Ted Oglove’s thoughts on the current mess…
Yesterday afternoon, I called Thornton “Ted” Oglove, who has been a mentor ever since I cold-called him six years ago when I started working on my book, Financial Fine Print. Though I was really only calling about my trip next week to San Francisco to speak to the CFA Society of SF, the conversation quickly turned to what was going on on Wall Street.
In addition to being incredibly knowledgeable about the markets, Ted’s an avid historian. Plus, he’s been around long enough to have lived through a few crises before. For those unfamiliar with Ted, he wrote the seminal book on earnings quality, Quality of Earnings, and was known for his ability to parse through lots of earnings-speak. Because the conversation was off the cuff, I didn’t record it, though it would have made for a great Podcast. Instead, here’s a few notes that I scribbled (with Ted’s permission) during our call yesterday:
“If I could ask Richard Fuld one question, it would be this: How did your stock have a book value of $27 a share all the way down? (A quick skim of Yahoo actually shows a book value of nearly $35). He’d probably say that the shorts, led by David Einhorn did me in. But I’d tell him that if there had been no short selling around, Lehman’s price would be the same. The shorts didn’t lead to Lehman’s write-offs.”
Ted also talked about the replacement of Glass-Steagall in 1999 with the Gramm-Leach-Bliley Act of 1999, which Ted said was “a terrible mistake. It was signed off on by Clinton, but it was created by the banking lobbyists and it turned the regulated into the regulators.”
And there was also this little pearl: “Earnings don’t mean anything anymore”.
Scary stuff from someone who’s been around the block a few times!
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September 16th, 2008 at 3:44 pm
Can someone explain how the book value of LEH shares are still worth $35? No really, please explain.
September 16th, 2008 at 7:23 pm
What does he mean by that, “earnings don’t mean anything anymore”?
September 16th, 2008 at 7:32 pm
I’m as confused as you are, G-man, as to why the book value would be so high, so if anyone can help out here, I’m all ears. I know that Yahoo numbers aren’t always accurate, but they’re usually close and this is way off.
As for the comment on earnings, I won’t be able to say it as succinctly as Ted, but I believe what he means is that by just paying attention to earnings, as in the actual number, without paying attention to the quality of those earnings — what’s in the stew, so to speak — is pretty much useless for assessing a company’s health.
One of the first things I remember Ted telling me 6 years ago was that you could have two identical companies (keep in mind this was a hypothetical since there aren’t two companies that are exactly the same) and company A could report 75 cents in earnings while Company B reported $1.50 in earnings. The difference was in the company’s (and their lawyers and accountants) interpretation of GAAP and other rules.
September 17th, 2008 at 2:03 am
Michelle,
another great post. I’m picking up “Quality of Earnings” tomorrow from the library. Thanks.
September 17th, 2008 at 2:03 pm
Mr. Oglove says ‘banking lobbyists’ wrote the most recent regulatory law, but who were the Congress people who introduced the bill? Who got the most contributions from those lobbyists? Clinton signed the bill, but was it in spite of misgivings, or did he support the law wholeheartedly?
I think if we are to get to the bottom of this mess, we need to hold the lawmakers and executives responsible for passing and administering the laws that let it happen.
September 17th, 2008 at 3:39 pm
@ Jo: The bill that replaced Glass-Steagall in 1999 was the Gramm-Leach-Bliley Act, which was introduced by Senator Phil Gramm and Reps. Jim Leach and Tom Bliley. In the Senate, it was passed along mostly partisan lines, but in the House, the bill rec’d bipartisan support and was signed by Clinton. Haven’t looked at the lobbyist contributions, but I’m sure it would be interesting.