2008 - A Perfect Storm on Wall Street

Watering Holes – Keeping Score
Was it just an accident? Was no one aware of what was going on? Not for a New York minute. There are dozens of restaurants and watering holes located throughout the downtown and mid town areas of Manhattan where those involved boasted of their investment genius by creating virtually worthless securities. And, as is their habit, they surely bragged of their exploits in the Hamptons and Cape Cod as well.
These kinds of activities never take place in a vacuum because part of the game is the one upmanship and bragging rights of the players involved. After all, these were the “Masters of the Universe”, often self described as “Financial Engineers” - not research analysts or investment professionals.
They likely owned MBAs from any number of white shoe, elite colleges and universities where they received part of their initial training. And we should not forget how many of those involved may have carried the “CFA” designation, “Chartered Financial Analyst” – how does that work? This crowd did not include any “Joe Six-pack” types or petty drug users and dealers who populate our jails. The result is the indictment of the entire securities industry without distinguishing between the honest investment professionals and these unprincipled con men, the self-described “Financial Engineers.”
Boards of Directors
How could this have happened on so wide a scale? It’s based on more than just the “greater fool” theory. The perpetrators had to be permitted, allowed, encouraged and highly motivated to produce the worthless products they peddled to unsuspecting investors. And they had to have willing enablers as well – it was no accident. Who might be among the enablers? Take a look – senior management, boards of directors, chief compliance officers, and small armies of lawyers in “legal departments” who are likely to have reviewed these products and waved them through. Perhaps one of the most amazing factors is that as widespread as these activities were there are as yet no known whistle blowers who stepped forward to alert regulators – apparently not one leak. And let’s not forget that the political class on both sides of the aisle, the so-called rating agencies, that actually rated any number of these products as investment worthy securities, and the regulators, federal, state and local. Were they all looking the other way?
It’s as if no one was watching the store – or perhaps some of them were participants in the “action” – we may never know. But we do know this much, as this is written not one individual has been charged, indicted or jailed for their part in this Perfect Storm. How can that be? Whatever happened to “regulatory enforcement”, transparency and accountability?
Where are all the lawyers?
Virtually every investment firm of any size employs a small army of lawyers whose job it is to review and approve investment offerings to the public, even those created by so called financial engineers. The job is simple: ensure that the investments are in compliance with all federal and state requirements for publicly offered securities.
In fact, it’s unlikely in the extreme that financial products offered by a firm would be created by a salesman – or financial engineer – without being studied and reviewed by one or more legal compliance types employed for this purpose – it’s their job. In other words, products or investments created by the firm offering them would not get out of the door without first being examined and reviewed for compliance with all aspects of applicable regulatory requirements.
Did this happen? Did the issuing or sponsoring firm have its legal/compliance department review these products? If so, how many lawyers were involved in the review/approval process? Someone had to sign off for compliance purposes – who were those lawyers?
Almost any firm involved has its own in-house legal/compliance departments, plus outside counsel, which might also be involved in the review process. In addition, it’s also possible that one or more of the staff lawyers were formerly employed by the SEC and “transitioned” to their new employers as part of their career paths, which raises additional issues. The process should have involved all of the above, plus the SEC, as well as the state Attorneys General – and so far there is an eerie silence that blankets these critical questions. Hopefully we will someday learn the answers to these questions, and all the legal/compliance lawyers will be identified and be subjected to regulatory actions, including possible disbarment. While this won’t necessarily involve recovery of investment losses, at least there will be a degree of accountability and the possibility of legal claims for recovery. And that’s a start.
Mutual Funds
I have often said that I firmly believe that mutual funds are the worst possible investment for the public, except for all other investments available. I still believe that despite the fact that so many funds have seen asset values decline 30 to 40% or more. Does anyone seriously believe that all of those well established, experienced, proven mutual fund portfolio managers woke up one morning last summer and overdosed on stupid pills? And that’s the point. As this is written, I am not aware of any open end mutual fund manager or advisory organization that has even been hinted at as having contributed to what has occurred. I believe that these well managed mutual funds will recover to their previous levels. Good, smart, capable portfolio managers haven’t suddenly lost their abilities as competent money managers. But it will take some time for markets to stabilize, which will happen as investor’s confidence is restored.
One of the smartest ways to help this along would be for congress to declare a 5 year suspension of capital gains taxes on all securities investments. That will do far more than pouring monies into securities companies and banks, many of which were active participants in the debacle we find ourselves in today.
Markets and securities prices will recover, but it won’t be because of any so-called federal “bailouts” with the government printing money and showering it on many of the same people who were responsible for putting us where we are today. The recovery will come when our friends in the legal profession step up and initiate legal actions against dishonest, manipulative marketing machines, including executives and boards of directors who acted as bystanders while all this unfolded. And it will happen when the regulatory authorities end their kabuki dance and go after the Masters of the Universe, every one of which is known to them. Then it will take a rare instance of politicians recognizing and acknowledging their part in the devastation of so many investors’ financial futures and disgorge any and all campaign contributions from the securities industry and refuse to accept them in the future, i.e., make those contributions illegal. After all, how the hell can you “regulate” those who are the equivalent of your very own ATM machines?
One thing is consistent - the thread that ties all of this together - the breeding mills that created the atmosphere that encourages people to discard ethical principles and anything like moral standards. It’s what a number of those white shoe, Ivy League colleges are all about. Anyone with a pulse knows that this did not happen in a vacuum. People knew about it, promoted it, encouraged and rewarded it (and themselves). The only question that remains is will anyone be held accountable for this massive fraud, and when? Who were the players? What did they know and when did they know it? It’s actually conceivable that the regulator and political classes knew everything about it and turned away from their responsibilities. I wish there was something positive that could come from this, but I’m not optimistic.

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