Wednesday, February 18, 2009

Now We Are All Sweating

We all know that money can corrupt, and large pools of money can corrupt more people than small pools of money. Welcome to Wall Street, where there are many many large pools of money and corruption was a way of life. Winslow, in his comments to my post of Tuesday, mentioned that there should be a Ministry of Business Ethics. I think that is an excellent idea if we could just find the right people to fill the positions.

My favorite people, the talking heads on TV news, are now trying to come up with what went wrong in the financial services industry and why we are where we are today. Everyone has an opinion, and I have my opinions too. Here is a slightly different twist on the events over the last 40 years.

While the financial services industry has an assortment of products to sell to clients, such as stocks, bonds, mutual funds and other forms of investments, the big thing that has changed over the last 40 years is the dissemination of information. In the old days, there was The Wall Street Journal, The Blue List of Municipal Bond Offerings, the Pink Sheets, all on paper and sometimes a day old. As desk top computers, the Bloomberg Company and other electronic forms of information came on the scene, information became available electronically, and everyone and anyone could have access to information and prices. Spreads narrowed and profitability became a tougher thing to come by. Firms merged to hold down costs, and the best traders followed the money to the better firms with the larger pools of capital. All this took place, and yet the enforcement of a “level playing field” disappeared as the philosophy of those in political power was one of deregulation. You can thank a host of characters, but two deserve special mention, Alan Greenspan, former chairman of the Federal Reserve Bank, and former Senator Phil Gramm. These two men did more to destroy wealth in this country, the United States of America, than any foreign army could have ever dreamed of doing.

The attitude of those on Wall Street, the traders and brokers, was that the buyer was not as smart as them. If they were, they would be traders and brokers and not on the “buy side.” This attitude flourished for many years and developed into a business culture of entitlement, or right, to take advantage of the “dumb buyer” on the buy side of the transaction. But, electronic information leveled the playing field and made it tougher for the institutional client to be taken advantage of. The retail buyer for the most part was still at risk.

The clear fraud that I saw in the late 1980s when I was a broker with a firm headquartered in Baltimore, now appears to be just the tip of the iceberg. That the New York Stock Exchange would list a new product, with no track record, and that the sales pitch would include the fact that the NYSE listed the product, and that that product would go belly up in six months and no one went to jail, probably only emboldened those that were a part of it or simply observed how innocent investors lost all their money in an investment product that should have never seen the light of day. The firms that participated in the underwriting of this fraud made money as did the brokers that sold it to their clients. The attitude that investors, whether private individuals or institutional clients, are marks or fish to be shot in a barrel did not just spring up in the last few years. All this behavior took place and more and the SEC stood by and watched. When you see what was gotten away with in the 1980s and 1990s, is it any wonder that the corruption of bond ratings for mortgage-backed bonds would be the next target for the unbridled greed of Wall Street?

Yes Winslow, we need better enforcement of the laws and perhaps we need better laws to deal with an industry where greed is as much a part of things as sweat is to sports.

Stay tuned.

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