Christopher MarkowskiArticle, Wall Street FraudLeave a Comment

The much anticipated global settlement between investment firms and regulators was finally unveiled this past month. As we stated here in the Markowski Monthly and on the radio show the big losers once again are individual investors. As the negotiations progressed over the course of a year it became more and more apparent that this settlement was a sell-out, a smoke and mirrors job that will do nothing to reform the major problems that reside on Wall Street.


Securities and Exchange Commission Chairman William Donaldson, New York Attorney General Eliot Spitzer and other state regulators unveiled a $1.4 billion settlement in which 10 of Wall Street’s biggest firms agreed to pay fines and reforms to put to bed allegations that they manipulated the stock market to suit their bottom line. Firms will pay $487.5 million in fines and give back $387.5 million in gains. Half of the $775 million will be put into a fund to benefit customers of the firm the remainder will be paid to states. The firms will also pay $432.5 million to fund independent research and $80 million to an investor education program. The deal requires that certain analysis from firms to be made public within 90 days after each quarter. Firms have agreed to stop allocating to executives and board directors preferential treatment when it comes to I.P.O.’s. An independent monitor will be assigned to make sure each firm is living up to their agreements.

I have stated time and time again that these fines would be akin to a parking ticket and that is exactly what they turned out to be. These fines, which on their face seem enormous in scope to the general public, are microscopic in comparison with the firm’s revenue. Dan Ackerman from Forbes magazine did the breakdown of the numbers for us. First, the fines, while large in absolute terms, are tiny compared to the big banks’ revenue. Merrill Lynch for instance, will pay $200 million. But last year, the company reported revenue of $28 billion (down from $45 billion in 2000). That works out to $112 million a day, not counting weekends. So the total fine, only half of which is a penalty, represents 1.8 days of Merrill’s revenue. Since the conduct Merrill and the others are accused of took place over at least four years, it’s fair to say that Merrill is paying less than a day’s pay for its transgression. The Salomon Smith Barney unit of Citigroup will pay a bit more relative to revenue, as will Bear Stearns, Morgan Stanley and Goldman Sachs will pay a bit less. (The amounts of the fines are supposed to reflect generally the degree of wrongdoing, but none of the banks admitted fault.)

“The evidence disclosed as part of the settlement will certainly aid private litigation against the banks, which could lead to greater payouts–though plaintiffs will still not have an easy case. The fines themselves, though, are something like a day’s pay. It’s as if a man earning $50,00 was fined $200 two years in a row. That’s a speeding ticket.”

Imagine people if the penalty for robbing a bank or sticking up a liquor store was nothing more than a $200 fine. Brokerage firms systematically manipulated the stock market, added billions to their respective bottom lines, executives analysts, and bankers reaped a small fortune in ill gotten gains and they paid their punishment was a speeding ticket. The bottom line is that white-collar crime does pay!

It has become apparent that States around the country have found another goose laying golden eggs. Wall Street should be renamed “Shakedown Street”! The $495 million will be used to pay for all sorts of things like filling potholes, public works projects and many other ventures of big government. Starting to smell like tobacco folks!

As far as the reforms are concerned, I would equate them to a magic act, all smoke and mirrors. The reforms are unenforceable and an absolute joke. In fact firms are already breaking the “rules”. Two days after agreeing to the “Global Sell-Out” Bear Stearns used a stock analyst to promote a new stock offering. Firms were to prohibit analysts from touting and pushing IPO’s at road shows and other events, the companies that their investment bankers were being paid to take public. When questions about this whole ordeal were raised by The Wall Street Journal, Bear Stearns took the uncomfortable step of delaying the IPO.

After the settlement was signed sealed and delivered two leading Wall Street figures, Merrill Lynch & Co. Chief Executive Stan O’Neal and Morgan Stanley CEO Philip Purcell, made comments that articulated their belief that their firms were above reproach and did nothing wrong. Mr. Purcell gave a speech were according to him, Morgan Stanley and its clients shouldn’t be slightest bit distressed by the firm’s conduct over the past few years.

“I don’t see anything in the settlement that will concern the retail investor about Morgan Stanley.” Philip Purcell

“If we attempt to eliminate risk — to legislate, regulate, or litigate it out of existence — the ultimate result will be economic stagnation, perhaps even economic failure.”

Stan O’Neal Mr. Purcell fielding questions directly contradicted all findings by regulators that Morgan Stanley failed to admit payments to other brokerage firms to manipulate their research on Morgan Stanley IPO’s. (See Research Scam) The bottom line is the CEO’s of the big firms are untouchable and they know it. Stan O’Neal had the audacity to come out and accuse regulators of trying to regulate capitalism and eliminate risk. No one wants to eliminate risk taking, it is essential to our survival. Capitalism is all about risk, we thrive in it, we create in it, we can manage it. However, when institutions manipulate it, lie, deceive, and use risk to unfairly steal from others, the classic Adam Smith capitalism model breaks down. If confidences and standards cannot be upheld our entire economic system breaks down, capitalism becomes like old automobile stuck in the mud. This is where we are today.

The remedy that has been applied to our system like some kind of half-ass snake oil will not solve anything. Brokerage firms donate so much money to both political parties and employ so many people that politicians and regulators ask for a little tribute money and let bygones by bygones. CEO’s like Mr. O’Neal and Mr. Purcell make arrogant comments because they can, they are the modern day “Untouchables.”

If I have said it once I have said it a thousand times…

“Corporations do not steal money, people do! Stop passing out ridiculous fines and start prosecuting con–artists and thieves. Until we start doing the right thing and put white collar criminals behind bars the malfeasance will continue.”

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