When Will Criminal Conflicts of Interest Stop?

For the last 20 years plus I've been amazed by the vast conflicts of interest that exist on Wall Street and in the financial industry. My first wake-up call was watching my first investment firm implode because of its own internal conflicts and mismanagement of an IPO of a mortgage derivatives fund, brought to us by our new hot shot MBA CEO out of some Ivy League school. That one particular investment brought down a 100 year old firm, and lost our investors at least $50 million (this was when $50 million was a lot of money). The firm was blindsided by the upside potential of this mortgage related, derivatives based, algorithmic program that they felt was hedged in every way possible, and would earn the firm millions in fees over the years.

It was not…and in less than 9 months it brought the entire firm down. No one went to jail and no one was forced to take responsibility. Incredible.

About five years later I watched two of my company's red hot IPOs file for bankruptcy, both within a year. Again, well over a hundred million lost to investors, yet no one was forced to pay the price. Nauseating.

In 1995 or so I read an article in the NY Times about Merrill Lynch and its research department. The article (which was buried on page 15b I think) spelled out that of the 700 or so stocks that Merrill's analysts followed, each had a rating of Buy, Sell or Hold. You would think that the ratings would be evenly distributed, say with 300 Buy ratings, 200 Sell ratings, and 200 Hold Ratings….this would represent a somewhat balanced and fair ratings system. But, as the Times piece spelled out, Merrill's analysts had sell ratings on just a handful of these companies that its research department followed. If you're asking "how could that possibly be the case?"… here's how: each of these companies also paid (or had the potential to pay) Merrill Lynch significant and very lucrative "finders fees" or commissions on future investment banking business, and Merrill's higher ups that oversaw the revenue side of the business knew that a "sell rating" would be the kiss of death to ever earning those huge fees that are the lifeblood of Wall Street.

Finally, years later, Wall Street was investigated for this fraudulent practice and forced to pay over $1 billion in fines…an amount that was supposed to be true penance for their admitted wrongdoing. The truth however was something else. That $1 billion fine worked out to less than 3 days of profits for the firms involved!

Of course we all know about Enron, WorldCom and the various dot-coms that were nothing more than one big shell game. And we know about the $500 million bailout of hundreds upon hundreds of criminal savings and loans that became the Resolution Trust Corp from the 1980's. Our modern day, trillion dollar bailout of the banking industry and of Wall Street is happening right before our eyes. Just follow the money that's being doled out under the TARP Program and you'll know who caused it by watching who saves the day (hint, they are one in the same).

Now, we have the biggest Ponzi Scheme ever supposedly in investment gurus Bernard Madoff's $50 billion scam. The SEC investigated Madoff's firm 8 times over 16 years, yet could find only minor record keeping violations….say what? Any novice in investments or bookkeeping could have spotted this scheme from a mile away, and in fact many reported him to the SEC over a 10-15 year period. Yet incredibly, the SEC failed to once take action. Now, over 8000 investors in Madoffs fund have likely lost everything they invested. $50 billion gone in the blink of an eye…

When will these CRIMINAL CONFLICTS OF INTEREST stop?? When will someone in our country's leadership have the courage and decency to do the right thing and completely restructure the Pyramid Scheme that is Wall Street?? And, let's not stop there. While we're on the subject of Ponzi Schemes, let's do something about the one that really is the biggest Ponzi Scheme ever; Social Security, or Social Insecurity if we were to call it by its real name. This boondoggle of an entitlement program is bankrupt, as all of the money in it has been "borrowed" by the Federal government to pay for other programs. In 2020, if not sooner, our taxes will have to be raised to 70% just to fund these bankrupt entitlement programs, including Social Security, Medicare and Medicaid.

This is the sad, depressing future that we're leaving our kids and grandkids. President Obama, if you truly do represent "Change that we can all believe in", do the right thing and put an end to ALL of these criminal conspiracies, once and for all. Unless someone does it, and soon, we won't have a country to call home for very much longer.

Stock position: None.

Comments

[john s. gordon:]

the citizens gave the message to george dubya a few yrs ago - don't mess with our social security.
> jack

Jan 06 08:25 AM

[Bill Herbert:]

Great commentary. The public is learning more every day about how thoroughly corrupt Wall Street is - and you're right, this has been a very long-term problem, starting in the Reagan admin.

That's when standards for ethics were allowed to slide badly, the major accounting firms began to sell a clean audit (regardless of how rotten and fraudulent the company may have been) for "consulting fees" that were ten times the 'audit fee' and when Wall Street became a promotion machine for many dicey ventures, mostly in the tech space. We also made the mistake of putting a former CEO of Merrill Lynch (Diamond Don) in as the T-Sec.

Then stock options and crony-packed Boards came into fashion, and it has been a mega-theft party ever since. The mass of public equity shareholders has had trillions looted from their accounts - yet the SEC has reached an all-time low under the laughable Bush admin.

It's pretty nauseating, I agree.

Jan 06 08:57 AM

[john s. gordon:]

copperb - i couldn't have said it better myself.
> jack

Jan 06 09:58 AM

[bobbobwhite:]

The stock market has reportedly lost at least 1/3 of its retail investors who will never return to the market due to market criminality and negligent gov't oversight. However, as these folks are a small percentage of the total money invested in it, does Wall Street care that much? Hardly. And, WS thinks and perhaps knows that people have short memories and those lost "investors" will return after one big runup. Probably right, as people will always be greedy more than they are wise.

And, the "robbing Peter to pay Paul" in gov't has been going on forever, as in the case of Social Security. That won't ever change as it happens even in tiny departments right down to state Fish&Game, where license money that is supposed to be used to help natural resources has been used for such things as fleet car purchases for unrelated bureaucrats. Don't ever expect common sense, decency or fairness in business or gov't. It's a mutation of the genes that happens to all gigantic "systems", even if they start out with good intentions.

Jan 06 10:00 AM

[OldLimey:]

The problem is that in several of the larger democracies - notably the US, but also the UK, Germany, Japan and many of the others - the legislative and executive branches of government have been captured by vested interests. The identity of these interests varies from country to country, and in the US Eisenhower's identified threat from the defence-industrial complex has over the last quarter of a century been supplanted by Wall Street. The only way to tackle this problem is through radical reform of political funding, lobbying practices, and the movement of public officials between jobs in the public and private sectors. I can't see it happening, and certainly not on the watch of a Chicago 'machine politician' whose appointments and outline policies look like a trip back in time rather than a true agenda for change.

Jan 06 10:01 AM

[axelrod608:]

Amen. Well said.

There's a reason I trade as I do. The only time I trade Wall St firms is shorts and puts. I doubt a one of them would be found solvent if one got a look at their level 2 and 3 portolios.

IPO's may be good for a quick pop, but ALL new startups are risky. Anyone who doesn't know that hasn't done their due diligence.

As for Wall St stock ratings, anyone who gives them consideration is too woefully ignorant to be in the market at all. The sheep ALWAYS get fleeced.

Jan 06 10:05 AM

[tiredofitall:]

It's time we all admit that government is corrupt, regardless of who is in 'power'. It's also time we all admit that the only way to really change or fix the issues with Wall Street is to stop enabling them - we live off them daily through the buying, selling and trading of stocks.

Big business will likely always be corrupt, but at least when it's private, hundreds of thousands don't loose their life savings.

Jan 06 10:59 AM

[bill d:]

I would share your indignation except where and what the f**k were YOU doing while this was going on ?? Did YOU do anything about it then ?? I'll assume you drew your checks and I doubt you gave any of the money back. Of course it wasn't YOUR fault was it ?? , Easy to slam Social Security but wait until YOU need it. A LOT of people not as fortunate as you & I couldn't afford to contribute and now it's all they have. Somehow I don't think you will. My portfolio including IRA is down about 50% and it is rather conservative. I still trade what I am willing to lose but SS is still my current major source of income. I am very fortunate - my net worth is probably around 600 K - mainly due to a couple of sound real estate investments - properties I lived in and sold - not a bubble boy.
The only problem with SS is the people (govt) that run it and treat it as their own union fund.
Wait until you've been around 50 years and been screwed a few times personally - then you can be righteously indignant. Personally I'm extremely pissed off. I believe China executes these pieces of garbage for their dealings - I would gladly pull the trigger myself

Jan 06 11:24 AM

[henarl:]

"When will these criminal conflicts of interest stop?"

Never! Because those that have the power to stop them are in on them. Anyone who believes in the honesty and objectivity of the financial industry and the government regulatory agencies, and invests accordingly, is a fool.

Brokerage analysts always have their ulterior motives. Do your own research to the best of your ability and hope for the best because investing is at best just educated gambling.

Jan 06 03:45 PM

[SeekingTruth:]

At long last a sense of outrage is starting to well up and overflow the walls of the shoddy and weak criminally constructed earthen dam of the Wall Street/Congressional/S... contrived Cess Pool. Relax for a moment and all this pent up sense of insult and abundantly well justified anger will dissipate faster than a church mouse at a rattlesnake picnic.
Unless laws are changed to better protect the investing and tax paying public , and appropriate punitive accountability established and carried out, the same crooks and crooked politicians will continue laughing all the way to their (Swiss) bank accounts.
The author ,and many of his colleagues, continue to do their part , but the rest of we fellow Americans must start to do ours. How? Get informed , seek out the truth, and raise Hell at every opportunity when it is needed and justified, and there is plenty of opportunity to go around for everyone . Do NOT assume that everything is going well just because something has not blown up in our own private and individual faces in the last few hours. The abuses may be spread out , but they are continuous and pervasive overall, and they threaten each and every one of us. Be inattentive and inactive at your own peril. We can and must do better -- Let's DO IT!

Jan 06 04:20 PM

[ngwun:]

"and you're right, this has been a very long-term problem, starting in the Reagan admin."

That would not be very long term. However i agree with your direction, & on an exponential, 1970 could approximate zero.
This behaviour has been occuring for thousands of years, even to the caves. Mutual predation may qualify the gene pool, but the great problem is the hypocracy of saying we believe one thing while being motivated by another, even to rewarding most, as a society, those who dissemble the best.
"Society's to blame, & we'll be charging them too!" (Python), but there is a problem for the group when one born with great riches; physical, mental, or financial, deems that this gives the right to vampirism of the group.
The actors are paid more than the engineers, whether they be on screen, or in the boardroom.


On Jan 06 08:57 AM copperbaron wrote:

> Great commentary. The public is learning more every day about how
> thoroughly corrupt Wall Street is - and you're right, this has been
> a very long-term problem, starting in the Reagan admin.
>
> That's when standards for ethics were allowed to slide badly, the
> major accounting firms began to sell a clean audit (regardless of
> how rotten and fraudulent the company may have been) for "consulting
> fees" that were ten times the 'audit fee' and when Wall Street became
> a promotion machine for many dicey ventures, mostly in the tech space.
> We also made the mistake of putting a former CEO of Merrill Lynch
> (Diamond Don) in as the T-Sec.
>
> Then stock options and crony-packed Boards came into fashion, and
> it has been a mega-theft party ever since. The mass of public equity
> shareholders has had trillions looted from their accounts - yet the
> SEC has reached an all-time low under the laughable Bush admin.<br/>
>
> It's pretty nauseating, I agree.

Jan 06 07:41 PM

[St Alphonso:]

It's all in the great ebb and flow. We have swung from post WW2 survival to pre-WW3 destruction. I don't think they want us just poor--they want us dead.

Jan 06 08:18 PM