Christopher MarkowskiArticle, Wall Street FraudLeave a Comment

Imagine what would happen if the punishment for robbing a bank was modeled after what Eliot Spitzer is now expecting out of the major brokerage firms like Merrill Lynch.

In the future all get-a-way vehicles must be at least 100 yards away from all banks. This is in order to give the overweight security guards an opportunity to catch the perpetrators.

In effort to remain fair, all would be bank robbers must now use only semi-automatic weapons. MACHINE GUNS ARE STRICTLY PROHIBITED.

All perpetrators must employ a non-partial to make sure all rules are followed…

If caught 1/10th of 1 % of money taken must be given to the state where said monies were taken, 50% of that will be shared among the remaining 49 states.

Also, if caught the perpetrators must make a statement to the general public to help clear up damaged image. However, this does not mean admitting or denying wrongdoing.

My intuition leads me to believe that if this were the punishment for robbing a bank, we would have a new career choice here in America. I would think that the bank robbing arts would be a vocation taught in every high school around the country. The remedy that the New York State Attorney General Eliot Spitzer has proposed is equally as ridiculous and will lead to more criminal action.

Let’s take a look at the press release.

“State Attorney General Eliot Spitzer today announced an agreement that should bolster the integrity of stock analyst research at the nations largest securities firm, and substantially outstrips any current requirements or mandated reforms.”

Under the settlement, Merrill Lynch has agreed to: 

Sever the link between compensation for analysts and investment banking. The agreement requires Merrill Lynch to separate completely the evaluation and determination of compensation for equity research analysts from Merrill Lynch’s investment banking business.

This one is funny! How in God’s creation is this one supposed to be enforced. Every firm has sworn up and down that they would never tie compensation together. This is an outright lie. How do stock analysts like Jack Grubman, Mary Meeker, and Henry Blodget etc. get pay packages that would make Barry Bonds and Alex Rodriguez swoon? It certainly was not for their accuracy. If you bought anything these hucksters were pushing over the past years you would be eating government cheese.

So where did they get these pay packages from? Must be the shoes. 

Merrill Lynch must prohibit investment banking input into analysts’ compensation. Merrill Lynch is forbidden from soliciting or considering any information concerning the amount of investment banking revenue received from clients covered by the research analysts and prohibiting the analysts from being evaluated by investment bankers.

I was speaking with a couple of highly respected portfolio managers from Federated Investors about this one. They were in full agreement that this “concession” isn’t worth the paper it is printed on. They both were ex-wirehouse managers who saw the light and left. They agreed that this was an absolute joke. The primary job of a stock analyst at the big bad brokerage houses was to bring in banking deals, not pick stocks. We have uncovered internal memos from last year where J.P. Morgan Chase bankers were telling their research department that they were not to change any recommendations on stocks without checking with them first. Currently, the investment banking market is very slow and these banks will do anything to get those revenue numbers up. If anyone believes that analysts and bankers are going to end their cozy relationship now, well you are probably the same people that believe the dot-coms are going to come back. 

Create a new investment review committee responsible for approving all research recommendations with strict standards and independence from investment banking and the analysts themselves.

Investment review committee?? Ever hear the one about the fox guarding the hen house? 

Establish a monitor to ensure compliance with the agreement. The appointment of the monitor is subject to the approval of the Attorney General.

Is this monitor some sort of geeky hall monitor like they had back in high school? “Where’s your pass?” This idea is so stupid and superficial it could only be the inspiration of some politician. Politicians have never met a panel, fact-finding committee, or monitor they didn’t like. How much do you want to wager that this monitor job pays well into six figures, maybe seven and one of Eliot Spitzer’s friends ends up getting the job? 

Require that upon discontinuation of research coverage of a company, Merrill Lynch will issue a report disclosing the termination of coverage and the rationale for such termination, and will notify investors that the last rating should no longer be relied upon.

If investors are going to actually believe a dated report that they should buy Enron or WorldCom; well, they probably shouldn’t be investing anyway. This skillfully thought out “reform” should go in the “Masters of the Obvious Hall of Fame.” Right next to the sell recommendation that Jack Grubman from Smith Barney just put on WorldCom after it dropped in value by 98%. 

Disclose in Merrill Lynch’s research reports whether it has received or is entitled to receive any compensation from a covered company over the past 12 months.

Extra Extra! Buy stock in any company that makes microscopes! Fine print is going to take on a new meaning after this one. Merrill Lynch was supposed to set up a website to cover this “reform” however if you try to find it on their site you will end up playing “Where’s Waldo” for hours.

 Pay a $100 million penalty.

Here are some simple facts to choke on. According to its most recent annual financial report, $100 million is less than one-third of what the firm paid for office supplies and postage last year. Merrill Lynch has had revenues of $1.8 trillion from 1998-2001. Henry Blodget their “star” internet analyst made over $30 million working for the company. The CEO David Komansky has made more money then the GDP of most South American countries. This reminds me of the scene in Austin Powers where Dr. Evil demands $1 million from the U.N…. or else! 

Issue a statement of contrition on the part of Merrill Lynch for failing to address conflicts of interest.

I was going to paraphrase the statement that was put out by Merrill Lynch; however, I got really sick after reading it and ended up spilling my lunch all over the document. If you want to read it, go look it up in the Wall Street Journal archives. I would do it for you but I am currently under strict doctors orders to steer clear from it. This was not a statement of contrition; it was a collection of lies that was put together as an advertisement for Merrill Lynch. I decided to go to my thesaurus to find the right language to describe it. Shall we say…disgusting, revolting, dreadful, appalling, inexcusable, etc.

I was flipping channels the other night when I came across a classic episode of “Seinfeld”. In this episode, George Costanza thinks there is a fire at a birthday party for his girlfriend’s son. George proceeds to trample over the elderly, the clown, kids, basically everyone in his path to reach safety. George displayed no concern for the welfare of anyone except himself. Eventually, everyone makes it outside to safety where they confront George. George proceeds to make up every lie/excuse in the book. The scene ends with the fireman asking George, “How do you live with yourself?” I ask the same question of all of these unscrupulous brokerage firms and analysts everyday. The question unfortunately falls on deaf ears.

The bottom line is that until criminality is finally applied to individuals who steal from others, it will continue to happen. Law enforcement officials must finally come to the realization that just because you are not wearing a ski mask, and instead are clothed in a Brooks Brothers suit and wing-tipped shoes, does not make you any less of a criminal. In fact, it makes you worse. At least people know what to expect from the guy in the ski mask. When you put on the uniform of a respectable citizen with your business card and television commercials to back you up, you should wield that power with great care. Taking advantage of your situation and robbing your fellow man for your own selfless greed is something not to be proud of. So you made yourself millions and got away with it. You still have to live with yourself. Hurts to look in that mirror, doesn’t it?

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