The Reckoning

The Reckoning

Hold on to your hats, folks, we're heading in to what could be the wildest week yet on Wall Street since the credit market troubles began. Banks, investment houses, hedge funds and other financial institutions will begin reporting their full-year results for 2007 that will include large, additional write-downs on asset-backed securities, higher reserves for loan losses and plans to raise additional capital at what might be called distressed prices. All the early indications are that it's going to be ugly.

Hints of what is to come were everywhere last week. The takeover of the nation's largest mortgage lender, Countrywide Financial, by the nation's largest bank, Bank of America, had all the earmarks of a rescue effort encouraged and blessed by regulators. Merrill Lynch and Citigroup were reported to be trolling overseas for big equity infusions from sovereign wealth funds, Freddie Mac was warned about another ratings downgrade and the bond insurer MBIA rushed to borrow $1 billion at nearly 14 percent to help offset $3.3 billion in charge-offs. Bear Stearns's longtime chief executive resigned, Sallie Mae brought in a takeover specialist as its new chairman and Fitch, the ratings agency, announced that the executive in charge of structured finance division had resigned.

It is not lost on anyone that these companies now on the ropes have been pillars of the global financial system, with so many employees, investors, borrowers and creditors that even one failure could trigger a market meltdown. Most credit spreads continued to widen while the costs of insuring loans and bonds hit new highs. And while some markets have returned to more normal operations, others -- the securitization of jumbo mortgages or commercial real estate loans -- remain closed.

The nervousness on the part of industry executives and economic policymakers is now almost palpable. Treasury Secretary Hank Paulson, acknowledging that the housing crisis has not hit bottom, promised to move quickly on a proposal for an economic stimulus package. And the chairman of the Federal Reserve made clear that the central bank stands ready to lower interest rates and inject even more money into the banking system. Wall Street now expects a half of a percentage point cut in rates at the Fed's next regularly scheduled in late January, but don't rule out a move even before then.

Corporate Candor

Truthfulness is one of those core values that companies either incorporate into their cultures or they don't.

So it should be no surprise that when Group 4 Securicor, the British corporate security company, issued a statement last week announcing the departure of Gary Sanders, president of its Wackenhut U.S. subsidiary, it attributed the move to a "realignment of reporting structure."

There was no mention of the fact that Wackenhut had just lost one of its largest contracts with Exelon, the electric utility, after release of an embarrassing video tape showing Wackenhut guards asleep on the job at a nuclear power plant. Or that Wackenhut had dismissed inquiries about lax security at the plant from Exelon and the nuclear regulatory commission. Or that that the Wackenhut supervisor at the plant, when first informed of the nappy-time tradition by a concerned employee, told him to "be a team player" and keep it to himself.

When asked by The Washington Post's Steven Mufson whether Sanders resigned or was fired, a Group 4 spokesman replied that it was by "mutual consent," noting that there was "absolutely no correlation" between Sanders's departure and "other reported events."

Here's my rule of thumb on all that: A company in which people withhold unpleasant information from colleagues and superiors, lie to customers and mislead regulators cannot generally be relied on to level with its investors or the public.