. If they can get their hands on them — which they can if they control 80 percent of the company with the losses — they can apply the losses against their corporate tax bill. So in November 2005, at a time when XO’s stock was around $3 a share, Mr. Icahn proposed the following deal: He would buy the company’s fiber optic assets for $700 million and take the net operating losses as well. The other XO shareholders would be left with the worthless wireless frequency — and they would have to use most of the $700 million to pay off the debt it owed to … Carl Icahn!

Let’s dwell on this for a minute. In his role as board chairman, Mr. Icahn was telling XO’s shareholders that it was in their best interests to sell. And yet, he was also saying that it was in his best interest to buy. It couldn’t really be both. Naturally, Mr. Icahn’s cronies on the board agreed to the deal. R2 Investments, however, reacted by filing a lawsuit, claiming that Mr. Icahn and the board were violating their fiduciary duty to the company’s shareholders.

I’m reading an out-of-print book recommended by Brad DeLong called Wall Street by Doug Henwood, published in 1997. Some parts seem eerily prescient, or maybe it’s just that same old ish keeps happening again and again:

But it’s wrong to blame only the government, despite the American habit of doing so. Virtually every high-end profession around was involved (a point made well by Martin Mayer [1990]). Auditors repeatedly certified fictitious financial statements, lawyers argued on behalf of con artists and incompetents, investment banks bilked naïve S&L managers, and consultants testified as character witnesses for felons. One of these character witnesses was Alan Greenspan, then an undistinguished economist from whom “you could order the opinion you needed” (Mayer 1990). Greenspan praised thrift-killer Charles Keating’s “seasoned and expert” management team for rescuing a “badly burdened” thrift through “sound and profitable” investments. Every word of this was untrue. Greenspan’s reputation, however, survived intact (just as it did his earlier demented jottings for Ayn Rand’s Objectivist newsletter).

In its infinite generosity, Washington came to the rescue. Of course it had no choice; no modern government would dare let a financial crisis turn into a general collapse. Yet the situation is rich with irony. In the early 1990s, Greenspan would craft the Federal Reserve’s bailout of the 1980s mania. And the braindead caretaker administration of George Bush crafted the greatest socialization of private loss in history, the S&L bailout. And, remarkably, almost nobody has suffered serious criminal penalties or political disgrace for this rampant abuse of trust. Huge quantities of public money — some $200 billion, though definitive accountings are hard to come by — were spent with little discussion or analysis, and the affair is now largely forgotten. The chance to use the industry’s partial liquidation as an opportunity to develop new public and cooperative financial institutions was blown. Within a couple of years of the crisis’ passing, no one paid it any mind any longer. It’s as if it never happened.

…

Sluttish accountancy is a long-standing practice. During the 1960s, John Brooks (1973, pp. 160–162) reported, accountants painted a glowing picture in numbers that merger promoters wanted. Investors, many of them naïfs, eagerly bought paper that only a few years later would turn out to be near worthless. “By following conservative practices and their consciences, accountants could have prevented this jiggery-pokery; they did not.” You could say exactly the same thing about the financial disasters of the last 15 years. Had Wall Street analysts, who are presumably competent to do so, given the accountants’ numbers a serious second look, much recent jiggery-pokery might have been detected.

Profiles of various NYC businesses and their bottom line.