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[TTHQ Staff]

BEING STREET SMART by Sy Harding WHO CARES ABOUT INVESTORS? April 9, 2004. After every serious bear market or market crash, investigations are undertaken to find out why, given all the regulations that were passed after the previous bear market, small investors were again on the losing end while the ‘smart money’ walked off with their money. As I pointed out in my 1999 book Riding the Bear – How to Prosper in the Coming Bear Market, which predicted just what has happened; When investigators turn over the rocks a lot of slimy creatures crawl out. Every time, it turns out that corporate executives, investment banks, and brokerage firms were still hyping stocks to the public long after they knew the stocks had already become grossly overvalued, even as the executives themselves were often unloading their own shares into the artificial buying surge they were creating. Every time, it turns out that stock exchange floor brokers and the specialist firms that are supposed to maintain a stable market for investors, were frequently trading in front of their customer’s orders for their own profits. Every time, it turns out that market-maker firms on the Nasdaq were quoting false prices to their customers, buying and selling in front of their customer’s orders to take much of the profit for themselves, and worse. Every time, it turns out there were special “can’t fail” investment ‘products’ developed and sold by promoters, like the original junk bonds, railcar & oil rig leasing programs, even ostrich farming partnerships, that promised great returns but were destined to failure from the beginning (if for no other reason, that up to 25% of each investor’s investment was taken as up front fees and commissions by the promoters). Every time, it turns out that most of the Wall Street analysts and spokespersons that were turned into financial TV ‘stars’ by the media, were actually highly paid shills pumping their firm’s stocks into bubbles without concern about the consequences to investors who listened. Every time, criminal action is threatened, out of court settlements are made that sound huge in the aggregate, but are hardly slaps on the wrist when divided among the dozen or two large firms that are involved in each settlement. The charges are always brought against brokerage and investment banking firms, not their top management. Occasionally a low level ‘goat’ is led to the slaughter. But those who run the firms and determine policy always remain in place. Every time, no matter how confident investors are made by the publicity surrounding the investigations, the settlements, a few showcase fraud trials, and assurances by government agencies that they’re on the situation and it can never repeat, it does repeat, again, and again, and again. It’s not easy to regulate a complex, many armed industry if it doesn’t intend to be controlled. And there’s no doubt that it is complex, especially in these days of international markets, and the widespread use of derivatives. That has been indicated in many investigations, where even the SEC has admitted it has to rely on the testimony of exchange members and brokerage firm executives to understand the intricacies of what was going on, and on their recommendations to come up with rules to prevent a recurrence. No doubt that complexity is the reason Congress and the SEC are perfectly content to leave the exchanges as ‘self-regulated’, with the potential lawbreakers policing themselves. Once again there needs to be a lot more determination to get the securities industry controlled and regulated than is being seen so far. The current investigations into mutual fund scandals are an example. Investigators, primarily Eliot Spitzer, NY State Attorney, have been uncovering scams and frauds in the $7 trillion mutual fund industry for six months now. The result so far is that mutual funds themselves have created a few new window-dressing internal rules to placate investors. More obviously, they have taken advantage of the situation to change their rules to the further detriment of their customers, by instituting fees of as much as 2% for investors who don’t hold onto their funds for at least three months, and in some cases now lock investors in for six months. And they’re lobbying to have any new regulations require all funds to do likewise, even those which are designed and offered to investors for more frequent trading, and don’t want such restrictions on their customers. But there have still been no new laws to better regulate the mutual fund industry. A bill did pass the House, and by a margin of 418-2. But it’s been bottled up in the Senate Banking Committee since, which is obviously dragging its feet. The committee has held eight hearings so far while trying to decide whether to act on the bill. Could it possibly be because most of the money that supports the political campaigns of committee members is provided by Wall Street? If history is any guide, any laws passed will be insufficient for the job anyway, but particularly so if the reluctance to do something is so obvious. Now that investors are making money again in a rising market, interest in fixing the problems has faded away, which plays right into the hands of those who want to maintain the status quo. Yet, now is the time the problems need to be addressed, not left until, once again, after the next time that investors have to pay the consequences of being too trusting.