How Corrupt is Wall Street?

§ Kanjinal → a Queens pediatrician → claimed he lost $500,000 investing in INSP
§ The Securities and Exchange Commission → launched a probe into practices at 10 firms → while the Justice Dept. is pondering an enquiry or its own
§ The widening scandal → plunged Wall Street into crisis
o Because many more individuals lost money in the recent market collapse
§ Relationship between analyst and their investment banking colleagues → grow
o Because it comes on the heels of several other scandals → raise big questions about how Wall Street operates
§ Enron Corp.’s collapse
o Many firms may have made a bundle investing in the partnership
o Those same firms advised clients to hold Enron stock virtually → until it went bankrupt
o Makes Wall Street seem rigged for the benefit of insiders as never before
§ Entire economy depends on the financial system → to raise and allocate capital
o Financial system → is built on the integrity on its information
§ Investors hesitate to put money into stocks
o It could easily put a damper on the economy → if companies are less willing or less able to raise capital on Wall Street
§ Wall Street → was always struggled with conflict of interest
§ An investment bank → is a business built on the conflict of interest → the same institution serve two masters:
o The companies → sells stocks, issued bonds, or executes mergers → want high price and low interest rates on their bonds
o The investors → it advised → low price and high interest rates
§ The bank gets fee from both → trades stocks and bonds on its own behalf
§ Mega banks → are allowed to do everything from trading stocks to lending money and managing pension funds
§ Chinese walls → were supposed to keep the bankers honest and free from corruption
§ The final blow → was the tide of money that flooded over Wall Street during the great tech bubble
§ The bubble burst in the spring 2000 → wiping out more than $4 trillion in investor wealth
§ The fact → bubble market allowed the creation of bubble companies, entities designed more with an eye to making money off investors
§ A feeding frenzy set in as rivals fought to grab a big share of the market to bring companies public
§ Investors took everything at face value → understandable
§ Analyst disparage stocks as “crap” and “junk”
o They threaten to thrust Wall Street into the sort of public relations nightmare
o All the ingredients are present:
· Publicity-hungry attorneys general, packs of plaintiffs’ lawyers, and potential congressional hearings
§ More explosive documents may be on the way
§ Spitzer and the SEC → seek the analyst’ recommendation and their potential conflicts of interest
§ Analyst were being paid to help the firms’ banking clients
§ If the analyst covering other industries at the firm harbored similar doubts about the companies they hawked → the number of claimants will expand exponentially
§ If the prosecutors conclude that firms are guilty of systemic fraud → research directors and other high-ranking execs could be vulnerable
§ New rules forcing analyst to limit and disclose contracts with investment banker colleagues
§ Analyst who work at investment banks often work against investors
§ Analysts are under pressure from the companies they cover → as well as from big institutional clients who may own the stock → to give positive ratings
§ Analysts also need to shine in surveys → in which money managers vote for their favorite stock pickers → they spend too much time lobbying clients rather that crunching numbers
§ The biggest factor contaminating the system is COMPENSATION
§ Analyst’ pay → tied to how much investment banking business they bring in
§ Experts say → a lot of the corruption oozing from Wall Street has to do with an erosion in investment banking ethics and practices
§ Slashed commission → meant the firms were forced to derive more revenues from investment banking business
§ Investment bankers generated mega profits from secretly investing in Enron’s hidden partnership
§ Wall Street itself → used to have much more of an interest initial public offerings is way of its 200 high
§ It’s unlikely that Wall Street → can sustain its profitability
§ Firms has already taken some steps → such as eliminating direct reporting by analyst to investment bankers
§ Focusing on increased disclosure will do little to end the abuse
§ The Street should take great pains to monitor itself in an effort to restore investors’ confidence