The Bottom 10
Portfolio.com salutes the most embarrassing business escapades of the year.
While the most recent golden age of corporate scandals has passed Tyco and Enron seem like a distant memory), there were still enough misdeeds and mistakes in and around Wall Street to keep business sections lively.
From student loan bribes to subprime loan blindness, from insider trading to illicit campaign donations, here are Portfolio.com's list of the Top 10-er, Bottom 10-business bungles of 2007.
1. Mattel Learns the High Cost of Low Cost
If there are two words that new parents fear more than "diaper change," it's "lead paint" or "choking hazard." Mattel had the unenviable job this August of telling parents around the world that those Fisher Price toys their babies love to gnaw on were quite possibly smothered in toxic lead paint. Since August 1, the American toymaker has recalled more than 20 million Chinese-made toys for reasons relating to lead toxicity, choking hazards, or tiny magnets that could be swallowed. As a result, Mattel chairman and C.E.O. Robert A. Eckert has been doing back flips all fall to recover the toymaker's image in time for the crucial holiday shopping period.
2. Student Aid Advisers Help Themselves
Not be outdone as a crusading attorney general by his predecessor Elliot Spitzer, Andrew Cuomo made a public show this spring of bearing his teeth at the $85 billion student loan industry. New York's new attorney general uncovered dozens of loan companies giving kickbacks to schools and school officials for steering students to certain lenders. These immoral, and sometimes illegal, bribes led to inflated loan prices for the kiddies, who where wholly unaware that their university's "preferred lender" might have garnered that title by giving away two first-class airline tickets to Maui. Federal legislation is currently in the works to reform oversight of the student loan industry.
3. Carl Icahn's Losing Streak
Everybody loves a good proxy fight! Especially when it's heavyweight champion Carl Icahn in the ring. In January, Icahn initiated a crusade to restore mobile company Motorola to profitability. A tug of war ensued between Icahn and chairman and C.E.O. Edward J. Zander-Icahn gunning for a seat on the board and agitating for Zander's ouster; Zander sniping that Icahn lacked the time and expertise to be an effective board member. Icahn cried uncle after he failed to garner enough support for his insurgency at a shareholder meeting in May, and it looks like Zander is having the last laugh: Motorola posted better-than-expected results for the third quarter and forecasts a profit in the fourth.
. Profile of Ed Zander by Kevin Maney.
. Video of Ed Zander interview by Kevin Maney.
4. Hubris and Nemesis on Wall Street
It's been a rough couple of months for Wall Street's chieftains, whose fortunes have soured faster than you could say "credit crunch." Stan O'Neal was ousted from Merrill Lynch at the end of October, just a week before Chuck Prince was dethroned at Citigroup, both in response to their banks' multibillion-dollar write-downs resulting from (what else?) the subprime lending mess. Jimmy Cayne is still teetering atop Bear Sterns, but recent criticism of his ... ehem ... "hands off" management style (including a smack-down in the Wall Street Journal) makes his future as C.E.O. anything but certain.
5. Sumner Redstone's Family Feud
The Redstones are no strangers to family drama, but Sumner's high profile falling-out with his daughter Shari this July has managed to reach new levels. Shari, currently non-executive vice chair of the boards of CBS and Viacom, was once viewed by Sumner as a confidant and successor for the role of executive chairman. But now issues around corporate governance and the future of the National Amusements cinema chain have father and daughter barely speaking. An irrevocable trust currently guarantees that Sumner's roles at Viacom and CBS will fall to Shari upon his death; Sumner wants her to give up that automatic right, and threatens to oust her from both Boards if she doesn't.
6. Subprime Ratings in Every Sense
If you're looking for someone additional to blame for the sorry state of the debt market, try the ratings agencies. When subprime products turned out to be less sturdy than advertised, it came to light that Standard & Poor and Moody's, who together comprise a virtual duopoly in the bond rating game, might be operating a little too close for comfort alongside the banks underwriting debt issuance. The higher the debt ratings, the happier their clients, the more fees collected from banks; the outcome was that many bond ratings were misleadingly generous. In July, in a last-ditch effort to make amends, Moody's and S&P downgraded hundreds of mortgage bonds-too little, too late.
7. Black Mark for Privatization
The role of private contractors in Iraq became a front-page issue in September when guards from Blackwater, a private security firm, opened fire in a crowded Baghdad neighborhood as they protected a State Department convoy. Seventeen Iraqis were killed, Blackwater was blackballed in Iraq, and the F.B.I. (finally) started asking questions about how well the government is overseeing the war's corporate contractors. Answer? Not well enough.
8. Corporate Gift Giving Gone Wild
An investigation late this summer into suspicious donations to the Clinton campaign revealed that major Democratic contributer Norman Hsu was not your average political donor: Hsu had been a fugitive since 1992, when he ran after being charged with grand theft over a Ponzi scheme he created to defraud investors. Hsu was arrested in September and charged with mail fraud, wire fraud, and violating the Federal Election Campaign Act.
9. Bailing Out at E.A.D.S.
In October, French regulators announced that they had been investigating fishy sales of stock by insiders at E.A.D.S., Airbus, and Daimler (which owns E.A.D.S.) made in the spring of 2006. All parties insist that their decisions to unload millions of euros worth of E.A.D.S. stock in mid-March was merely fortuitous timing. Mais non! They had no foreknowledge of production delays on Airbus's A380-which cut the stock price for parent-company E.A.D.S. nearly in half when they were made public in June.
10. Carlyle's I.P.O. Oops
Private equity players like Carlyle Group rarely get publicly humiliated, but ohhh the schadenfreude when they do. The firm had a fair bit of egg on its face this summer when it found out the hard way that July 4 was exactly the wrong time to take public its snazzy mortgage-backed securities fund, Carlyle Capital. No sooner was the hedge fund listed in Amsterdam than the private equity firm was forced to lend $200 million of its own money in bail-outs before its reputation suffered irreparable damage. Lesson to Carlyle: In the future, stick to L.B.O.'s.
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