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.
- Omission of required disclosures – such as entire sections of the Financial Footnotes
- 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.
- 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
- 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.