Christopher MarkowskiArticle, Wall Street FraudLeave a Comment

I always get a kick out of the bull-excrement mission statements from the big investment firms…

Our integrity and reputation depend on our ability to do the right thing, even when it’s not the easy thing.  J.P. Morgan Chase

No financial incentive or opportunity regardless of the bottom line justifies a departure from our values.  Goldman Sachs

The talent and passion of our people are critical to our success. Together, we share a common set of values rooted in integrity and excellence.  Morgan Stanley

The interests of our clients must come first.  Merrill Lynch

Andrew Ross Sorkin of the New York Times reported on a survey done of Wall Street insiders by the law firm of Labaton and Sucharow that are employed by these firms that reinforces what we have been telling you for almost two decades…they are full-of-it.

23% of the insiders stated “they had observed or had firsthand knowledge of wrongdoing in the workplace.”  24% said they would “engage in insider trading to make $10 million if they could get away with it.”  26% said that they “believed the compensation plans or bonus structures in place at their companies incentivizes employees to compromise ethical standards or violate the law.”  17% said that they expected their leaders were likely to look the other way if they suspected a top performer engaged in insider trading.”  15% doubted that their leadership, upon learning of a top performer’s crime, would report it to authorities.”  Last but not least, 28% of respondents felt that the financial services industry does not put the interests of clients first.  The reality is that these numbers are more than likely skewed to be much more positive than they are showing.  Human nature does play a part in these surveys and respondents do have incentive to portray their firms in a positive light.  Our expertise and knowledge of history dictate that these numbers should be much worse.

Enron Returns

J.P. Morgan did a heck of a job bringing Enron back to life.  Government investigators have discovered that J.P. Morgan has put together some deviously clever manipulative schemes that transformed power plants that were losing money into powerful profit centers.  I am all for profit, but achieving profit through lies and deception is not my bag baby.  J.P. Morgan using eight different schemes, offered energy prices that falsely appeared to be attractive to state energy authorities.  The states of Michigan and California paid millions in excessive payments to J.P. Morgan.

Unsuitable Advice

Wells Fargo and Merrill Lynch have been ordered by the Financial Industry Regulatory Authority to pay millions in fines for selling mutual funds of floating-rate bank loans during the credit crisis that were not suitable for their clients.

MMMMMM…Wells Fargo and Merrill Lynch recommending lousy unsuitable investments for their clients…in other news, the sky is blue and water is wet.

Idiot Broker

 A former J.P. Morgan broker is suing the firm due to the fact that the bank’s securities unit encouraged sales of proprietary mutual funds by withholding commissions from brokers on trades of outside funds.  The suit claims that an internal review system flagged trades in nonproprietary funds and required brokers to respond to inquiries from the system within 30 days or risk losing compensation.

Did this broker actually think that he would be able to provide independent non-biased advice to his clients?

This guy is either really dumb or was born is another universe.  You are a broker, a salesman, not an advisor! Your job is to sell what your boss tells you to sell no matter how crappy the product.  If you don’t like those big brokerage firm rules, it’s really quite simple, do the right thing and leave.

Please Don’t Raise Standards

In one of the more ridiculous excuses I have heard in some time, the big investment houses have told the Securities and Exchange Commission that raising investment advice standards for brokers would be too expensive forcing them to spend millions of dollars to upgrade their compliance systems.


Big deal, they spend many millions on dinners, golf outings, private planes, fancy office furniture and strippers, but they can’t fix compliance?  The reality is that this has nothing to do with compliance; it has to do with their business model.  They are in the business of manufacturing investment vehicles and selling them to their clients.  If they employed true investment advisors that acted as fiduciary’s they could not bring the lousy products that the firm produced to the customer.  By law they would have to bring the best available product that was available.  They like pushing junk with high commissions, it has worked out great for them so far.

The Safe Way Of Making Money On Illegal Drugs

HSBC Bank admitted to laundering $881 million that we know of for Mexican and Colombian drug cartels.  They also stated that they violated sanctions by doing illicit business with Iran, Libya, Cuba, Burma and the Sudan.  This was not some, one time thing that they could try to blame on some poor back office employee; they did the deeds time and time again, for years.  Nobody from HSBC was put on trial; nobody from HSBC went to jail. They paid a fine and walked away.  When you hear the horror stories about the atrocities that take place on the Mexican border, remind yourself, that the bankers of the murderous drug lords make it all possible.

The conduct of the bank was so over the top and obvious that Chief Wiggum from the Simpsons could have broken the case.  Drug dealers would enter HSBC’s Mexican branches and “deposit hundreds of thousands of dollars in cash, in a single day, into a single account, using boxes designed to fit the precise dimensions of the teller windows.”  Matt Taibbi stated in Rolling Stone, “In order to more efficiently move as much illegal money as possible into the legitimate banking institution HSBC, drug dealers specifically designed boxes to fit through the bank’s teller windows.  Tony Montana’s henchmen from the film Scarface, marching duffle bags of cash into the fictional American City Bank in Miami, was actually more subtle than what the cartels were doing; when they washed their cash through one of Britain’s most storied financial institutions.”

Call Marketing…We Need A Better Name

In order to get a proper understanding of how horrible the big investment firms were behaving during the run-up to the credit crisis, one needs to study the civil cases that are filed against the firms.  The Securities and Exchange Commission and the Justice Department are nowhere to be found.  In a case brought by a Taiwanese Bank against Morgan Stanley, it was discovered that employees of the firm putting together another one of their ticking time-bomb weapon of mass destruction securities, were debating in jest what to call their creation.

The evil-scientists of Morgan Stanley came up with, “Subprime Meltdown, Hitman, Nuclear Holocaust, Mike Tyson’s Punch-out, and last but not least Shitbag.”

In regards to the profane naming contest, Morgan Stanley said in a statement: “While the e-mail in question contains inappropriate language and reflects a poor attempt at humor, the Morgan Stanley employee who wrote it was responsible for documenting transactions.  It was not his job or within his skillset to assess the state of the market or the credit quality of the transaction being discussed.”

 Sure thing.

An email was sent by another Morgan Stanley banker suggesting that the deal should be called “Hitman 4.”  Hitman could not be used because it was the nickname of the units boss Jonathan Horowitz.  Horowitz’s reply to the Hitman 4 suggestion, “I like it.” 

When all was said and done $415 million out of the $500 million toxic asset deal went to money heaven and ended up worthless.  Morgan Stanley made money crafting and selling the deal; they also made money shorting the deal (betting that the asset would blow up.)


Let’s fire up the DeLorean and take a trip down memory lane…

In 1947 the U.S. government sued the top seventeen investment banks for violating antitrust laws, in other words, collusion.  The Justice Department in their suit alleged that the investment firms had created “an integrated, overall conspiracy and combination beginning in 1915 and in continuous operation thereafter, by which they developed a system to eliminate competition and monopolize the cream of the business of investment banking.” 

William Cohan reported on this case in Bloomberg.  He found that the U.S. argued that the top Wall Street investment banks including Morgan Stanley who was the lead defendant and Goldman Sachs had crafted a type of cartel which was able to set prices charged for their services, such as securities underwriting and mergers and acquisitions.  The firms colluded to essentially box out any smaller banks.  It was discovered that the big investment firms would strategically place their partners on their client’s boards of directors.  By doing this, it placed their firms in a very favorable position to win when and where business was coming from and how to win it.

We could only wish there were seventeen investment banks competing against one another today.  The too big to fail variety, .2% of all banks outstanding, namely: Goldman Sachs, Morgan Stanley, JP Morgan Chase, Citigroup, Bank of America and Deutsche Bank are many orders of magnitude larger and more concentrated than they were back in 1947.  The twelve largest banks today control 70% of the entire U.S. banking industry.  Size, concentration, revenue and connections have placed these entities above all rules and laws.  Attorney General Eric Holder stated during a Senate hearing on March 6, 2013, “When Banks are considered too big to fail it is difficult to prosecute them.  If we do bring a criminal charge, it will have a negative impact on the national economy.” 

President of the Federal Reserve Bank of Dallas, Richard Fisher, points out another example of the problem of too big to fail, an unfair market for capital.  “The megabanks can raise capital more cheaply than can smaller banks.  Studies, including those published by the International Monetary Fund and Bank for International Settlements estimate that this advantage to be as much as one percentage point.”  That one percentage point gives the big banks anywhere between a $50 billion to $100 billion advantage annually.  Fisher repeats a point that we have been making for over a decade, too big to fail investment banks are “patently unfair.  It makes for an uneven playing field, tilted to the advantage of Wall Street against Main Street, and it places the financial system in constant jeopardy.  It also undermines citizen’s faith in the rule of law and representative democracy.”

In the aftermath of the 1929 stock market crash, the investigation that followed found that there were widespread instances of collusion and fraud by the big investment firms.  The legislation that followed was the Banking act of 1933 known as the Glass-Steagall Act.

They don’t make legislation the way the used too. 

After the dotcom/Enron/WorldCom blow up Congress gave us thousands of pages of legislation rules and laws known as Sarbanes-Oxley.  A set of rules written in gray, rather than black and white.  It did didn’t take much time at all for the firms to find plenty of wiggle room.  A consequence from this rushed piece of legislation was the increased difficulty in doing investment-banking deals (IPO’s) here in the United States.  The business left for Europe and Asia and Wall Street focused its attention on creating assets out of thin air (derivatives like mortgage backed securities, collateralized debt obligations and other weapons of mass destruction.

That led us to the next blow-up when the weapons created went off.  Wall Street again is facing another set of rules known as Dodd-Frank.  This piece of legislation basically makes the culprits behind all of the disasters omnipotent.  Too big to fail is the law of the land.  Thousands of pages of rules and regulations that only the large firms with the high economies of scale can afford to abide.  Small banks and financial institutions are being forced out of business because the legislation is too costly for them to comply.  The winner in this is of course are the big investment firms, who suck up all of the business left behind by firms regulated out of business.

Glass-Steagall was a piece of legislation that for the most part kept conflicts of interest somewhat at bay for sixty-six years.  The beauty of the legislation was its simplicity; the law is only fifty-three pages long.  I appreciate regulations that are black and white.  Anyone who appreciates and loves the free-market and believes that everyone should be equal under the law should love black and white legislation as well.  Lawyers hate black and white, not much wiggle room and billable hours with no gray areas.  The Ten Commandments was a pretty simple piece of legislation that seems to have stood the test of time, and it was written on two stone tablets.  No wiggle room in “Thou shall not…” 

The Glass-Steagall legislation did this…It split up all conflicting operations within a firm; forcing the firm to decide which arena they would operate.  Savings banks could take deposits from the public and make personal and home loans.  Commercial banks could take deposits from businesses and make business loans.  Investment banks could raise capital for businesses by taking companies public, doing secondary offerings, handling mergers and acquisitions.  Brokerage firms would be providing a market for stocks and bonds, handling trades and helping people manage their money.  Mutual funds, which at the time wee known as investment trusts could invest in portfolios of stocks and bonds and sell shares to investors. 

Glass-Steagall is not perfect, however, it is user friendly and does eliminate many of the conflicts of interest that have been a plague on our financial markets.  A return to this legislation would break up the current too-big-to-fail model that is stifling completion and hindering growth.

“Never be afraid to raise your voice for honesty and truth and compassion against injustice and lying and greed.  If people all over the world would do this, it would change the earth.                                                                                                              William Faulkner 


Harding Sy Bringing Back Glass-Steagall Would Rebuild Shattered Confidence In Wall Street Forbes 5/21/12

Fisher Richard W. & Rosenblum Harvey How To Shrink The Too Big to Fail Banks Wall Street Journal 3/10/13

Cohan William D. How Wall Street Turned A Crisis Into A Cartel Bloomberg 1/8/12

Eisinger Jessie Explosive Charge: Morgan Stanley Peddled Security Its Own Employee Called Nuclear Holocaust ProPublica 1/23/13

Taibbi Matt Outrageous HSBC Settlement Proves the Drug War Is A Joke Rolling Stone 12/18/12

Durden Tyler How Many Billions of Drug-Laundered Money Does It Take To Shut Down A Bank? Zerohedge 3/7/13

Jamieson Dan Ex-J.P. Morgan: Firm Pushed House Funds Investment News 6/11/13

Kelly Bruce Wells Fargo, Merrill To Pay $5.1 Million To Settle Charges Over Bank Loan Funds Investment News 6/4/13

Sorkin Andrew Ross On Wall St., A Culture Of Greed Won’t Let Go New York Times 7/16/13

Durden Tyler Will JPMorgan’s Enron Be The End Of Blythe Masters? Zero Hedge 5/3/13

Schoeff Jr. Mark SIFMA to SEC: Fiduciary Rule Would Cost A Ton Investment News 7/5/13

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