Being Street Smart
The Punishment of Wall Street Firms
By Sy Harding
Politicians
and the regulatory agencies are patting themselves on the back
publicly over the `tough' out-of-court settlement they imposed
on Wall Street brokerage firms this week (to settle charges of
deceptions, fraud, and scams imposed on public investors in the
1990s).
Privately the Wall
Street firms must also be patting themselves on the back, for
negotiating another soft settlement, the details of which were
released in a 1000-page report on Monday.
The firms named in
the settlement, Bear Stearns, Credit Suisse First Boston, Lehman
Brothers, J.P. Morgan Chase, Merrill Lynch, Salomon Smith Barney,
Morgan Stanley, etc., sure have a familiar ring to anyone remembering
previous Wall Street scandals and settlements.
The settlement also
has a familiar scent. The firms, "while neither admitting
nor denying guilt", agreed to pay $1.4 billion, and to set
up safeguards to put an end to the deeds they don't admit doing.
Publicized as a record amount, the settlement is hardly a slap
on the wrist compared to the profits Wall Street firms made in
the 1990s by the allegedly fraudulent hyping of overvalued stocks
to investors.
That it was a record
settlement is a deception in itself, since the $1.4 billion settles
the charges against ten firms. In 1996, Prudential Securities
settled Justice Department charges that it had defrauded customers
to whom it had sold $8 billion worth of limited partnerships.
It had to set up a $1.2 billion restitution fund by itself (and
also had to admit to criminal wrongdoing). Separately, Paine
Webber settled the same charges against it for $292 million,
while Merrill Lynch, Dean Witter Reynolds, Lehman Brothers, and
other firms, negotiated similar settlements. The total easily
exceeded this week's $1.4 billion settlement.
Coming close to this
week's total settlement, as recently as 1998, thirty-seven Wall
Street firms, again including the biggest names - Merrill Lynch,
Goldman Sachs, Salomon Smith Barney, Charles Schwab & Co.,
etc., were forced to provide a $1.03 billion restitution fund
to settle charges of defrauding investors as Nasdaq market-makers.
This week's settlement
isn't even a restitution fund. None of the money goes back to
the investors who suffered the losses.
Overall, more than
$6 trillion of stock market value disappeared over the last three
years.
How much of that was
the result of stocks being hyped fraudulently by Wall Street?
We'll never know. Because there's no way to allocate the losses
between deceptive research and recommendations provided by brokerage
firms, the games played in hyping initial public offerings (IPOs)
by investment banks, or corporations who falsified their financial
statements. There is also the question of how much of the losses
to allocate to the multiplying effect of the media, in its blind
service to its Wall Street `contacts' and friends, or to mistakes
investors would have made anyway, especially in letting greed
during a bull market overcome reason. And then there is the question
of how much was due to the market (and the economy) simply following
the normal pattern of cycling periodically between bull and bear
markets.
However, we can get
some idea of how Wall Street firms made out in relation to investors.
Not counting all the other stocks that were hyped in the late
1990s, I reported in a February, 2002 column that, "In just
one 12-month period, from mid-1999 to mid-2000, just from IPO
activity, Morgan Stanley earned $517 million in fees for bringing
IPOs to the public, while investors suffered losses on those
IPOs averaging almost 55%. Goldman Sachs earned $478 million
in IPO fees, while the IPOs it brought out plunged 54% over the
following 12 months. Credit Suisse First Boston earned $425 million
in IPO fees, which for investors plunged an average of 43% over
the following 12 months. And so on, virtually through the whole
list of investment banks."
So, how big a deterrent
is a $1.4 billion settlement of charges that covered numerous
years, and is split between ten firms? Just a minor cost of doing
business.
Meanwhile, where were
the regulators while the deceptions they reported this week were
going on? There was no shortage of suspicions, clues, and accusations
at the time. It's too bad they only got to it after the damage
to investors was done, and the profits were in the pockets of
Wall Street firms.
The most disturbing
aspect of the settlement is not just that it is but a slap on
the wrist of the firms, relative to their income, but that, as
always with these settlements, it leaves those in charge still
in charge.
The management of corporations
like Enron, WorldCom, Tyco, etc., caught in the investor deception
scams, have had their personal properties seized, are facing
huge personal fines, and long prison terms. In this week's settlement
with Wall Street firms, two research analysts were fined and
barred from the securities industry for life. But about the only
way top management ever leaves Wall Street is to move on to prestigious
positions in Washington or the regulatory agencies, where they
will then be the watchdog in charge when the next wave of scandals
comes to light.
Rather than being a
sign that investors can relax and have confidence in Wall Street
again, this long-awaited handling of the latest fraud charges
is a sign instead that investors need to be aware that it might
signify business as usual.
