Restoring CONfidence in Wall Street
The plea deal: Now we should believe them?
CBS MarketWatch, 5-1-03
WASHINGTON (CBS.MW) -- The big investment firms -- and the self-regulatory organizations that are supposed to keep them honest - think this week's $1.4 billion settlement with regulators will restore investor confidence in Wall Street.
Let's hope not.
I'm not suggesting that investors stay out of the market. That would be foolish.
But if investors have learned anything from this shameful episode, they will never again have complete confidence in anything they're told about an investment. They will always be suspicious that they're being lied to by people whose loyalties lie elsewhere. And that will make them better investors.
The key to this settlement isn't the $1.4 billion that made the headlines, and it's not the rule reforms that are supposed to limit future conflicts of interest. The key to the settlement, at least for investors, is the pile of documents that prove you can't trust Wall Street - no matter how big the name or how supposedly reputable the firm.
"It's been a hard lesson, but it points out there's no substitute for doing your own homework," says James Nelson, who is in charge of securities regulation for the state of Mississippi.
Nelson says Wall Street executives and analysts should be ashamed of themselves for making American investors more cynical. The Gadfly agrees about the shame. But I'd argue that the cynicism, now justified, is exactly what individual investors need.
Read cynically
Nobody's suggesting that investors ignore investment research, or that financial journalists stop interviewing analysts. But consider EVERY statement about a potential investment with a cynicism fed by reading the incriminating analyst e-mails that the prosecutors and regulators dug up.
Nelson suggests that when considering any piece of investment information, you should ask yourself: "What is this guy's motivation, who is this talking head, why is he on this program, how is he getting paid?"
Andre Pineda, the deputy commissioner of California's Department of Corporations, which regulates the securities industry in the state, says he hopes the Wall Street scandals provide "a wakeup call for a generation of investors."
"The bottom line is the only person an individual investor can be sure doesn't have some conflict of interest is the individual investor. Trust yourself, and get independent confirmation of any advice you're getting," Pineda said. "The fact that you're getting advice from the biggest names in the business doesn't mean that you're getting good advice."
Investors aren't stupid, but we sometimes ignore our best instincts.
We knew we needed to be careful with research. We knew our brokers and their firms were out to sell us things. We knew we should take the time for due diligence beyond a "buy" rating or a newspaper article. But we didn't want to miss out on the easy money, and we got burned.
Maybe we'll finally learn our lesson this time.
"If investors haven't yet realized the need to look for objective and multiple sources of information before making an investment decision, this case is proof positive that you need to do that," said Heather Murphy, spokeswoman for the Arizona state securities regulator. "If you're investing money you're risking money, so it behooves you to do it wisely."
Trust yourself
Pineda points out that the settlement should also teach investors that there is only so much the government can do to protect you. The regulators can try to clean up the mess, punish the guilty and try to impose rules to prevent the next scandal, but they can't return your retirement.
And don't believe Wall Street executives when they say they'll never cheat you again.
Imagine, if you will, a crooked car dealership -- we'll call it Grubman-Blodget Motors for the sake of the story. They've been turning back the odometers and slapping on fresh paint to sell junkers as almost new.
Suppose they get caught and fined for fraud. Maybe a few of the salesmen quit in shame and go off to spend their multi-million dollar commissions. Would you buy another used car from the same lot without having your own mechanic check it out?
This time, we've got somebody to blame. The salesmen snookered us, the analysts cheated us, the executives lied.
But knowing what we know now, the next time we're taken in by a sales pitch and fail to do our own homework we'll have only ourselves to blame.