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Foolish Business Moments in 2011

The level of financial foolishness seems to be rising with such ferocity each day, that it's become difficult to keep track. Nevertheless, there were many foolish business moments in 2011, so let's look at the truly memorable ones.

Out-to-Lunch Financial Regulators

Forget about brokerage firm MF Global's meltdown and the missing $1.2 billion stash that nobody can find. Where were financial regulators? Didn't they learn anything about protecting investors from the multi-billion dollar Madoff miss?

Maybe one of the problems is that the people working at places like the Securities and Exchange Commission (SEC) are too close with the Wall Street folk they are allegedly regulating. This seems to be the case with MF Global, who was supposedly under the careful watch of the Commodities Futures Trading Commission (CFTC).

The CFTC's chairman, Gary Gensler, and MF Global's ex-CEO, Jon Corzine both worked at Goldman Sachs ( GS ) in the 1990s. Gensler was also a political contributor to the New Jersey Democratic Party, which helped to get Corzine elected as New Jersey's governor.

It's true that you can't regulate stupidity, but it's also true that you can't regulate your friends.

S&P's False Alarm

The aftermath of the 2008-09 Financial Crisis showed the world just how inaccurate credit ratings can be. Debt that was assigned the safest rating of AAA turned out to be X-rated rubbish. What we didn't know was that a massive ratings snafu of another kind could happen.

In November, Standard & Poor's sent an errant research alert downgrading France's AAA-credit rating. The credit agency quickly established it was a mistake. French regulators opened upon an investigation into the ordeal, looking for answers like everyone else. How could a mistake of this magnitude occur in the first place, and no less, right in the middle of a sovereign debt crisis? For lack of a better explanation, let's just say it was a 'wardrobe malfunction' and leave it there.

France and other eurozone nations are still potential candidates for a future downgrade, but for now France's AAA-rating remains unchanged.

Rewarding Inside Traitors

Another foolish business moment was when the University of Chicago rewarded Henry (Hank) M. Paulson Jr.'s gross ethical failures with a mid-year appointment as a 'distinguished senior fellow' at its Harris School of Public Policy Studies.

Media reports from Bloomberg to Reuters, now say that Mr. Paulson tipped off hedge funds about Fannie Mae's rescue in 2008 while he was serving as the U.S. Treasury Secretary. By prostituting high level inside information, Hank Paulson's egregious behavior gives new meaning to the phrase 'Hanky Panky.'

Together with Freddie Mac, both quasi government agencies held around $5 trillion in mortgage backed securities and other debt, allowing for plenty of room for hedge fund insiders to profit from the inside information being shared with them by government officials like Paulson. And they did.

Did the University of Chicago's Trustees NOT know about Mr. Paulson's unethical conduct before his appointment as a 'distinguished senior fellow?' And if they did, isn't their decision to appoint Paulson anyway, a brash show of poor judgment?

In any capacity, other than a high level government official, what Mr. Paulson did is illegal insider trading. (Apparently, it's still OK in Washington D.C. to be an inside traitor, but not an inside trader.) Like all places for higher learning, the University of Chicago has a moral responsibility to shelter its students from crony capitalists, unethical types, and people of ill repute. The total cost of undergraduate education for just one year at the University of Chicago is now more than $53,000. For that kind of money, shouldn't the University's Trustees be doing a better job at screening who it puts in front of its student body?

The Quadruple A-Rating

Even the great Warren Buffett contributed his fair share of foolishness this year. After Standard & Poor's ( MHP ) downgraded the U.S. government's long-term debt from AAA to AA+, Buffett (NYSE: BRK-A) questioned the move and said the U.S. deserves to have a quadruple A-credit rating. Buffett's statement ranks as one of the dumbest things said in 2011 and possibly ever.

First off, there is no such thing as a quadruple A-credit rating and even if there was, the U.S. government wouldn't qualify. The U.S. has amassed $15 trillion in national debt and continues to spend more than it takes in. Many experts agree that unless Congress cuts spending by $4 trillion over the next decade, national debt will only grow worse. If the U.S. government was a corporation, it would have been long ago forced into bankruptcy.

Maybe the real reason Buffett feels the U.S. deserves a quadruple A-rating is not because he actually believes it to be true, but rather, to protect his ownership stake in Moody's Investor Services ( MCO ), an S&P competitor. Moody's left its credit opinion of U.S. debt unchanged.

Two Plus Two = Seven

Groupon's (NasdaqGM: GRPN) bizarre method for counting its revenues was another stupid moment in business. If Groupon sold a coupon for $10 and passed $5 of that amount to the merchant, the company still recorded $10 in revenue.

Soon enough, regulators stepped in and forced the company to change its accounting method for recognizing revenue. The forced change caused Groupon's total sales to fall around half - far from the rosy numbers it had previously spewed.

Groupon's snafu gave new meaning to the word accountant, which contains the words 'to count' and 'ant.' Literally translated, the word accountant means to count very little.

Making Customers Mad

The idea byNetflix (NasdaqGM: NFLX) to spin-off its DVD service from its streaming one, was conceptually good, but poorly executed. Raising subscription fees by 60% and launching a completely different business called Qwikster wasn't the way to go about it.

Besides creating a lot of confusion and an embarrassing mess for the company's management team, Netflix saw its former high flying stock get clobbered, falling by around 60% in value.

Ron DeLegge is the Editor of ETFguide.com and Author of 'Gents with No Cents: A Closer Look at Wall Street, its Customers, Financial Regulators, and the Media' (Half Full Publishing, 2011).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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