On Wall Street, fear of the unknown often has a worse effect than facts that shed light on how bad things really are.
That has been true this summer, as stock prices have suffered scary price swings amid a spate of daily rumors about which bank, brokerages, lender or hedge fund might be sitting on big losses tied to the imploding mortgage market.
On Monday, the Dow Jones industrials dipped 3 points to 13,237 as stocks actually showed some signs of stabilization after hearing the facts — often painful ones — from a pair of high-profile firms involved in the two big business stories of the summer: the fallout from the subprime mortgage meltdown and buyout deals driven by private-equity firms.
The market also got help from the Federal Reserve, which added $2 billion to the banking system to free up credit, bringing its total to $62 billion since Thursday.
Goldman Sachs, a Wall Street titan that was the subject of negative rumors last week, came clean Monday and let the world know the extent of the losses suffered by three of its hedge funds, some of which employ quantitative, or computer-driven, strategies.
In a conference call, the investment bank said its Global Equity Opportunities fund had suffered losses of roughly 30% this year, all last week. (That followed earlier admissions by Bear Stearns that two of its hedge funds were virtually worthless and last week's bombshell from French bank BNP Paribas that hedge funds it operates were also in trouble.) Goldman also announced that it and other large investors, including former AIG CEO Maurice "Hank" Greenberg and KB Homes founder Eli Broad, were pumping $3 billion into the fund, which was valued at $3.6 billion prior to Monday's investment.
"This is not a rescue," said David Viniar, chief financial officer at Goldman, adding that the cash infusion was a "good investment opportunity" given that the fund's assets have been driven down far below what they're worth.
"Disclosure is good," says Rod Smyth, chief investment strategist at Wachovia Securities. "Goldman laying out the facts is a part of the process of trying to find a floor under stock prices, but I just don't think we are there yet."
Disclosures were also evident in the second-quarter earnings report issued by the Blackstone Group, a giant private-equity firm that went public earlier this summer. The firm's president, Tony James, told analysts that the firm tripled its net income in the quarter and recently closed a $21.7 billion buyout fund.
James admitted the recent disruption in the credit markets, which has made financing more difficult and expensive, has made it tougher to get mega-deals done. But he said the firm has had "little in the way of hung-up deals" and that it was focusing on smaller deals and Asia.
That doesn't mean more bombshells can't rile investors, says Henry Herrmann, CEO at Waddell & Reed. Wednesday is the deadline for hedge fund investors to ask for their money back this quarter. If a fund can't meet redemptions, the market will react poorly, he says.