April 4, 2006

Privateers Dominate Wall Street

Employees of the Securities and Exchange Commission (S.E.C.) get paid the same regardless of the high level of lawlessness that individual investors deal with on a daily basis. S.E.C. investigators pick a few meaningless cases that can get good news coverage and they collect their paychecks. The S.E.C. functions more as an enabler than an agency charged with the responsibility of protecting the public. Corruption in financial markets is perceived as being good for the economy. Privateers who act in the best interests of the government are allowed to do as they please. Dishonesty is seen as being essential for economic growth.   It is like a town that won't get rid of organized crime, because the mob boss gives money to all the charities. The public is at a disadvantage because they get sucked in at the top when the privateers need to unload stock.

During the last quarter, financial firms earned astronomically high profits from their proprietary trading activities. At least one firm increased both total revenue and earnings by 60% in the most recent term. Capitalism and free markets are great when everyone plays by the same rules. When select parties have the play book and get exempted from the rules, only phony free markets exist. In trading activities, no one makes such huge profits unless markets make dynamic moves, usually higher. For example, the stock market is up for the year but not enough for a firm to make windfall profits on the move. No other markets have changed that dramatically either. A good question to ask is, how have different firms' research recommendations fared? Are the stocks they recommend up by 40-50% or more? Are these organizations not giving their customers the benefit of the best knowledge they have? Is the random nature of short term trading present for all traders except the world's largest financial firms? Either luck of the kind no one else possesses is in play, or they are being allowed to cheat.

What Can An Individual Do?

The best way to neutralize dishonesty is to be aware that it is present. Officials in government will do nothing until they fear being embarrassed. When individuals everywhere start questioning the integrity of financial markets,  change will take place rapidly. Dishonest tactics only work in an atmosphere of ignorance.

Ridicule works. When private parties start ridiculing the S.E.C. for being the joke that it is, the agency will try to prove otherwise. Noise gets the attention of elected leaders. Senators and congressmen listen to the public's chatter If it is loud enough. They are always looking for an issue to milk. I am surprised that liberal politicians have not noticed the lack of integrity in financial markets. They are always looking for flaws in corporate America. When there is a true deficiency present, they ignore it. Ralph Nader, here is your chance!

Blogs, Message Boards and Email

Perhaps the best thing an individual can do is continually raise the issue in blogs, message boards and emails. The news media only deal with the most superficial aspects of an issue. News stories are covered on the basis of what is likely to attract an audience. In the old days investigative reporters were good at uncovering new stories. Any individual who brings up a controversial topic runs the risk of being dismissed as a kook, but investors need to go ahead and take the risk. The first response of a listener is usually to dismiss the issue with a trite explanation or platitude. The majority of passengers on the Titanic, I am told, trusted the ship not to sink after it hit an ice berg.