By Rick Newman
"When markets are in trouble," wrote John Kenneth Galbraith in 1954, "the phrases are the same: 'The economic situation is fundamentally sound' or simply 'the fundamentals are good.' All who hear these words should know that something is wrong."
The famed economist was writing about the 1929 stock market crash, but Galbraith's insights are as timeless as he intended. Beginning in 2005, there were signs that a supercharged real estate and financial boom were getting out of control. By 2007, the apparatus was starting to overheat, and in 2008, as we all know, the system nearly melted down. Yet right up till the moment the gears seized, many of America's corporate bosses continued to insist that the fundamentals were sound. Here are 10 of the most ignominious reassurances from the Great Recession that began in 2007:
Stanley O'Neal, CEO, Merrill Lynch: "[The subprime problem is] reasonably well contained. There have been no clear signs it's spilling over into other subsets of the bond market, the fixed-income market, and the credit market."--July 28, 2007, at a conference in London
What happened next: Merrill ended up losing more than $50 billion on mortgage-backed securities, including subprime loans, which imperiled the entire firm. O'Neal left Merrill in November 2007 and was replaced by John Thain.
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Charles Prince, Citigroup: "We see a lot of people on the Street who are scared. We are not scared. We are not panicked. We are not rattled. Our team has been through this before."--Aug. 3, 2007, in an interview with the New York Times
What happened next: Bad real estate bets led Citi on a money-losing binge, forcing Prince to step down in late 2007. In 2008, the bank reported an unprecedented $28 billion loss. Citi has stayed in business thanks to $45 billion in aid from the U.S. government, which effectively owns one third of the bank.
Angelo Mozilo, Countrywide Financial: "We continue to be bullish about the long-term prospects of both Countrywide and our industry."--Oct. 26, 2007, in a conference call with analysts
What happened next: Bank of America bought Countrywide for about $2.5 billion--a fraction of its former value--in 2008, as housing was on the verge of a meltdown and disputes over Countrywide's lending standards were intensifying. In April 2009, BofA said it would retire the Countrywide name. In June, the Securities and Exchange Commission charged Mozilo with insider trading and fraud.
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Martin Sullivan, AIG: "We believe we have a remarkable business platform with great prospects that represent tremendous value . . . . AIG is well positioned to capitalize on current and future opportunities."--Dec. 5, 2007, in a presentation to shareholders
What happened next: AIG's share price plunged as investors worried about swaps AIG had sold to insure mortgage-backed securities that were suddenly falling in value. Sullivan left in June 2008. By September, AIG was insolvent, necessitating an $85 billion bailout that's the biggest in American history.
Alan Schwartz, CEO of Bear Stearns: "Some people could speculate that Bear Stearns might have some problems . . . since we're a significant player in the mortgage business. None of those speculations are true."--March 12, 2008 on CNBC
What happened next: Bear suffered a swift bank run as clients withdrew their money and its capital ran out. Two days after Schwartz's appearance on CNBC, Bear effectively collapsed. JPMorgan Chase bought the firm in a government-brokered deal for an ultimate price of $1.2 billion, about 95 percent less than Bear's peak value in 2007.
Richard Syron, Freddie Mac: "We are confident that the capital we are raising will enable us to both advance our mission and increase our returns to shareholders."--May 14, 2008
What happened next: The federally chartered housing agency became insolvent in September 2008 and was taken over by the government, virtually wiping out the stock. Syron stepped down. Freddie Mac has received about $51 billion in federal bailout funds so far.
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Richard Fuld, Lehman Brothers: "Our core franchise and our culture are strong. Our capital and liquidity positions have never been stronger."--June 16, 2008, on a conference call with analysts
What happened next: With clients pulling their money from Lehman accounts, the firm ran short of cash. Fuld reportedly turned down a financing offer from Warren Buffett, perhaps because he thought a government bailout--like that of Bear Stearns--would come with better terms. But no bailout materialized, and Lehman filed for bankruptcy on Sept. 15, 2008.
Rick Wagoner, General Motors: "Under any scenario we can imagine, our financial position, or cash position, will remain robust through the rest of this year."--July 10, 2008, answering questions after a speech in Dallas
What happened next: GM ran out of cash by December and stayed in business thanks to government funding that now totals $51 billion. As part of its reorganization GM declared bankruptcy on June 1, 2009.
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John Thain, Merrill Lynch: "Right now we believe that we are in a very comfortable spot in terms of our capital." --July 17, 2008, on a conference call with analysts
What happened next: Merrill nearly suffered the same fate as Lehman Brothers, with spooked clients withdrawing their money and investors driving the share price downward. With a collapse possible, Bank of America bought Merrill Lynch in September 2008 for a final price of about $29 billion, far below Merrill's value a year earlier. Thain left Merrill in early 2009, following the controversy over $3.6 billion in bonuses paid to Merrill bankers right before the BofA merger became official.
Daniel Mudd, Fannie Mae: "If we can get through this rough patch--and everybody's pulling on the same rope, I think, to try to get through this rough patch--on the other side of it is a very strong future for housing."--Aug. 20, 2008, in an interview with radio host Diane Rehm
What happened next: Like Freddie Mac, Fannie Mae became insolvent in September 2008 and was taken over by the government. Mudd left. Fannie Mae has received about $45 billion in federal bailout funds so far. Some analysts think the housing market could take 10 or 20 years to fully recover.
- With Danielle Burton, Carol Hook, Jennifer O'Shea, and Bobbie Sauer