The Myth of Wall Street

Why is Wall Street inherently conflicted? Greed and power should surprise only the feeble minded. When I started in the financial services industry, the concept of a Chinese wall was laughable. Yet, Wall Street plugs along decade after decade under the false assumption of self-regulation protecting the public from double-dealing. Wall Street's highest paid are responsible for abdicating their fiduciary positions in the most recent credit crisis. After experiencing the collapse of the financial system, I'd like to play Dr. Phil. How's that working out for you?

It's NOT working for me, to be quite frank, and I believe many investors share my disgust. Everyone loves transparency in everyone but themselves. Never is this statement more true than on Wall Street, where honesty and trustworthiness are weaknesses. Anyone who has run a business can attest, somewhere along the line your integrity will be challenged. During an interview with a wire house I was questioned by an executive of the firm. He asked, “ Are you honest, loyal, and committed?” Well, I answered quickly, “Absolutely.”

After working for the firm several years, it became my true belief the goal of this institution was to hire people with these traits. Not because the organization was aligning itself with my core values, but it was acquiring these values out of necessity. A colleague of mine decided to leave the firm for greener pastures, but he was met head long with an injunction. Allegations swirled back and forth about improprieties. To my chagrin, I was asked to set for a deposition to repudiate a claim by my colleague. I had to inform the management team that my deposition would be detrimental to the firm, because I was obligated to tell the truth. Well, as they say, the rest is history. If you would like to know how to short circuit a fast track career, outing your employer in a deposition is a sure fire way.

Why is there more transparency in a real estate transaction than in a financial asset transaction? Why is hiding your intentions deemed to be the norm and acceptable? People hiding assets inside hedge funds, limited partnerships, and private equity is deemed appropriate and wise. What part of full disclosure does Wall Street not understand? All of it! A radical idea would be to require all ownership positions be disclosed as quickly as possible. Hedge funds would be required to expose their investors and positions for the purpose of preventing abuse. Knowing who you bought or sold an investment from/to is the quickest way to remove conflicts. Asymmetrical information is a tool of Wall Street protected by the lack of transparency.

The most powerful people in our society should not be able to cover their investment transactions for extended periods of time, and hopefully, not at all. It is human nature to cut the pie in one's favor, so let's regulate the markets for the benefit of the small investor, not the large and sophisticated investors. The fog of war analogy is not acceptable, when it comes to the markets and disclosure. The regulators MUST focus on creating a level playing field for the small investors. A real-time public disclosure of an individual's investment position would be the perfect goal. Until the rules are changed, a small investor should own only the SPY, QQQQ, XLF, UYG, UYM and other ETFs.

Disclosure: Long UYG

Comments

[hillbilly:]

The only way “free” trade is acceptable and possible is with transparency of ownership-down to the individual. Risk must follow the profit all the way up the line.

2008 Nov 07 09:43 AM

[Permacritical:]

Don't demonize the free market! The buyer must always beware. I would not have a problem with full disclosure for everyone, but unfortunately the IRS and taxes exist and honest people are punished and deceitful people are rewarded. Who wants to be honest in an arrangement like this? Anybody? Anybody? The market is simply responding to the confiscatory role that taxes play in our society. It is a good thing that people hide their money so that they can keep as much of it as possible. This is what makes people wealthy, keeping our money not letting someone else take it. The government takes it and pees it away on the Ponzi Scheme of Social Security and other such tripe that adds no value. The 16th amendment is immoral, reprehensible, breeds deceit in our society, and is certainly and patently unconstitutional. The market is much less corrupt than those who make our laws, because it is forced to submit to it whenever it comes knocking on the door. The government is never forced to submit to it. The worst that can happen is that they lose their overpaid and underworked job, eg. Nixon and that A-hole Spitzer, but they'll make more than their state salary writing books and granting interviews. In conclusion full disclosure is great for everyone, just get rid of taxes and we'll certainly do our part to be honest. Then again without taxes the motivation for being deceitful seems to evaporate - funny how that works isn't it. If you treat the market right, then it will treat you right. If you treat it wrong, it will turn around and bite you in the A when you least expect it. The ones with the highest motivation to lie are the rich, becuse duh - they have the most to lose. Most of our problems are really quitre easy to fix when you think about it.

2008 Nov 07 11:32 AM

[hillbilly:]

"The ones with the highest motivation to lie are the rich, becuse duh - they have the most to lose. " exactly why we need complete transparency of ownership. Buyer can't beware without knowing who he is dealing with.

2008 Nov 07 02:30 PM