Wall Street’s version of the Garden Of Eden

By WND Staff

In a bid to end Wall Street’s airing of filthy dirty financial linens, New York Attorney General Eliot Spitzer has come up with the idea of a “Global Settlement” to put an end to investigations into “alleged” wrongdoings by Dec. 11. This global settlement would mete out millions of dollars in fines to investment banking firms.

According to the Financial Times, there are some problems with how the global settlement will end. At the heart of the issue is the admission of wrongdoing by banks and the wrangling by them to limit the disclosure of evidence against them. This is because they fear that if more wrongdoing is disclosed, it will increase investor class-action suits, which some estimate could result in fines as high as $5 billion – which is what Attorney General Spitzer wants in order to add enough fuel for investor restitution.

Regulators have informed banks that their fines could total more than $1 billion. CitiGroup is being asked to pay $500 million for its Salomon Smith Barney unit, Credit Suisse First Boston has been asked to pay $250 million, Merrill Lynch & Co. agreed earlier to pay $100 million and will not be asked to pay more, Goldman Sachs and Deutsche Bank have been asked to pay $50 million each. All of these fines seem low in comparison to the $4 to $6 trillion lost by investors as a result of Wall Streets deceit.

I think we should take a good hard look to determine if what these vipers are being asked to pay is equal to the most heinous crimes of deceit, deception and distortion since the Garden of Eden.

The Dow Jones and Nasdaq markets are today’s Garden of Eden. The Dow Jones opened the 1990s at 2,753 and closed the decade up over 11,452. No one ever said the rise in the Dow was a bubble, however, the NASDAQ was an entirely different story. The rise in the Internet and tech stocks was unbelievable. No one ever used the word “tulip” to describe what was happening during the four years. Instead, it was described to the average investor in many positive and believable ways by leading analysts and investment bankers on CNBC Squawk Box and other financial news programs. The rise, we were told, was the automatic result of the “Knowledge Revolution” vs. the old “Brick and Mortar” way of doing things, since brains were more important than profits. The Internet connected the world electronically, superseding cable, telegraph and telephone. It was the “new gold” of the 21st century.

Taking advantage of this new “gold rush” were the institutions that should have been safeguarding the system. We are told the SEC just could not keep up with the huge number of filings and allowed major corporations like Enron to go unwatched.

There are a number of actors in this new version of the Garden story. They are: analysts, accountants, attorneys, auditors, CEO’s and investment bankers. Consider the following:

Analysts have the most critical job of all for they heralded the new offerings, prompting investors to want part of the gold rush. It was hard to see an initial public offering open at $10 and close at $100 and not want part of it. Of course, in our naivete, we all thought that the system was safe and sound.

Veteran analyst John E. Olsen who lost his job at Credit Suisse First Boston because he refused to give Enron a positive rating said that during his time at Goldman Sachs, while he was not pressured to upgrade stocks, he felt an implicit sense that his primary role as analyst had changed and that he was to help Credit Suisse secure new business. Using the analysts to tout how good the firm was, was a new way to make money – after all if an analyst, who knows more than you and I, tells you that the stock is good, then the stock is good – isn’t it? By the mid-1990s, investment bankers relied on their analyst’s positive advice before underwriting a deal and for their reports to stay bullish long enough to keep stock moving up so their new clients were happy. In return, these complying analysts earned bonuses in the millions.

It is interesting to note that the baby went out the door with the bathwater. The analysts were now cheerleaders, being used to “churn” a stock’s reputation to keep investors buying it. The investors were told by the brokers of that same investment-banking firm to “hold” the depressed Internet stocks because “it will come back.” They did because they thought the firewalls between honesty and integrity and lies and untruths were still in place.

In fact, with new initial public offerings as numerous as flapjacks, the old rules of a new IPO having two or three quarters of growth were thrown out the window. Furthermore, sell ratings by analysts dropped below 1 percent in 2000. After all, we were in the Garden.

Accountants deal in numbers. Depending on what you do with the numbers determines if you have a gain or loss. Its called “funny accounting.” Ask Arthur Anderson, a global accounting firm which no longer exists, if lying was worth it. Auditors, too, have a problem. Did you know that corporations were the reason a rule was changed in November 2000 that allowed auditors to play both sides of the fence? They could now earn 40 percent of their income from performing internal audits while earning as much as they could by consulting. Some firms reported that they were earning three times what they earned in auditing by consulting – hard to pass up that kind of money.

Attorneys – what can we say? There are enough jokes about how many honest attorneys are in heaven and that pretty much sums up how you and I are protected. They wrote the rules, bent the rules and reinvented the rules – whatever makes them money.

Corporations have been put on such a high pedestal. We are told that out of the 100 biggest countries, 51 are corporations. They create wealth and jobs. The new princes of power – the corporate executives – paid themselves well while they disguised expenses to keep earnings up. They played other games – just ask Ken Lay, former CEO of Enron. or Bernie Embers from WorldCom.

But who has the most sin? The investment banks and bankers. They actually believed, like the serpent, they were God – to the point of playing God. First, they employed the analysts and they changed the rules for their clients, the CEOs, who employed the accountants and the auditors along with the attorneys to tell them what they wanted.

Investment banks and bankers sold complex investments to their clients such as derivatives and structured investment deals which allowed Enron to raise billions in cash, avoid taxes and hide debt by using complicated partnerships, off-the-books transactions and related exotic investment products. For this, between 1997 and 2001, Enron paid $167 million to CitiGroup.

With regard to bringing dot-coms and other Internet companies public, they bent the rules and changed their fortunes. Credit Suisse First Boston earned $2.7 billion in fees for bringing Interwoven public (those who cashed in the stock while it was hot earned another $21.4 million). Since they were a late player in the game, they became extremely aggressive in obtaining business. The $1 billion of Enron stocks and bonds they brought public says it all.

To keep the business coming, investment banks offered top executives of their client firms hot IPO shares. Goldman Sachs gave 21 top executives, including Ken Lay and eBay’s Meg Whitman IPOs.

Bernie Ebbers earned $28 million from IPOs. For example, they would be offered an IPO share at $8.00 when the offering price was $10.00. In the first day or so it would be bid up to $80 or $120 per share. This is when the executives and insiders sold, leaving the “buy and hold it, it will come back” investor high and dry. Of the 36 IPOs covered by analyst Jack Grubman between 1998 and 2002, 16 went bankrupt.

Investment bankers, as gatekeepers of capitalism, failed. Interestingly enough, it was Congress who opened the Garden of Eden’s door when they repealed the 1933 Glass-Steagall Act in 1999. It allowed the merger between banks and investment firms to take place so that JP Morgan Chase and Citibank could provide companies with structured financial packages.

In a speech before the Securities Industry Association in November, SEC Commissioner Harvey Pitt put it in perspective: “Too many Americans who piled into the stock market at the worst possible time, lured by false expectations of sustained double-digit increases in their personal portfolios, feel fundamentally betrayed by an industry that made them believe unbelievable rises in personal wealth were possible.”

They say the real key to keeping Wall Street honest is compliance – enforcing rules. Congress repealed a rule that worked extremely well for 66 years, but it limited the ability of investment banks to play in a world without borders, which was more important, that protecting the investor. The Glass-Steagall was our firewall – our Tree of Knowledge of Good and Evil. Interestingly enough, when God punished the serpent for its behavior, God changed its form. For Wall Street not to feel some of the pain it has caused the tens of thousands of investors who lost $4 to $6 trillion would be a real sin.

Those directly responsible for the rape, robbery and pillaging of investor monies should be booted out of the Garden, sent to federal prison for reform and have all of their assets confiscated and used for investor compensation. Maybe then, we will have adherence to the rules.

If the investment banks earned billions of dollars in fees, why is a fine of $1 billion or less reasonable justice? It’s a drop in the bucket. Maybe Eliot Spitzer’s office needs a telephone call from we the investors – maximum fines are in order. His number is (212) 416-8000. Let’s hit Wall Street in the same place we were hit.


Joan Veon is a certified financial planner and is president of Veon Financial Services, Inc., an investment advisory firm. Visit her website, WomensGroup.org.