Wall Street’s helpful backhand

The talk on Wall Street these days is thick with disgruntled investors who think they may have been “had” by the system that decides how Wall Street touts stocks.

For those of you that suspect the system is corrupt and self-dealing, I would like to firmly and assuredly tell you … you are correct!

Let’s look at a story in the June 13 Wall Street Journal that looked at some of the conflicts of interest that exist.

Credit Suisse First Boston was fighting with Merrill Lynch for the (lucrative) job of being the lead underwriter on a new stock offering for GoTo.com. CFSB eventually beat out Merrill for that (money-making) job. Within hours, Merrill’s technology analyst, Henry Blodgett (who previously had been bullish on GoTo.com’s stock), suddenly reversed his course and downgraded the stock to a “neutral” from an “outperform.”

Coincidence? That is what Merrill assured us it was. Merrill says that Mr. Blodget had no idea his own investment firm was going make a pitch to get the lead-underwriting job.

As I read the Journal, it took me 10 minutes to ponder Merrill’s denial (about five seconds to read the statement, and the rest of the time to try and stop laughing).

Having once worked on Wall Street, my bet is that Mr. Blodgett knew good and well that Merrill was pitching GoTo.com to be the lead underwriter. Very likely he was in contact with GoTo.com management on an almost a daily basis. There is no way he could not have been aware of this.

To believe that Mr. Blodgett was unaware of this fact belongs in the realm of fairy tales.

Interestingly enough, Mr. Blodgett, who has been taking a lot of heat for his many conflicts of interest of late, has suddenly become very unavailable to the media. One year ago he was all over the place making multiple appearances, in recent weeks he has been harder to find than Jimmy Hoffa.

I think this is all good for investors to see because you need to know what type of nonsense goes on at the brokerage houses.

The fact is the IPO business is one of the most lucrative areas of the brokerage business.

By the way, do you know what the biggest profit center at all brokerage firms is? That would be the margin department – loaning you money against your stocks … to buy more stocks.

Look at any brokerage firm statement and you will see they make more money in the “loan” business than in any other area. And what a wonderfully profitable business it is. They loan you money (which is secured by the stocks you have in your account), and it brings in big bucks for them every month like clockwork, and don’t you forget it.

They also (unbeknownst to most of you) loan out your stock certificates to others, on short sales, and make money off of that – all this, in addition to charging you commissions for your trades.

Often, when they are touting a stock very hard to the public, they are in fact selling it out the back door.

Wall Street is a treacherous place, and you must realize that most everyone coming at you has a conflict of interest in what they are trying to sell you.

For instance, I write a newsletter, and I can tell you that at least 75 percent of the people in my business take money, stock, or both, from companies for touting their stocks. Some disclose that fact, many don’t (I have never accepted money, stock, or anything from any company for recommending their stock).

What investors need to get is un-conflicted stock advice that can give them truly honest opinions about stocks. Those people are as rare as four-leaf clovers.

The new requirements about Regulation “D” on Wall Street is going a long way to level the playing field for investors, evidence of that is how loudly the brokerage firms have howled about this event.

No longer can companies give inside information to their favorite golf-partner or analyst about the next quarter, etc.

Now that conference calls are open to one and all, they have turned into nothing-burgers that are basically worthless. Where conference calls used to be for the “chosen few,” and little tidbits were handed out as rewards for being “good boys” (and touting their stock), that game is now over. That is why all the “whisper” numbers have pretty much disappeared.

What you as an investor must know is this: It is your money you are investing, and as such, nobody cares as much about it as you do.

If you are going to pick your own stocks and manage your own portfolio, it can be done, but it is hard work. You need to find someone that you can trust, that is not dealing cards to you from the bottom of the deck.

If you enjoy doing your own research, that is fine. If not, be forewarned that most everyone you come in contact with in this business who is trying to sell you a stock, does indeed, have a conflict of interest.