Spinning Through the Credit Apocalypse

Wall Street’s head honchos say the crisis is nearly over. Don’t bet on it.

Read more about Wall Street’s ongoing crisis.

John Mack

Somebody must be giving out Magic 8 Balls on Wall Street, because playing soothsayer is all the rage these days. Still trudging through the credit crisis, the bigwigs at several of the country’s most important banks are saying that our long national nightmare is over —the credit crisis’s end is nigh.

Maybe it is, but it’s a curious time to start trusting these prognosticators. These are the same executives who got blindsided by the credit crunch, and when they failed to warn their companies (and the country) that the sky was about to fall on Wall Street, they lost their rights to the benefit of the doubt. They are the boys who failed to cry wolf: They didn’t say anything before failed mortgage- and asset-backed securities arrived to devour the markets, so now they’ve lost the credibility to be listened to seriously.

But that isn’t stopping them from talking. Consider:

Dick Fuld, CEO of Lehman Brothers: Earlier this week, on April 15, Fuld told shareholders that while the “current environment remains challenging,” he thinks “the worst is behind us,” and the credit situation will probably last for another two quarters before we return to normalcy. He no doubt hopes so. Lehman Brothers, the fourth-largest securities firm in the country, has written down $3.3 billion since the third quarter of 2007—$1.8 billion this year. Lehman’s profits were halved in the first quarter of 2008.

John Mack, CEO of Morgan Stanley: Trotting out his most strained sports metaphor on April 8, Mack said that the credit crisis is in the eighth inning or “the top of the ninth.” If that’s the case, then Morgan’s starting pitching was pretty dismal. Mack and the now-departed Zoe Cruz allowed Morgan to lose $3.7 billion from subprime losses in 2007. This, coupled with a $2.3 billion write-down in the first quarter of this year, doesn’t inspire confidence in Mack’s prognostications.

Lloyd Blankfein, CEO of Goldman Sachs: At Goldman’s annual shareholder meeting on April 10, Blankfein said that “we’re closer to the end than the beginning,” and that “we’re getting to that point where people are seeing the light at the end of the tunnel.” Blankfein and Goldman have fared better than most throughout this fiasco. The firm’s mortgage desk insulated them from the crisis, leading to profits at the end of 2007. But these days, not even Goldman has been spared—the company wrote down $2 billion in the first quarter, $1 billion of which was because of mortgage loans and securities.

William Rhodes, senior vice chairman of Citigroup: *Showing more restraint than his colleagues, Rhodes told the press on April 15 that we’re only halfway through Wall Street’s odyssey. “We’re just getting into the eye of the storm at this particular point in time,” he added. But given that the storm has lasted for about two or three quarters, we should be out of it in another six to nine months, according to Rhodes’ metaphor. That’s in accordance with his cohorts’ predictions. Of our four honchos, Rhodes and Citigroup have been hit hardest of all. They’ve already written down $22 billion in 2007, and market analysts are expecting a new $11 billion write-down when it announces its first quarter earnings later this week.

There’s a reason to try to offer hope in the midst of disaster. Rosy predictions from the corner offices can help spike stock prices, which in turn can try to kick-start some momentum for the markets. But even the sweetest talker can’t mask nasty numbers, and it looks like that’s what’s coming for the nation’s banks this week. JPMorgan’s 50 percent earnings loss and the boardroom drama at Washington Mutual (not to mention its $1.14 billion loss) could be just the beginning of a bleak earnings-report season. If that’s the case, then even John Mack might admit that Wall Street will have to play extra innings.

Correction, April 16, 2008: The sentence originally misidentified William Rhodes as Citigroup’s vice president. He is the senior vice chairman. (Return  to the corrected sentence.)