Tags: HP | best | brightest | flaw

Microview or Macroview: The Judgment of the Best and the Brightest Has the Same Flaw

By    |   Wednesday, 21 Nov 2012 07:48 AM

When I read that Hewlett-Packard was writing down $8.8 billion of its $10 billion purchase price for Autonomy, which it bought last year, I was a bit stunned. Not only was the amount of the write-down high — almost 90 percent of the purchase price paid just a year ago — but the reason given was accounting improprieties and outright misrepresentation by Autonomy. That’s outrageous, not just because of Autonomy’s fraudulent behavior, but because HP didn’t see it.

HP uses the best lawyers on Wall Street, the best due diligence people and the best auditing firms. HP is exactly the kind of company that supports these firms and pays their incredibly high prices. They can and will pay for the best, especially in a big acquisition like Autonomy.

But, why didn’t they catch such blatant and massive fraud? What’s going on here??? This is exactly why they earn the big bucks — to find this kind of blatant fraud. Actually, they’re paid the big bucks to find much less blatant fraud. But, they should certainly find the blatant fraud as well.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

Unfortunately, seeing the best and brightest making huge errors of judgment has become all too common in American business and finance recently. This is not an isolated problem. Remember Enron? Only the very best stock analysts got to cover Enron. The inexperienced and junior analysts were put on the small companies. The best and the brightest are assigned to the big, fast-growing companies like Enron. But none of them caught the problems with Enron.

When Bank of America decided to buy Countrywide Mortgage, it had the best and the brightest law and due diligence firms looking over Countrywide’s books. Yet, they never uncovered the massive problems that have plagued BofA with the worst acquisition in banking history, causing tens of billions in losses.

When Bernie Madoff went to look for investors, he didn’t go to the dumb money; he went to the smart money. He went to hedge funds and very wealthy individual investors who had all the best investment options available to them. They weren’t like retail investors who don’t have access to so many investment options. The best was open to them and they thought Madoff was the best.

Madoff and Enron are crooks, but there is no doubt that those individuals who analyzed them and invested in them were stupid; stupid not to see the problems and stupid to not even suspect them.

They are bad investors and bad businessmen, just like the people who reviewed and invested in Autonomy. I could tone down that language since there are certainly shades of gray in every story, but sugar coating what happened is not smart.

I say this not to criticize any one law firm, accounting firm or investment banking firm. Instead, it is a reflection of those entire industries that the best and the brightest could be so easily fooled and fail so miserably in their jobs.

The same people who failed to see the Internet bubble, the Enron meltdown or the horrible Autonomy investment are the same people running Wall Street today, telling you that everything is fine with the market. If their judgment is so bad on a microscale, why would anyone think their judgment on a macroscale with respect to the economy and the investment markets is any better?

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

Obviously, part of the reason they overlooked the problems of Enron, the Internet bubble and Autonomy is because they WANTED to. They saw immediate rewards to overlooking the problems and missed the longer-term implications. Wouldn’t that be the same reason they would want to overlook the big macroproblems in our economy and investment markets? They WANT to. They see immediate rewards to overlooking the problems (keeping the stock market pumped up) and miss the longer-term issues.

That’s the real message here — if investment bankers and companies are missing such massive microproblems with individual companies then they are just as likely, and perhaps more likely, to miss massive macroproblems with the larger economy and investment markets.

The kind of astute analysis you are getting from Wall Street regarding the Internet bubble (and the social media bubble), Enron and Autonomy is the same kind of astute analysis you are receiving from Wall Street on the economy. And the end result will be exactly the same.

About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $300 million under management. He is a regular contributor to the Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.

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RobertWiedemer
When I read that Hewlett-Packard was writing down $8.8 billion of its $10 billion purchase price for Autonomy, I was a bit stunned. Not only was the amount of the write-down high, but the reason given was accounting improprieties and outright misrepresentation by Autonomy. That’s outrageous.
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