by Jeff McCord of The Investor Advocate
“Fear and Loathing” of Wall Street, 2012
To-date, the presidential primaries have studiously avoided reference to the unfolding catastrophe brought to the American public just four years ago by the financial services industry. The political issues contested thus far bring to mind Hunter Thompson’s reporting of the 1972 election campaign:
“This may be the year when we finally come face to face with ourselves; finally just lay back and say it — that we are really just a nation of 220 million used car salesmen with all the money we need to buy guns . . .”
(See: “Fear and Loathing: On the Campaign Trail, 1972,” By Hunter S. Thompson)
Off the campaign trail, however, Stanford University scholar Lindsey Owens writes to tell us:
“Animosity toward banks, financial institutions, and Wall Street has been an important part of the public discourse since the bank bailouts of 2008. Indeed, Americans’ confidence in all three institutions has plummeted accordingly in the years since.
[W] hile changes in the business cycle have an effect on public opinion in this domain, it is the economic contractions that correspond to major scandals in the financial sector that motivate the largest shifts in confidence and provoke the most public outrage.”
Self-Loathing on Wall Street?
Professor Owens’ study of public opinion of Wall Street over the past 30 years suggests that even writer Hunter Thompson’s common man understands the difference between normal changes in the business cycle and financial industry scandals that actually contract real economic activity. Some of the geniuses on Wall Street also get it. In a recent poll by a corporate public relations firm (and long-time defender of financial services companies), a majority of Wall Street marketing executives admitted their industry’s own behavior caused its PR problems. Interestingly, 74 percent said “that increased regulation of the financial services industry will help their firms improve reputations and trust with customers.”
In a similar vein, consider the “cry in the wilderness” of the Goldman Sachs derivatives salesman who publicly resigned via the New York Times over the firm’s routine “ripping off of clients”:
“I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all. It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as ‘muppets.’ “
Feds Deny Wall Street Execs the Expiation of More Regulation
Sadly, if guilt-riddled Streeters truly want more regulation and reform, this year may mark the rare non-event of Wall Street not getting what it wants from government. Indeed, enactment of the so-called JOBS legislation – a bill with massive bi-partisan Congressional support eagerly signed by the President – may prove the antipathy of what financial marketing executives desire. Here’s what SEC Commissioner Luis Aguilar said in a March 26 statement about the “Jumpstart our Business Start-ups Act”:
“I share the concerns expressed by many that [the JOBS bill]. . . would be a boon to boiler room operators, Ponzi schemers, bucket shops, and garden variety fraudsters, by enabling them to cast a wider net, and making securities law enforcement much more difficult. Currently, the SEC and other regulators may be put on notice of potential frauds by advertisements and Internet sites promoting “investment opportunities.” H.R. 3606 would put an end to that tool. Moreover, since it is easier to establish a violation of the registration and prospectus requirements of the Securities Act than it is to prove fraud, such scams can often be shut down relatively quickly. H.R. 3606 would make it almost impossible to do so before the damage has been done and the money lost.”
Fear of Wall Street at Regulatory Agencies?
Loathing and self-loathing of Wall Street hasn’t gotten us very far. This is, in part, because of fear of Wall Street – fear that it may not continue to dish out the $14 million plus given to Congressional candidates in the election cylce ending June 30, 2011, and fear that it may take legal action should government bite the hand that feeds it. It is the latter fear that apparently makes regulators timid about implementing even the modest reforms of the Dodd-Frank Act, which requires new rules to reign-in the wild derivatives market, among other changes.
First, a New York Times editorial on March 24 summarized the problem with derivatives:
If there is one lesson from the financial crisis that should be indelible, it is that unregulated derivatives are prone to catastrophic failure. And yet, nearly four years after the crash, and nearly two years since the passage of the Dodd-Frank law, the multitrillion-dollar derivatives market is still dominated by a handful of big banks, and regulation is a slow work in progress. That means Americans, and the economy, remain at risk. . . . Unreformed, [derivatives] will cause havoc again.
Secondly, numerous media explained why neither the Times nor honest Wall Streeters will get the regulation they crave. Underwriters and marketers of derivatives have evidently filed frivolous lawsuits against the feds, making regulatory personnel fearful of writing new rules required by law.
Here’s how Reuters reported it on March 8:
Some U.S. regulators are “paralyzed” by the threat of lawsuits from Wall Street firms seeking to slow or stop the rollout of rules that would crimp their bottom line . . . Bart Chilton, a commissioner at the Commodity Futures Trading Commissioner, said if regulators live in fear of a lawsuit alleging they failed to consider sufficiently the costs and benefits of a rule, rulemaking slows or halts and opponents have succeeded. Regulators, already months behind in implementing rules from the Dodd-Frank financial reform law passed in 2010, are bracing for additional legal challenges as more regulations are completed.
Turns out, the International Swaps and Derivatives Association, Inc. and the Securities Industry and Financial Markets Association have already filed two lawsuits on behalf of JP Morgan Chase, Goldman Sachs and Morgan Stanley alleging the CFTC did not adequately consider the costs to industry of new regulations on speculative derivatives based upon oil, gas and other commodities. For more, see Bloomberg.
Fear and Loathing of Wall Street: Private Investors Pick-up Slack
Fortunately, as timid federal regulators move at a snail’s pace, private investors led by pension funds are actually taking action against the underwriters of spurious derivative products, misrepresented sub-prime mortgage backed securities products and other hooligans along with their professional enablers.
Interestingly, although the number of resolved securities class action lawsuits alleging fraud and other wrongdoing (typically led by institutional investors) declined overall in 2011 to 65 from 86 in 2010, settlements by underwriter defendants in such lawsuits matched an all-time high of 26 percent of the total (of all securities class action settlements) reached in 2010. And, $1.36 billion was recovered for investors through all securities class action settlements approved by federal courts in 2011.
Last year’s largest legal victory for shareholders was the $208.5 million won from the officers, directors, the underwriter and auditor of Washington Mutual bank, the first and largest bank to fail in the then unfolding sub-prime mortgage and derivative catastrophe.
Read more here.
SEC Two Months Late in Fulfilling Dodd-Frank Obligation
Unfortunately, the Supreme Court decisions eliminating private accountability for those who knowingly enable securities fraud (Central Bank and Stoneridge) and immunizing from liability in America foreign based fraudsters who prey upon US investors (Morrison) continue to limit the ability of private actions to enforce securities laws and protect the public.
And, speaking of Morrison and foot dragging on implementing the lawful reforms of the Dodd-Frank Act, as of March 19, the SEC was two months late in issuing a report to Congress on whether or not the anti-US investor Morrison decision should be overturned.
Apparently, federal regulators cannot fully decide just whose side they are on: the American people they are empowered to protect or the financial services firms they are empowered to regulate?
Fear and loathing of Wall Street may be universal sentiments among the public, thoughtful financial executives and the federal government during this election year.