How The Smart Money Turned Dumb in 2008

These 10 financial titans made some of the worst calls of the year—and lost billions.

By SHARE

If you feel like you got sideswiped by the 2008 financial meltdown, you're in good company: Some of the smartest money minds in America got fleeced, too.

With the stock markets down about 40 percent since the start of the year, most investors are feeling pain. Yet this is the kind of environment in which many of the richest money mavens have made fortunes: By making shrewd counterconventional bets; or buying damaged assets others won't touch and finding a way to breathe life back into them; or taking on astounding levels of debt, certain of their own abilities to turn it into profit; and, above all, putting total faith in their moneymaking intuition.

Except for this year. It turns out that the same overwhelming developments that swamped millions of ordinary Americans—an unprecedented housing bust, frozen credit markets, and a reeling economy—knocked the wind out of billionaire investors who should have known better. Here's how a few of America's most fabled financiers went astray in 2008:

Stephen Feinberg, cofounder, Cerberus Capital Management. His private-equity firm owns majority stakes in more than 30 companies—but two, Chrysler and GMAC, have become poster children for woes in the banking and automotive industries. Cerberus bought 51 percent of GMAC in 2006 for $14 billion, and 80 percent of Chrysler for $7.4 billion. Chrysler is now essentially insolvent. GMAC, with a huge portfolio of bad mortgages, could declare bankruptcy if it can't convert itself into a bank holding company to qualify for federal aid.

Loss: Several billion dollars, depending on whether Chrysler survives or gets sold off piecemeal and whether GMAC stabilizes its balance sheet or declares Chapter 11.

Consolation: Chrysler could get help from the federal auto bailout—though Cerberus will have to give up some of its ownership stake and open its closely guarded books to government auditors.

Sam Zell, chairman, Equity International. What was he thinking? Only a year ago, Zell, who has made billions as a real-estate mogul, paid $8.2 billion for the Tribune Co., owner of several metropolitan newspapers and the Chicago Cubs. The company's decline wasn't hard to predict, because newspapers have been losing business to the Web and hemorrhaging money. Tribune declared bankruptcy in December, with $7.6 billion in assets, $13 billion in debt, and shrinking cash flow.

Loss: Zell only put up $315 million of his own money to buy the company, borrowing the rest. He'll lose a big chunk of that, but investors will lose much more.

Consolation: Tribune Co. will keep operating while it winds through bankruptcy court.

Leon Black, CEO, Apollo Management. Black's private-equity firm bought Linens 'n Things in 2006 for $1.3 billion, with a plan to revive the ailing retailer and sell it for a profit. Instead, the company declared bankruptcy in May and began liquidation proceedings in October. And in 2007, Apollo paid $6.6 billion for Realogy—parent of the Coldwell Banker and Century 21 real estate brokerages—just as the housing boom was inverting. Realogy's losses top $200 million so far in 2008. Other companies in the Apollo portfolio are struggling, too.

Loss: The Linens 'n Things wipeout cost Black's firm $365 million, according to the New York Times, while other problems threaten about $3 billion worth of holdings.

Consolation: Black told the Times that the struggling economy is actually good for his firm, which is preparing to take advantage of the need for vast corporate restructurings in coming years.

Hank Greenberg, former CEO, AIG. Even after his 2005 departure from the company he built into an insurance powerhouse, Greenberg exercised considerable influence as its largest shareholder, holding more than 10 percent of the stock. As the firm foundered this fall, Greenberg fought against government intervention that would have diluted his holdings. But with a chaotic bankruptcy filing as the only option, he lost that battle. Federal aid to AIG now totals more than $150 billion in loans and equity purchases, and Greenberg and other shareholders have lost almost all their equity.

Loss: The value of AIG shares controlled by Greenberg has plunged from nearly $25 billion to less than $1 billion.

Consolation: AIG's shares—and Greenberg's wealth—should rebound somewhat if the company fixes its balance sheet and pays back government loans.

Bill Miller, manager, Legg Mason Value Trust mutual fund. Miller became an investing legend by beating the average stock market return for 15 years in a row and earning some of the investing industry's most prestigious awards. Then, he placed a huge bet on housing-related stocks like Freddie Mac, as the housing market was about to enter a free-fall. He also gambled that financial stocks like Merrill Lynch, Bear Stearns, Citigroup, and Washington Mutual would bottom out in 2007 and early 2008—accumulating ever greater holdings as the stocks fell in value, figuring he was getting a bargain. Instead, he was blowing billions, unaware of the financial-industry wipeout unfolding around him.

Loss: Miller's fund has performed 20 percent worse than the markets over the last year, according to the Wall Street Journal, mainly because of its exposure to financial stocks. The loss approaches $10 billion. That's client money. Miller doesn't disclose his own losses.

Consolation: His fund is still in business.

Richard Fuld, former CEO, Lehman Brothers. If any one person has become the face of the Wall Street debacle, it's Fuld, who seemed to believe his firm was too mighty to fail—even once it had. While Lehman's share price plunged and trading partners started calling in hundreds of billions of dollars in debt, Fuld insisted all was well. He was so convinced of his firm's rosy prospects that at one point, he turned down funding from Warren Buffett, arguing that the interest rate was too high. But he failed to appreciate that Lehman's rabid borrowing—more aggressive than any other investment bank—left it mortally exposed, or that a federal bailout at the time would have been a political stink bomb.

Loss: Much of Fuld's personal wealth was in Lehman stock and he lost nearly $1 billion when the firm collapsed.

Consolation: He still owns five palatial homes, according to an illuminating exposé in New York Magazine.

Joseph Lewis, British currency speculator. This reclusive billionaire thought investment bank Bear Stearns was a bargain as its share price plummeted from a peak of $170 in 2007 and early 2008. The lower it went, the more he bought. Less than a week before the firm collapsed, Lewis picked up 569,000 shares at $55 apiece, according to the Wall Street Journal. Days later, the U.S. government brokered a JPMorgan Chase takeover of Bear for $2 a share. By then, Lewis owned nearly 10 percent of the company.

Loss: Nearly $1 billion. Bear Stearns CEO James Cayne lost about the same amount.

Consolation: The JPMorgan offer was later raised to $10 a share, mitigating the pain a bit.

David Bonderman, founder and principal of private-equity firm TPG. Bonderman has made a fortune buying distressed companies like Continental Airlines (1993) and Petco (2000), and turning them into profit machines. That's what he hoped to do with Washington Mutual, which was reeling from mortgage losses when TPG sank $1.35 billion into the bank in April. But there was no turnaround: Just five months later, Washington Mutual was effectively insolvent, prompting the FDIC to step in and broker a firesale to JPMorgan Chase.

Loss: Bonderman's entire $1.35 billion evaporated.

Consolation: His firm still controls a number of firms worth about $50 billion.

Stephen Schwarzman, CEO, Blackstone Group. Schwarzman saw a bright future for private equity when his famed firm went public in June 2007. But the share price has plunged 80 percent since then, from an initial price of $31 to less than $7 today. Blackstone, which used to mint money, announced a $503 million loss in the third quarter, with Schwarzman suggesting future results will be even worse. Among other things, Blackstone is the financial adviser to troubled insurance giant AIG.

Loss: When Blackstone went public, Schwarzman's owned about $4.8 billion in stock. Those shares would now be worth less than $1 billion for a $4 billion loss.

Consolation: He's still a billionaire.

T. Boone Pickens, CEO of hedge fund BP Capital. The Texas oilman has made billions guessing right about the future of energy—until this year, when he failed to foresee the sudden drop in oil prices, from record highs. In September, he predicted that oil prices would be at about $120 a barrel by the end of 2008. Right now, they're under $50.

Loss: About $1 billion of investor money, including $270 million of his own, according to the Wall Street Journal.

Consolation: His book The First Billion Is the Hardest is a bestseller. And his alternative-energy manifesto, the Pickens Plan, has gotten Barack Obama's attention.