Wall Street’s Secret Plans To Continue Raiding the Capital Markets

In another excel­lent expose “Wall Street Pro­pri­etary Trad­ing Under Cover”, Michael Lewis exposes Wall Street’s plan to exploit loop­holes in the laws and regs to con­tinue pro­pri­etary trad­ing, the activ­ity that was the pri­mary down­fall of Bear Stearns and Lehman Brothers.

Mr. Lewis points out that despite reports to the con­trary the recently-passed Finan­cial Reform pro­vides lit­tle more than a speed bump to pre­vent pro­pri­etary trad­ing. From inter­views with Wall Street insid­ers, Mr. Lewis reveals that many Wall Street traders never stopped and have no plans to stop pro­pri­etary trad­ing. He goes on to point out that Wall Street never intended to stop prac­tic­ing one of its most lucra­tive and uneth­i­cal activities.

None of this news surprises me given my experience working with the SEC, Senate Banking Committee, FDIC, Senator Corker, and the Congressional Oversight Panel. My pre­sen­ta­tions to them focused how to improve the integrity of the cap­i­tal mar­kets most effi­ciently by immediately filling holes in the corporate financial reporting system. I highlighted several major breaches of financial disclosures that had gone undetected and remain uncorrected by the SEC. For example, over the last 5 years we found 10 com­pa­nies whose income state­ments do not add up cor­rectly and 20 com­pa­nies in the last 11 years whose bal­ance sheets do not bal­ance. For more examples, see the Cor­po­rate Finan­cial Dis­clo­sure Trans­gres­sions report I submitted to the SEC and the Senate Banking Committee. What you read in that report will surprise you.

The point is that key to restoring confidence in the markets is restoring the integrity of the information available to the public. For capital markets to function properly, investors have to be able to trust the information provided for making investment decisions.

Trust in the capital markets can only grow from:

1.     Transparency

2.     Accountability

3.     Accuracy

I showed everyone with whom I met in Washington how New Constructs provides all three for the 3000+ companies we cover. Take a look at my presentation and let me know if you do not agree.

I explained how my proposal would breathe new life into the natural market mechanisms that allow free markets to self-regulate. In other words, enabling investors to make adequately-informed investment decisions helps protect them from unfair losses more than any exogenous regulatory intervention.

Until we address the problems listed below, Wall Street will be able to continue to have its way with investor and the markets.

  1. Omission of required disclosures – such as entire sections of the Financial Footnotes
  2. Unethical assumptions used in the calculation of earnings – such as volatility estimates that are far below their true level in order to reduce the cost of option expense reported in earnings.
  3. Exploitation of grey areas in accounting – such as the use of operating leases to hide debt off-balance sheet. See our recent report analyzing the off-balance sheet debt for
  4. Misrepresentation of profitability – the heavy reliance on reported EPS could be mitigated by offering a more comprehensive and standardized measure of profitability for all U.S. stocks.

In conclusion, Mr. Lewis’ arti­cle is another excel­lent piece of insight into the true, inner work­ings of the big Wall Street firms. The arti­cle also under­scores the point I have made in Decod­ing Wall Street Pro­pa­ganda: Wall Street is in the busi­ness of mak­ing money for itself, a goal which is not aligned with pro­duc­ing reli­able research on stocks.

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