-
When it comes to financing the average middle-class American, our government-backed mortgage entities will accept nothing but the most pristine standards. Except when it comes to the millions of home loans for which the feds want lenders to toss standards out the window.
September 26 -
Theres no question that that banking industry owes a solid to government policymakers for bailing them out of the crisis. Whats still much in dispute is whether the Dodd-Frank Act and the various other salves that have been applied to stave off another calamity will work as intended.
September 23
Editor's note: A version of this post originally appeared on
"It's a crime what's legal on Wall Street," is a phrase we used to invoke frequently during my years at Forbes. The topic came up so often because in finance so many practices that are just plain wrong persist for years, and decades, directly under the noses of the financial cops.
Then on occasion, when nobody's expecting it, something snaps. Too many people lose money. An ambitious government official goes on the rampage. All of a sudden, practices that have been so wrong in so many ways forever suddenly become unacceptable.
That's what happened with mutual fund market timing and late trading a decade ago. For years, Securities and Exchange Commission officials acknowledged that the once-a-day setting of prices made international mutual funds an easy mark for those who gamed the system at the expense of small, long-term investors. Yet
Over the past few years, Wall Street's collapse has led to a crackdown that's put more wrongful practices off limits. Banks, for example, face a much
Companies that service mortgages can no longer connive with property insurers to
Good stuff all, but Wall Street remains a place where a lot of very bad behavior continues to take place out in the open. Here are some of the most egregious examples.
Financial Advisor Chicanery: Imagine a two-tiered health care system in which some doctors were legally obligated to do what's right for their patients and others, like snake-oil salesmen of yore, could recommend whatever treatments made them the most money, as long as they didn't kill patients outright. Now imagine that the shysters did all they could to blend in with the real doctors. That's effectively the type of system we have today among the people Americans count on to tell them how to invest their life's savings. Registered investment advisors must, by law, put clients' interests first. Many thousands of other "advisors" at places like Morgan Stanley, Merrill Lynch and smaller shops are held to a much lower "suitability" standard. In essence, even though these people often refer to themselves as "financial advisors" or by some other comfort-inducing title, they're really glorified salesmen. Some do a great job serving their clients. Others don't. It's up to them. Under the law, as long as they avoid putting an 85-year-old widow into an exotic derivative with a 20-year lockup, they're bulletproof. Few clients know this fiduciary-suitability gap exists. The suitability crowd has worked tirelessly to keep the standard low and the distinctions murky. The cost to the public is incalculable but huge.
Pension Official Payola: Across the country public officials have been funneling growing slices of their trillions of dollars of public pension assets into hedge funds and private equity partnerships that boast high risks and high costs, but not necessarily high returns. It just so happens that their fund managers often show their appreciation by investing in the political success of the public officials who favor them. I wrote about one such
Chairman-Equals-CEO Absurdity: A corporate board of directors is legally obligated to represent shareholders. A chief executive is the leader of the hired help. But in over half of U.S. corporations, the
Management Buyout Mess: The top managers of public companies have a fiduciary duty to maximize shareholder value. Yet sometimes those occupying the boardroom and C-suite get it in their heads that they'd like to buy the company they're managing. In such cases, the lower the share price falls, the bigger their potential gains. So their fiduciary duty and personal financial interests are diametrically opposed. The answer to this one is simple:
SRO Conflict: Think of foxes guarding a henhouse. That's essentially the franchise the New York Stock Exchange and Nasdaq enjoy as "self-regulatory organizations" with the authority to write market rules and supervise trading activity, along with Wall Street's self-funded watchdog, the Financial Industry Regulatory Authority. Even back in the days when exchanges were nominally not-for-profit, the SROs failed to prevent a steady stream of scandals, including some that indicated the very core of the exchanges' trading operations were rotten. That included price fixing by Nasdaq market makers and improper trading by New York Stock Exchange floor brokers. Now that the exchanges are themselves publicly listed, the SRO structure is even more suspect and poses new perils. Following the debacle that was the initial public offering of Facebook, Nasdaq sought to invoke its SRO status as form of legal immunity from traders who lost money at the hands of its technological mistakes. Bottom line: Cops and robbers should never live under the same roof. That's a truism new
Fairness' Opinion Unfairness: When corporate boards are trying to convince the world that a merger or acquisition is "fair" to shareholders, they turn to their investment bankers to render an opinion. You might as well ask a barber if you need a haircut. The problem with fairness opinions is twofold: the investment bank rendering the opinion typically has a financial interest in seeing the deal get done; and the directors seeking it may also be looking forward to a change-in-control or other payday that investors aren't. Bottom line, fairness opinions are a bogus exercise. Tear down the facade and leave boards to face the legal ramifications of their actions sans the fig leaf.
Revolving-Door Debacle: It's hard to swing a cat without hitting a financier/regulator who hasn't profited from the incestuous ties between Wall Street and Washington. Treasury Secretary Jack Lew hails from Citigroup. Former SEC boss
Neil Weinberg is the editor-in-chief of American Banker. The views expressed are his own.