How to Play ‘Gotcha!’

Peter Schiff’s brilliant, turn-on-a-dime viral marketing promotion

November 2007 By Denny Hatch

multipage

Last March it was announced that New Century—a giant lender of subprime mortgages—was going out of business, followed in August by the Chapter 11 of American Home Mortgage.

Many economists predicted that this subprime debacle had a long fuse. On October 24, 2007 came the announcement that Merrill Lynch was forced to take an $8.4 billion hit in the third quarter caused by a revaluing of the bonds backed by subprime mortgages. Merrill Lynch stock fell 5.8%, its credit rating was downgraded and the overall loss for the quarter was $2.4 billion.

Last August 23rd, this e-zine took off on the subprime mortgage crash. My last words in that issue: “Wall Street stinks.”

This sentiment was echoed by Peter Schiff, president of Euro Pacific Capital and author of “CRASH PROOF: How to Profit from the Coming Economic Collapse.”

But where lenders, homeowners and—most recently—Merrill Lynch were ripped apart by this catastrophe, Peter Schiff turned on a dime and leveraged it into a magnificent viral marketing effort.

Wall Street’s Most Duplicitous and Incompetent Practitioners
When I was researching a book about the rise and fall of Priceline.com, I began to realize that among the sleaziest scoundrels in the investment arena are research analysts for the major investment bankers. They claim to be impartial while shamelessly touting stocks in which their companies have a financial position.

In addition, it was clear—from the way they wrote about the companies they were urging investors to buy—that they did not have a clue about how the businesses worked. For example, the dot-commers were burning through millions of dollars a day developing their Web sites but had zero plans for generating income to pay overhead, let alone generating a profit.

Yet the analysts—who were working for the firms that were underwriting the IPOs—were urging investors to buy, buy, buy. I wrote about Priceline.com:

The IPO price was $16 a share, and the stock hit a high of $165. For one brief moment in time (April 30, 1999), the investment community was persuaded that Jay Walker’s 35,000 square feet of sublet office space in Stamford, Connecticut, with its little assemblage of computers, exotic software, and 177 employees were worth (on paper) $23.1 billion—more than United, Northwest, and Continental airlines combined.

In just eight months, the stock went from being what the proud underwriters trumpeted as a “10-bagger!”—having increased 10 times or 1,000% of the issue price—to a negative 100-bagger. On the last trading day of the year, the stock closed at $1.31.