Conspiracy of Fools

I have to say that for a business book - a book that you can learn an awfully lot from - its a pretty good read.

Conspiracy of Fools is a book that recounts the years leading up to the collapse of Enron - and the ultimate collapse - and deals in depth the utter incompetence of one of the largest energy companies in the history of America.

Working (kind of) in the mortgage industry - and reading this book - makes me wonder if the entire banking and MBS-type companies are as poorly run as Enron was. Seeing how these large companies, specifically Bear Stearns, could crumble nearly overnight makes you wonder if all of these MBA's and complex hedge-funds are based on the same concept that ultimately brought down Enron - the belief that things could only go up.

Obviously things did not continue going up. Houseing prices fell. Liquidity in the secondary market dried up. The equity-value of many people's houses, due to the decrease in the value, is now negative. Bonds that had AA and A ratings fell overnight to junk status.

Sounds to me that the underlying mistake that was made by Enron has been made again. The thinking that there will not be a downturn and not preparing properly in the event that there was a downturn. Inaccurate recording of assests (such as the MBS that were one day safe investment grade securities and the next day junk status) and greed over common sense.

A few excerpts from The Economist (May 10 - 16, 2008) to mention some of the companies that seemed to be a little too greedy (or incompetent):

"Countrywide Financial's share price took another dive, after an analyst advised that if Bank of America went ahead with its proposed $4.1 billion takeover of the stricken mortgage lender it would be saddled with massive writedowns. Although the analyst recommended it "completely walk away" from the deal, BoA gave assurances that it would proceed."

"UBS announced it would cut 5,500 jobs by the middle of next year (2,600 of them in its investment-banking business) as part of an effort to repair its tattered balance sheet. The Swiss bank, which has written down $38 billion during the credit crisis, one of the largest sums of any financial group, also said it had sold billions of dollars of subprime debt at a discount to BlackRock, an asset manager."

I'm sure we will hear more about BlackRock shortly...