Why Wall Street's settlement is a joke on the trusting rubes

April 30, 2003|By Jay Hancock

FINANCIAL service companies always have sold bad investment products to rubes. Always will.

New York Attorney General Eliot Spitzer almost admitted as much in his Monday advertisement of the "far-reaching reforms that will radically change behavior on Wall Street."

In a close call with reality near the end of his decree, Spitzer acknowledged that "there may be other problems on Wall Street" and "there may even be scandals in the future."

Gosh, Eliot. You think?

A politician's inability to speak plainly, or perhaps scruples about showing cynicism unbecoming of a public official, stopped Spitzer from flatly predicting the inevitable. But he gets points for coming close and venting some air from the reform bubble.

The phrase "caveat emptor," as the Latin indicates, has been in use for a while.

But modern financial products offer unprecedented opportunities for consumers to wake up one day and see a picture of their money on a milk carton.

Because the business of Wall Street involves not toasters and brake pads but nest eggs and net worth, the dollars are enormous. Because the dollars are enormous, more of them tend to disappear in the inevitable shenanigans. Big dollars inflate brokerages' incentives to cheat and consumers' propensity to make dumb choices.

Computers and globalization have opened up a marvelous new world of inappropriate investments for the average guy and gal - and made it easier to take the plunge.

What's more, since land stopped being the key to wealth after 1850, financial products have become increasingly abstract, which also aids fraud. You can't kick the tires or slam the doors on an insurance policy or a junk bond.

The settlement announced Monday is a joke, and not just because Sanford I. Weill is still running Citigroup and the $1.4 billion in industrywide penalties is tip money in Lower Manhattan. Indeed, $1.4 billion is less than what Wall Street cost one client - Orange County, Calif. - a few years ago.

Merrill Lynch, whose Internet analyst, Henry Blodget, referred to a company he recommended publicly as "a piece of junk" in private, was fined $200 million and barely broached the topic at its annual meeting Monday. Standard & Poor's said yesterday that the settlement shouldn't be a big problem for the malefactors' credit ratings.

The settlement's main flaw is that it pretends to be more than it is. For all the hoopla, the deal involves a relatively small aspect of Wall Street - retail, "sell side" stock analysis. By insulating analysts from inter-firm conflicts that might skew their research, the settlement promises pure, sincere, 24-carat stock dope and, presumably, early retirement for everybody.

Securities and Exchange Commission Chairman William H. Donaldson talks about restoring "investors' faith and confidence in the fairness and integrity of our markets." National Association of Securities Dealers Chairman Robert Glauber said Monday "marks an ending, but even more, a beginning."

Four problems.

1. Stock analysts will always get pressure to pull punches from investment bankers as well as from the companies they cover.

2. Stocks are inherently risky.

3. Even honest analysts are frequently wrong.

4. Rogue brokers.

Stock analysts are the advertising copywriters of the financial trade. The brokers and financial planners do the real work, and no broker worth his Bloomberg screen needs a script from research to work up a sales pitch. There are many honest and good brokers, but the other kind also thrive, as a browse through the "disciplinary actions" section of NASD's Web site demonstrates.

Join me in a trip through The Sun's business news archives. 1992: "Salomon agrees to pay $290 million fine for violations of securities rules." 1997: "Prudential could wind up paying $3.38 billion to settle fraud claims," and "30 brokers to pay $910 million to clients in Nasdaq trades." 1998: "Merrill to pay Calif. county $400 million." And so forth.

Now you're going to call your broker, sell your stocks and then fire her. Don't. Good stocks, bought at reasonable prices, are still probably the best long-term investment.

The point I'm trying to make is that wise investment advice in 2003 is the same as in 1993 or 1923. Educate yourself. Do you own research. Don't rely on Henry Blodget or Eliot Spitzer. Stocks are risky, and Wall Street cares more about itself than it cares about you.

To suggest otherwise would be the biggest fraud of all.

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