The Financial Hazards of Washington's Rumor Mill

  • Share
  • Read Later
Lawrence Jackson / AP

Senate Majority Leader Sen. Harry Reid, D-Nev., during a news conference on Capitol Hill in Washington, Wednesday, Oct. 1, 2008

Speculating about the health of companies has long been considered imprudent in Washington, where an ill-considered, offhand remark by politicians can cost businesses and shareholders millions of dollars. With stock markets reeling, the slightest hint of corporate instability today can sink stock prices, making it unwise to suggest that financial titan X may be in danger of joining the roster of bailout candidates.

In the current climate of fear, there's good reason to think before speaking. Just ask Sen. Charles Schumer. In June the New York Democrat warned that mortgage lender IndyMac Bancorp was on the brink of collapse. His remarks, regulators say, caused a run by depositors that helped bring down IndyMac. Schumer rejected that assertion, saying blaming him is like blaming the fire on the guy who calls 911.

Despite the danger of naming names, it may be increasingly difficult for politicians to refrain from public speculation. That's because it's no longer just companies and their investors who stand to lose in a corporate failure. Billions of taxpayer dollars are now flowing into the equation, and voters with no direct stakes at risk can reasonably claim a right to know what company the government may be buying into at their expense.

Finding a balance between secrecy and disclosure is a tricky business, as Senate Majority Leader Harry Reid discovered on Oct. 1. After the Democrat from Nevada emerged from a luncheon on Capitol Hill, he spoke briefly to reporters about the financial crisis, mentioning that another insurance company was in danger of following AIG into failure. "One of the individuals in the caucus today talked about a major insurance company — a major insurance company, one with a name that everyone knows — that's on the verge of going bankrupt," Reid said. The senator stopped short of identifying the company, which might have been smart — except that panicky investors proceeded to dump the stocks of virtually all of the household names in the insurance business. Shares of Prudential, Hartford Financial Services and Metlife tanked in the following days and have struggled to recover.

Reid's comments forced Metlife to issue a press release insisting it was not the company Reid nearly outed. "The statement yesterday by Senate Majority Leader Harry Reid does not apply to MetLife," the release stated."MetLife is financially sound and has high ratings from all of the major insurance ratings agencies. MetLife is fully able to meet all its obligations."

It seems unlikely that Reid's contretemps will be the last. At least part of the recently passed $700 billion financial rescue plan will be used to inject cash into banks and other financial companies in an effort to unlock frozen capital markets. Which banks get how much remains to be seen. Amid all the uncertainty, one thing at least seems clear: another big company is likely to require federal help in the coming weeks. And that means loose lips in Washington may add to the off-balance-sheet liabilities of the imploding financial industry.