Sunday, November 2, 2008

Will There Ever Be a Reckoning for Wall Street and Brokers?

For the last three decades, I have read thousands of stories about brokers selling inappropriate investments, failing to disclose the risks and the alternatives, and generally placing their own financial interests before their clients.  The only defense for those individuals who rely on "financial advisors", who are really nothing more than salesmen, is to acquire enough knowledge about investments so that you are capable of fulling vetting the advice being given to you.   

There was yet another example of a broker taking advantage of a client's trust and lack of knowledge in a front page article in today's NYT, called  "The Reckoning: From Midwest to M.T.A., Pain from A Global Gamble"NYTimes.com   BusinessWeekThe gist of this story has been told tens of thousand of times in the past, with the names and schemes changing but the end result is the same.  There has yet to be a reckoning.     A "financial advisor" from the firm Stifel, Nicolaus & Company (who no longer wants to be called a financial advisor due to litigation no doubt) convinced several school boards in Wisconsin to borrow 165 million and to use 35 million of the school boards' money to insure some of the toxic crap sold by Wall Street called Collateralized Debt Obligations.  The school boards were not told that this was what they were doing.  Instead, the trusted financial advisor told them, and this was recorded, that the School Boards would be investing in a CDO containing 105 bonds from reputable companies.  The broker had attended a 2 hour course on CDOs.   This 2 hour course made him an expert and sufficiently knowledgeable to advise the board members about this 200 million dollar investment.   If 6% of the bonds defaulted, the school boards would lose all of their money which in fact happened. Even if none of the bonds defaulted, the Boards would have received only slightly less money by investing their 35 million in treasury bonds.  The broker made $300,000 a year.  His firm made about 1.2 million on the deal.  Other banks involved in the deal made their cuts.  The only way to protect yourself from these kind of shenanigans is to know more than the highly paid salesman masquerading as knowledgeable financial advisors.   

I have been making my own financial decisions for over three decades. I would never rely on a broker.  As I have said in these blogs, I am not a financial advisor but an individual investor who makes his own financial decisions.  For those who rely on brokers,  I would suggest becoming far more knowledgeable so that you can assess for yourself the wisdom of the advice received from these highly compensated salesman. One question that always needs to be answered is whether the salesmen is advancing his own self interest at your expense and whether there are alternatives to his recommendations which would achieve your objectives but provide less money to him.  The folks in the fleeced school boards in Wisconsin apparently did not ask these basic questions, nor did they make a meaningful effort to learn about the recommendation before jumping into it,  and they certainly did not do their own homework about the patently inappropriate product that Stifel recommended to them.  They are not blameless.  All of them should be fired for failing in their duty to the public.   If there is any remaining doubt about blindly trusting representatives from a brokerage company, then maybe you need to review the stories about investment firms unloading positions in auction rate securities on unsuspecting clients, telling them they were as good as cash from earlier this year. It’s a Long, Cold, Cashless Siege - New York Times Ex-counsel at UBS settles auction-rate trading case with New York State - International Herald Tribune Auction rate security - Wikipedia, the free encyclopediaCitigroup faces auction rate security fraud charges - Aug. 1, 2008New York State sues UBS, alleges auction-rate fraud | Reuters Compliance Week: Compliance Week: Cos. Face Auction Rate Insecurities

This is just a very small sampling of the articles on this subject.  I have read stories like the one in the Times today ad nauseum for thirty years and it keeps happening over and over again, year after year, decade after decade. 

The stories from earlier in this decade are even more chilling,  recommending that clients buy trash like Enron or Worldcom when the investment firms were trying to do more business with them, and the sordid other instances of conflicts and self dealing.   With all of these clear warnings about the greed mentality, incompetence and irresponsibility of Wall Street , their self aggrandizement-in it to enrich themselves above all else mentality, irrespective of the harm left in their wake, the only question that I have is when will there be a Reckoning?   There will only be a reckoning when everyone realizes that you have to become knowledgeable yourself, you have to do your own research, you can not rely on what you are being told, and you can not assume that the person pretending to be knowledgeable is in fact knowledgeable, competent or even interested in promoting anything other than their self-interest or the interest of their firm.  

I never invested in Washington Mutual.  If I had, I would have found this story instructive about how that company operated. NYTimes.com  My question after reading this story, and countless others like it, is why are the top executives for a firm like Washington Mutual paid so much money to destroy their own company and the savings of investors?  

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