On Friday here, I argued that the current implosion of financial stocks is the equivalent of the tech stock bubble of 1999-2000, only upside down and backwards. Then, valuations were extreme and irrational on the upside. Now, they’re extreme and irrational on the downside. Then, like now, there was a lot of talk about the start of a “new era.” And, then (as now) strange new metrics emerged that were used to justify the extreme prices of the time. I happen to believe, for instance, that investors’ new obsession with the tangible common equity ratio—a measure that no one, most notably regulators, has ever shown the slightest interest in before—isn’t so different from tech stock bulls’ devotion to things like “eyeballs per share” back in the day.

Both eras had their own sets of cheerleaders, too—people who went from being nobodies to Omniscient Global Oracles almost overnight. In 1999, whenever Henry Blodget, say, or Jack Grubman or Mary Meeker made a pronouncement, the world stopped what it was doing to sit up and listen. But in the end, of course, the oracles stayed bullish too long, and descended back into obscurity almost as fast as they’d emerged from it. 

And now? In the midst of the current crackup, one name seems to be at the top of everyone’s list of gloom-and doom cheerleaders: Dr. Nouriel Roubini of NYU business school. He predicted the current crisis as early as anyone, and got it right both in severity and expected knock-on effects. His subsequent calls have proved prescient, as well. I don’t know of anyone who deserves more credit for forecasting the whole bloody mess the world’s in.

I mention this because I read the interview Roubini gave to the Wall Street Journal this past weekend. I’m starting to suspect that, just as Blodget and Grubman ended up staying bullish just as things began to turn down, Roubini will overdo things on the downside even once the financial system begins to heal itself.  

In particular, it’s a stretch for Roubini, and a dangerous one, to extrapolate his macro economic forecast for the financial system as a whole, and apply it equally to the individual institutions that operate in that system. That, unfortunately, is what Roubini does with respect to his comments about Wells Fargo this weekend. He tells the Journal:

Wells Fargo took over Wachovia. It doesn’t work! You can’t take two zombie banks, put them together, and make one strong bank. It’s like having two drunks trying to keep each other standing. 

Hold on a minute, doc. Wells Fargo a “zombie bank”? What data are you looking at to arrive at that conclusion? On the available evidence, none.

There’s simply no factual basis for what Roubini has to say. Wells hasn’t had the credit problems or exposure to bad assets that have plagued so many of its competitors. It was profitable every quarter last year, and is expected to be profitable in the first quarter of 2009. Its capital ratios are extremely strong.  

(As far as that goes, don’t try to argue that Wells’s acquisition of Wachovia has somehow, like a malevolent potion, magically transformed the company into a zombie. When it did the deal, Wells identified $60 billion of Wachovia’s assets as impaired--and wrote them down by 40%. Under the new marks, even Wachovia isn’t much of a zombie anymore.) 

And Wells isn't apt to run into new problems going forward. Over the next two years, we estimate the company will generate $65 billion in pre-tax, pre-provision earnings which will be more than sufficient to cover the $32 billion of charge offs we expect it to incur.  In all, Roubini’s “zombie” bank should make over $20 billion in the next two years!

Roubini’s been emphatically right for the last few years—a lot more right on the macro picture, certainly, than I have been. But he runs the risk now, I believe, of Jack-Grubmanizing himself. When I read Roubini’s comments about Wells Fargo this weekend, it was hard to shake the feeling that he’s gotten into the habit of starting off with the gloomy conclusion, and filling in the facts to support it later on. Even, by the way, when there are no such facts available.  

Interestingly, Roubini alludes negatively to the psychology that surrounded the tech bubble a decade ago, especially the psychology of the media:

The problem is that in the bubble years everyone becomes a cheerleader, including the media. This is the time when journalists should be asking tough questions. . . . The Masters of the Universe always on the cover, or the front page. . . .In the bubble years, no one asked the hard questions. A good journalist has to be the one who, in good times, challenges the conventional wisdom.           

In bad times, too, I might add. At the moment, however, Nouriel Roubini is the walking, talking incarnation of the conventional wisdom—which is why he’s become ubiquitous on the cable shows, and why the Wall Street Journal devoted 45 column inches to him on Saturday. The media have become Roubini cheerleaders lately, just as they were CEO cheerleaders not so long ago. I, for one, wouldn’t mind if they asked Roubini some of the tough questions he says the media should be asking. They might start, in a small way, by asking him what exactly he sees in Wells Fargo that makes it a zombie.

What do you think? Let me know!

Related:

Are Financial Stock Valuations the Mirror Image of Tech Stocks in ’99?

Memo To Feds: Stop Meddling In Wells Fargo's Spending Plans