Big Business as Usual.

May 7, 2003 12:33 PM

BigBusiness As Usual. "In announcing their record settlement with 10 Wall Street firms accused of misleading investors with bogus recommendations, [the Securities and Exchange Commission] also released new e-mail records showing stock experts chortling about how they were making out like bandits at the expense of the average investor", and revealed troubling insights into the way Wall Street really works: "Merrill Lynch initiated coverage of LFMN on September 28, 2000 with a 2-1 [10-20% appreciation forecast short term, 20% appreciation forecast long term], when LFMN traded at $22.69. At that time, Merrill Lynch was pursuing an investment banking relationship with LFMN. After Merrill Lynch initiated research coverage, LFMN's price declined to the....$3-5 range in December. On December 4, 2000, Blodget e-mailed a fellow analyst,'LFMN at $4. I can't believe what a POS [piece of shit] that thing is. Shame on me/us for giving them any benefit of doubt.' Merrill Lynch's research report on LFMN dated December 21, 2000, [reiterates] a 2-1 rating..."
And the "record settlement" with these common swindlers in three piece business suits from our brave SEC? For Wall Street, Fines Are A Day's Pay.
posted by fold_and_mutilate (23 comments total)

foldy, you ignorant slut! have patience! ain't ya never heerd o' trickle down? wait, here comes some now...
[partakes thick, brownish goo oozing down the wall]
see! that's what makes uhmurkuh so great!
posted by quonsar at 12:44 PM on May 7, 2003

"Well, I did some calculations, and apparently crime does pay" -- Jon Stewart.

(Mentioned on Lisa Rein's Radar)
posted by Space Coyote at 1:05 PM on May 7, 2003

This illuminates why it is so difficult to stop this sort of boardroom cronyism. The CEO answers to no one really, usually friends with the board, friends with the investment bankers. Who is there to hold accountable, when the shareholders know none of this is taking place?

Many shareholders have no idea, in that they are busy at work, while their money is "safe" in the 401(k).

The reality is the middle class is being looted.

Funny, how coach pays for the first class they can never sit in.
posted by The Jesse Helms at 1:06 PM on May 7, 2003

If you believe a brokerage firm or investment bank that has had one of its analysts issue a negative recommendation on a company is ever going to get any more investment banking business from said company, I've got a bridge I'd like to sell you.-- Bankrate.com, 2000

There's a reason sell-side analysts are on the sell side. Their main purpose -- in the grand scheme of the investment banking food chain -- is to sell stock-- Red Herring, 2000

Sell-side analysts typically work for full-service broker-dealers and make recommendations on the securities they cover. Many of the more popular sell-side analysts work for prominent brokerage firms that also provide investment banking services for corporate clients -- including companies whose securities the analysts cover-- SEC, Via Businessline, 2001

A research firm that decides to go it alone, without support from investment banking, is writing itself a death sentence. These firms were born with arteries pumping banking fees that feed every major organ. Only God could make a fish breathe air and a sell-side analyst subsist on the accuracy of his recommendations. -- AIMR, 2001

No one deserves to be a victim of fraud, but people who put their trust in an organization so rife with conflicts of interest ought not be too surprised about any of this. And it's hardly news.
posted by trharlan at 1:16 PM on May 7, 2003

tharlan - A good point, but if you stretch it just a little further, you get:

The loyal employees ... who put all their money in [company] stocks, what were they thinking? Were they thinking? People like that, of course they’re going to get robbed. Did they sniff around, read some interoffice e-mail, ask a few questions about why the bosses were dumping stock? Did they even try to find out the bosses were dumping stock? They did not. So they lost everything they had. These folks were not on the ball.
posted by soyjoy at 1:31 PM on May 7, 2003

That's what you get for trusting your employer.

(kill my boss? Do I dare live out the American dream?)
posted by Space Coyote at 1:36 PM on May 7, 2003

soyjoy: The loyal employees ... who put all their money in [company] stocks, what were they thinking?

A great question. The central tenet of Investments 101 is "Diversify".

I don't harbor much sympathy for the people who managed their money contrary to decades of time-tested advice, just as I lack sympathy for the armchair mechanic who takes his car apart and can't figure out how to put it back together, or the amateur roofer who lives in a leaky house.
posted by trharlan at 1:48 PM on May 7, 2003

Personally, I will never invest in the stock market unless I am wealthy enough to be the guy pulling the strings behind the scene, and screwing the small-timers. Otherwise, it's small business for me.
posted by zekinskia at 1:59 PM on May 7, 2003

The appropriate comparison shouldn't be fines/revenue, it should be fines/(revenue from initial offerings of stock during the indicated period). Not that it necesarilly invalidates Foldy's point about the fines being easy for these firms to handle, but the order of magnitude does need to be restated.

While not quite as calous as trharlan, I do think people who buy stuff because some guy says buy it should seriously reevaluate their investment strategy. The majority of the losses, btw, weren't in people's individual investmnet accounts, they were in managed funds run by people who understood how the business works - and those guys definitely can't excuse themselves by being shocked! shocked! that sellside research could be tainted.

Lastly, everyone focuses on the losses of the past couple of years while ignoring the fact that what was lost was profit that never should have been made - no one should have issued that telco high yield or those Internet retail stocks & no one should have made the stellar returns of the late 90s (the tragedy isn't the NASDAQ falling to 1500, it was that it ever hit 5000 or whatever). But people thought all of a sudden that the market was a guaranteed thing, and so they made poor investment decisions (they provided the demand side which the bankers supplied by giving them exactly what they were asking/begging for).

Does that excuse these analysts? No. Does that excuse banking firms for offering shoddy advice to clients? No.
posted by fluffy1984 at 2:04 PM on May 7, 2003

Also, The Jessie Helms -

I am trying to parse your post and I can't quite get to how you feel the issue at hand relates to corporate governance (board of directors and CEOs) or the looting of the middle class by the wealthy. Interested to hear your opinion is all.
posted by fluffy1984 at 2:07 PM on May 7, 2003 [1 favorite]

The Gramm-Leach-Bliley Act strikes again. The financial services industry needs to have better regulation, as allowing firms to continue like this will only hurt the economy more. The SEC should have been way more indepth with its probe and attempted to make at the very least some sort of legal case involving jail time, especially for scumbags like Blodget. The fines were also fairly low.
posted by Darke at 2:17 PM on May 7, 2003

People should get their information for investing from more reliable sources like the forms filed by these public companies with the SEC. They aren't allowed to lie on these forms, and the numbers are all audited and signed off by large accounting firms. Large accounting firms can always be trusted, as they are the gatekeepers for financial integrity.

Those SEC filings are the only information(short of illegal uses of insider information) that the average investor has available to them. Companies would never fudge those filings, as it would represent an attack on the markets themselves by betraying the public trust that is the basis for all markets.

(/naif)
posted by dglynn at 2:54 PM on May 7, 2003

who cares, the stocks are going up again
posted by H. Roark at 4:43 PM on May 7, 2003

Thieves? Running Wall Street? Surely not!

A word of advice, if you're going to put your money in stocks, you damn well better know what your doing and be prepared to invest for the long haul.

If you are some moron who thinks he's got an unbeatable system to make a short term killing in the stock market, than you deserve to lose every cent you own. I hope most investors learned this from the rain of dot-commers splattering on the sidewalk in 2000.
posted by mark13 at 4:46 PM on May 7, 2003

No one deserves to be a victim of fraud, but people who put their trust in an organization so rife with conflicts of interest ought not be too surprised about any of this.

I don't harbor much sympathy for the people who managed their money contrary to decades of time-tested advice...

A word of advice, if you're going to put your money in stocks, you damn well better know what your doing and be prepared to invest for the long haul.

I realize you guys are sitting around in your parents' basements in your underwear and thus able to theorize comfortably about the world, but the fact is that out here in reality we employees have no choice but to put our retirement money into stocks—it's the only game in town. And if I were capable of being interested in money and stocks, I wouldn't be an editor today, I'd be one of those obscenely rich investment-banker Master-of-the-Universe assholes. I picked an assortment from the choices offered me, crossed my fingers, and hoped for the best. I lost lots of money during the bull market of the '90s, and am doubtless losing more now. I'm sure I deserve to for not focusing all my energy on my money instead of my stupid marriage and my stupid reading and my stupid blog (and this stupid blog). But somehow I can't see it that way. I think they should keep your retirement money in a safe interest-bearing account instead of forcing you to gamble it in a sucker's market. I know, absurdly 20th-century of me.
posted by languagehat at 5:32 PM on May 7, 2003

Yoda: Stopped they must be; on this all depends. Only a fully-trained Jedi Knight, with the Force as his ally, will conquer Vader and his Emperor.
posted by poopy at 6:40 PM on May 7, 2003

i nominate fold_and_mutilate
posted by poopy at 6:41 PM on May 7, 2003

Yeah, I'm sure my investments will be much more productive when foldy runs the markets. Clearly he has the stockholders in mind.
posted by NortonDC at 7:33 PM on May 7, 2003

I realize you guys are sitting around in your parents' basements in your underwear and thus able to theorize comfortably about the world, but the fact is that out here in reality we employees have no choice but to put our retirement money into stocks

languagehat, what a breath of fresh air. Glad you said it so I can just quote it. That was kind of the point I was trying to make in linking to this Ian Frazier piece, which I'm afraid trharlan didn't quite read before endorsing it. When I originally read it last night I thought it only vaguely chuckleworthy, but in the context of some of these comments, it's a gut-buster.
posted by soyjoy at 8:46 PM on May 7, 2003

Languagehat: I realize you guys are sitting around in your parents' basements in your underwear and thus able to theorize comfortably about the world, but the fact is that out here in reality we employees have no choice but to put our retirement money into stocks.

I work in the business. Been doing it for seven years. If my arguments convince you that I am in my parents' basement, maybe I should consider a different career...

soyjoy: I read the article. Really. It was pretty clever.
posted by trharlan at 8:56 PM on May 7, 2003

tr: Bad assumption on my part, then, sorry. I only made it 'cause after Frazier went so far into detail on how the employee/investor was swindled by his own company into not diversifying, you came back preaching the "Diversify" gospel and mocking these folks as "amateurs." A little harsh, eh wot?
posted by soyjoy at 9:29 PM on May 7, 2003

Some little investors got screwed. Some also made out like bandits (they aren't of course, getting any press). Like trharlan, I'm in the biz. In the effort to try to stop the next batch of investors from getting "screwed" in the next boom market, permit me to offer a few little pieces of advice (and tr, do correct these if you disagree):

1. Beginning with Markowitz's "Portfolio Selection" in 1959, and confirmed over and over again as technology has permitted enormous amounts of data crunching to be done, there is pretty widespread acceptance of the fact that around 75% - 80% of any given portfolio returns, over time, reduce to one simple element: Asset Allocation. Spreading one's investments across various instruments - fixed income, equities, etc., etc. Trying to time the market (buy low! sell high!) is largely foolishness, as is following the advice analysts give on any individual equities ... and whether the analyst arrives at his/her opinions ethiocally or unethically will not alter this principle one iota.

2. While abuses are always what makes the press, the majority of folks that work in retail brokerage, and as analysts, are ethical people that do try to do the best for their clients. Here's the second big piece of advice: If the average investor is going to be reading analyst's reports, sample many of them. Anyone that actually invests a sizeable chunk of their money based on the opinion of a single analyst is a fool, and will soon be parted from their money.

3. Despite the complexity of the math of modern trading systems, the virtually inescapeable, fundamental variables in invesment decisions are still extremely simple to state: Risk and Return. The higher the risk, the higher potential rate of return should be expected. If you want no risk, you'll get no return. The higher the possible upside, the higher the potential loss. The individual investors using a solid asset allocation model, and pursuing it during the last boom, did not make nearly as much as those who jumped on the bandwagon and bought every stock that was hyped. Of course, during the current downturn they also have not lost nearly as much. The problem during the boom was not with analysts, it was with greed. And if you want to blame Wall Street executives, do not forget to also blame individual investors - because they participated too - just as fervently. No one complained about Henry when his word affected stocks in a way that doubled the size of people's portfolios. When the portfolios get cut in half because the company crashes, that's when suddenly he's to blame.

If people want to spend a lot of energy trashing Wall Street - cool. It's a great sport. People have been doing it for decades. It becomes a contact sport during down markets. Hopefully, a good number of people have also taken a moment out during halftime to actually learn some lessons. But the lessons are not new - the principles of investing intelligently have been around for a long time.

While I'd probably need to add a legal disclaimer if I wrote any more than this - I'll close with something that is as close to an absolute investment truth as it's possible to get:

If what a single analyst says, about a single stock or bond, can significantly affect your portfolio, you are investing very badly.
posted by MidasMulligan at 11:00 PM on May 7, 2003

trharlan: Sorry, I knew that was over the top as soon as I posted it. But dammit, I get pissed at people (not focusing on you here, just explaining) who act smug about the fact that they're into stocks and know about them and therefore everyone else should too. Let me give you a parallel. I was in Moscow on a group tour many years ago and happened to be the only one who spoke Russian when a bunch of us were stuck at the end of the subway line trying to find our way to the Ostankino hotel (way out of town) after dark when most transport had stopped running. Now, I could have taken the position "Hey, I learned Russian; you could have too, and you're now suffering the consequences of not bothering to. Better luck next time, chumps. Learn to make better choices." And gone on to find the hotel myself. But I didn't; I stuck around and translated for them and we all got there together. I'm not patting myself on the back; I think most people in my situation would have done the same. To do otherwise would be to be an asshole. But somehow when it comes to financial stuff there are a lot of assholes out there. Again, not pointing the finger at you, just explaining where the anger comes from. I didn't ask to have my retirement money put in the stock market, and I have no more interest in changing my entire lifestyle to focus on such things than you do in changing yours to study languages. Everybody's choices in life can land them in hot water if they run into the wrong situation. And life in these United States is becoming the wrong situation for more and more people. [/rant]
posted by languagehat at 7:27 AM on May 8, 2003