Raising the Titanic (A reply to my readers)

October 9, 2008

In over a decade of market commentary, no single piece has generated more positive reaction than Of Wall Street, The Titanic, and the Britanic.  I thank all of you who have written to me and phoned me.  I truly appreciate the feedback, and it lets me know that my scribblings are of some consequence.

The Asymmetrical Warfare of Wall Street

Wall Street is too often a battlefield on which asymmetrical warfare occurs. Major, powerful financial interests (wirehouses, international banks, hedge funds) take to the field with overwhelming firepower in the form of their sheer numbers, their influence, and a more pernicious weaponry: regulators who act as their proxies and politicians who are purchased and stored in their pockets.  Smaller firms (namely, regional/independent) and individual registered persons are cannon fodder in such a battle.

I do not believe that larger firms are inherently evil or bad. To the contrary, having worked in-house at Smith Barney and having represented major firms, I know that they too are largely staffed with decent folks. And many of those employees are now suffering as their jobs are lost and their retirement funds destroyed.  The victims of runaway corporate greed and stupidity are often both the public investor and the company's employees. The imbalance I rail against is not that smaller is better--that is as foolish a position as its opposite. What I seek to cast light on is the bias in our politics and regulation towards the interests of larger companies.  

Small firms have devastated the investing public with boilerroom and pennystock fraud. Individual RRs have besmirched our industry's reputation through fraudulent practices that harmed the most vulnerable of investors.  Nonetheless, I am angered when I do not see equal condemnation of the misconduct of larger firms.  

Our present market catastrophe was designed, engineered, and furthered by the largest within the investment community. However, when our regulators and politicians were confronted with evidence of such misconduct, it was often termed as an inadvertent error or a misunderstanding or a technical problem.  Smaller miscreants are routinely shut down and prosecuted, but their larger brethren and the senior execs of such firms are typically insulated--as if they were buffered from all the fraud committed on their watch.  We are too often asked to believe that the highly compensated helmsmen did not set the course, did not read the charts, and were unaware of the doings of their crew. In truth, fraud is fraud, be it the design of a boilerroom or the doings of a wirehouse. 
Setting Reckless Courses

My reference to the Titanic in my last blog was designed to be thought provoking. I hoped to raise the consciousness of our industry and the public investor by drawing a parallel. The finest minds designed that famed ship. Still, it sunk.  And in its aftermath, its younger sister ship was refitted and submerged within 55 minutes after striking a mine.  The point?  Well, for me it is a stark warning. Do not believe that ships or markets are designed to be impervious to danger. Do not go back to the folks who designed a failed vessel and rely upon their input to protect future ships.  Do not be lulled into a false security that because we know what caused a problem that we can always avoid its recurrence. Perhaps, the most subtle of all points I saw was this: that too often we set a dangerous course with the speed of reckless abandon into a pack of icebergs because we feel unsinkable. 

My hope is that we all survive this shipwreck.  That is not a certainty. But if we make it safely back ashore, we must not retrofit our markets as if sending to sea another Britannic. This is a time to toss the failed designs into the garbage and start anew--with better plans and architects.  Still, that depends upon two critical assumptions.  One, that we survive this disaster. Two, that there is genius out there to redesign our markets in a more seaworthy fashion.