When Stupid Things Happen to Smart People

Two Nobel winners, a former trading head of Salomon Brothers, a former vice chairman of the Federal Reserveu00e2u20ac”with a crew like that managing your hedge fund, how do you lose? That’s what the investors in Long-Term Capital Management LP thought, only to see the worth of their investment fall to one-tenth its value a week before.

For that matter, how does a brilliant student of business and of the markets like Cendant CEO Henry Silverman perform the due diligence on an acquisition and end up with CUC International, a Wall Street darling that was apparently cooking its books to the tune of $500 million over a few years?

And then there are those ever-so-bright partners of Goldman Sachs, many of whom amassed fortunes advising companies as to the ideal time to go public. With uncommon fanfare, Goldman announced its own IPO, and so misread the markets that they missed the hottest IPO market of all time. A somewhat embarrassing indefinite postponement of the public offering was the result.

What happened, anyway? Why do very smart people, in boardrooms and in life, do such patently dumb things?

Well, they do. Hubris is alive and well in corporate America, as very smart people make unbelievably bad decisions. But the message for bank directors is this: Don’t assume you’re not every bit as capable of making decisions affecting your company as the experts who are trotted out to advise you. Common sense need never be checked at the boardroom door.

Some areas where your antennae should be especially sensitive:

Stock repurchase plans. Investment bankers and macho CEOs love these, but they usually have no effect on the price of the stock, and they burn cash that, in a crunch, may be nice to have in the bank. Directors have been known to feel foolish opposing these. It’s amazing how stocks that “can’t go much lower,” do.

Stock splits. They execute beautifully in a bull market, and they generate just enough fees to keep your advisers on the pro side of doing them with great frequency. Remember the reasons you did it when the stock’s in single digits.

Acquisitions. Banks may be the one area where acquisitions generally worku00e2u20ac”a function of our dysfunctional system of a gazillion banking institutions, where consolidation just makes sense. Most corporate acquisitions don’t worku00e2u20ac”integration is just too hardu00e2u20ac”except when we’re in one of those crazy runs of the stock market where cheap currency and soaring multiples make even senseless combinations sensible.

Overseas acquisitions. Take the above and underscore it. Sell your product overseas, but unless your organization is huge and your pockets deep, don’t try to buy a company from someone whose motivations to sell you don’t understand, in a country whose market you don’t understand, all communicated to you in a language you don’t understand.

Strategic partnerships. This is the buzzword of the day, and it stands for, “They won’t buy our stuff and we can’t afford to buy their company, but wouldn’t the market love it if we announced we were working together!” Strategic partnerships are rarely strategic and are rarely partnerships at all. If the primary value of the strategic partnership is in the public announcement thereof, it’s probably better to drop it.

The current market correction is a great time to reclaim your skeptical eye. Business remains a game of common sense. You’re just as smart as the consultants and the

self-professed experts on your board, and deferring too often or too completely to their expertise is a sure prescription for sending your company or your bank down the tubes.

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