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The Securities and Exchange Commission (SEC) bills itself as “The Investor's Advocate.” As a matter of fact, on their website they title the page about themselves with that byline, followed by “How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation.” If that is their intent, then we must consider them 'The Well-Meaning Gang That Couldn’t Shoot Straight.'

The SEC certainly enjoyed noble beginnings, in 1933, in response to the abuses that led to The Great Crash. The SEC was to be a nonpartisan and independent-of-outside-influence regulatory agency that administers federal securities laws to protect investors, to ensure that securities markets operate fairly and that investors have access to all material information on publicly traded companies, and to regulate brokerage firms, advisors who provide investment advice, and investment companies.

I believe that nobility lasted at least until the appointment of its first Chairman in the same week. Joseph P. Kennedy was a stock market and commodity speculator in the days when there were no laws against insider trading – which he engaged in; associated with mobsters like Sam Giancana and Frank Costello – according to their own admission; was likely a part of the "Bear Raid" that precipitated the 1929 stock crash; drove up the value of stocks like Libby-Owens-Ford by telling the public one thing while secretly manipulating the other side of the market; and bribed journalists to present information he knew to be false.

So why was Kennedy the first SEC Chairman? Partly because he donated vast sums to FDR’s election and partly because, as President Roosevelt answered someone who asked why he had appointed a crook to such a noble office, "Takes one to catch one."

Through the years, the SEC did some wonderful work in trying to fulfill the objectives of its charter. Prospectuses list all the known risk factors in various industries and companies, investment banks were prevented from acting as commercial banks and taking depositors’ money, brokerage research and underwriting staffs were separated, the short sale uptick rule was established, Ponzi schemes and shady practices of unethical investment advisors were uncovered, etc., etc.

And then came the 1990s. It seems that, as hard as the lower level auditors accountants and lawyers were working at the micro level, the SEC at the top was serving more and more as the Washington, DC branch of Wall Street. Consistently chaired by Wall Street CEOs on a brief “sabbatical” in the “public sector” (which you may read more properly, depending on which animal you favor, as “stalking horses,” “weasels” or my own favorite, “wolves in sheeps’ clothing”), these men seem to have set out with a single purpose: to dismantle the regulatory structure built up since the Great Crash to protect investors.

What we are left with today is a shambles of protection that affords little protection from the most egregious excesses of the most egregious practices of Wall Street. Today Glass Steagall -- which prevented commercial banks from using depositor funds to engage in speculative trading and kept Wall Street brokers from getting their hands on that money--is no more.

As Sy Harding of Street Smart Report (see his free daily blog here) wrote a few months back…

The Glass-Steagall Act was passed in the 1930’s to help prevent a recurrence of the 1929 market crash and the Great Depression. It provided strict separation of the activities of various types of financial firms, the overlapping of which had been significantly responsible for creating the late 1920’s market bubble and subsequent crash…

Basically, savings banks could take in deposits from customers and loan the money out in home mortgages, auto loans and other types of personal lending.

Commercial banks could handle deposits and checking accounts of businesses and make commercial loans.

Investment banks could provide investment banking services, including arranging for companies to go public, merger and acquisition activities, making bridge loans, etc.

Brokerage firms could handle investment services for investors.

Insurance companies provided insurance and annuities.

Real estate brokerage firms provided real estate services on a commission basis.

Mutual funds invested in stocks, bonds, or other assets and sold shares to the public to provide them with diversified portfolios.

The financial sector screamed and yelled, but the separations were made fairly quickly and enforced. And none of the dire consequences Wall Street firms warned would be the result if government set up such restrictions took place. All sectors of the financial system managed to flourish very well for the next 60 years under the separations and restrictions.

But in the late 1990’s, banks and insurance companies began looking over their walls in envy at the big profits that brokerage firms and mutual funds were making from the booming stock market. Brokerage firms looked over their wall at the profits that could be made from packaging home mortgages, auto loans, etc. into leveraged investment derivatives…

…in 1998 they began lobbying Congress, and bombarding the media with articles and interviews aimed at having the public accept the idea of tearing down the walls… Overnight the walls disappeared. Banks were suddenly in the brokerage business, introduced their own mutual funds, were neck deep in investment banking, had huge trading departments trading for their own profits, etc. Brokerage firms were providing home mortgages, packaging the mortgages of other lenders and selling them to investors, etc.

And we soon saw the results with the stock market bubble in 2000, and the subsequent real estate bubble just a few years later, and the near collapse of the entire financial system last year under the weight of all the toxic assets that had mushroomed on the balance sheets of all types of financial firms…

…Wall Street of course claims that the abolishment of Glass-Steagall in 1999 was a good thing, that it resulted in innovative investment changes that strengthened the economy and markets.

Huh? We’ve had two recessions and two severe bear markets since 1999, with buy and hold investors still way underwater over the last 10 years, consumers in worse trouble than they’ve been in since the great Depression, and the financial system near total collapse for the first time since the 1929 crash and its aftermath…

In the late 1990s, Congress and President Clinton embraced the campaign spearheaded by Sandy Weill, then head of Citicorp (NYSE:C), to rescind Glass-Steagall. Weill and his ilk paid $200 million in lobbying fees for this endeavor in the 1997-98 election cycle alone (and contributed another $150 million directly to various Congressmen and other politicians during those months). That was chump change to Wall Street – and, in fact, it came out of the pockets of Citicorp and other shareholders, without Weill or his cabal of cohorts having to put up a penny of their own to pull off this taxpayer heist. No matter the source, it was enough to buy respect, votes, or whatever. And we are still paying for it today.

(According to PBS's "Frontline," just days after the Treasury Department agreed to support the repeal, Treasury Secretary Robert Rubin accepted the job as Weill's chief lieutenant at Citigroup. Weill and co-boss John Reed thanked President Clinton, whom Weill called in the middle of the night to keep the deal going, personally.)

The major investor protection to prevent another Bear Raid as in 1929 was the “uptick rule,” which stated that no short sale could take place on a downtick; that is, the stock must fluctuate up and down and can only be shorted if its current price is higher than its last price. The idea was to prevent uncontrolled short-selling from driving stocks and markets lower than they would normally go. In 2007, it was rescinded.

Today, the SEC and a number of Wall Street firms are trying to gut yet another, and perhaps the last, of the Big Three investor protections. This regulation stems from the 2000-2001 revelations that Wall Street analysts were pumping stocks that in private e-mails they called a piece of excrement, albeit a bit more colorfully. They knew this stuff was trash, but they wrote glowing reports extolling its virtues so they could pump and dump ever more shares on an unsuspecting public. (This one is in limbo, since a federal judge held them up, noting “The proposed modifications of the rule would deconstruct the firewall between research analysts and investment bankers.” Ya think?

Where does this leave us today? In a word: unprotected. The “new” short sale collar is a bad joke. Designed by Wall Street, it basically says that if a stock falls 10% in a day, nobody can short it for a couple days – after which they can bang it down another 10%, then another, and so on. We had a series of intelligently-designed and well-enforced rules from the 1930s to the 1980s. Remember? Then all hell broke loose and, ever since, “investing” has given way to nano-second trading by computers, and individual protection has taken a back seat to institutional swinging, speculating, and day-trading of your pension, your fund, whatever and wherever they can use Other People’s Money for their own gain.

What to do about it? Well, as a citizen you might remind your alleged legislators that this is an election year and if they’d like that cozy seat again in 2011, they need to reinstate the uptick rule, a modern equivalent of Glass-Steagall, and keep Wall Street honest.

As an investor, you need to simply be aware that the relative quiet and lack of volatility of the past few months could be shattered at any time. As a way to protect yourself from and actually profit from volatility, you might consider the iPath S&P 500 VIX ETF (NYSEARCA:VXX), which is basically a play on the volatility of the market. Since most people will wait to sell until all others are selling, we’re betting that there will be a waterfall effect of selling and that volatility will rise -- and that VXX is a smart way to profit from their selling.

And if we are successful in creating a new Glass-Steagall equivalent, , I would think a number of regional banks like Wilmington Trust (NYSE:WL), Bank of Marin (NASDAQ:BMRC), Bank of Hawaii (NYSE:BOH), United Bankshares (NASDAQ:UBSI), Trustmark (NASDAQ:TRMK), Heartland Financial (NASDAQ:HTLF), Sterling Bancshares (NASDAQ:SBIB) and Capital City Bank Group (NASDAQ:CCBG) would do very well and recommend them for your further research. If we fail to reinstate Glass-Steagall, these banks might still do quite well, but more as takeover candidates by money-center banks Too Big Too Fail, Too Stupid to Succeed Without Regularly Reaching Into Our Pockets.

Author's Disclosure: We and / or clients for whom these investments are appropriate, are long VXX and a substantial cash cushion. All the regional banks are on our watch list but we aren’t ready to buy them yet…

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – for example, our Investors Edge ® Growth and Value Portfolio beat the S&P 500 for 10 years running but did not do so for 2009. We plan to be back on track on 2010 but then, “past performance is no guarantee of future results”!

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

Source: SEC: Well Meaning Gang That Can't Shoot Straight