Wall Street hits the wall By Bruce Eaton Public speaking is feared more than death and snakes but it’s something I actually enjoy. But there’s one type of speech I hope I’m never called upon to give: the inspirational talk that virtually demands that you pass along those words that really changed your life—the sentence or two that crystallized your thoughts and experiences, gave you a sense of how the world really worked, and pointed you towards a new path. Because mine would be about as blunt and inelegant as the Wall Street executive who delivered them: “What do you want me to do about it? Puke? I’m going out to dinner.” I’m reminded of these words every time there’s a news item about Wall Street greed, corruption, malfeasance, negligence, or misjudgement—which throughout 2008 has pretty much meant 24/7. These few words—not exactly a prime candidate for Bartlett’s—were the exclamation point at the end of a short story in which I figured out that Wall Street was (and will continue to remain so, although hopefully to a lesser degree) in many ways a legalized system of money skimming on a level that Tony Soprano could only dream about. And while your eyes might start to glaze over and your brain crawl to a standstill when presented with Wall Street minutiae, it’s actually pretty easy to understand how brokerage firm honchos can pay themselves millions of dollars and you end up losing hard-earned money in a new “investment” that seemed to be a good opportunity when you bought it but turned out to be a sinkhole for your savings. It’s how you ended up with a chunk of mortgage-backed securities. Here’s the key concept. Investment bankers and their firms make huge amounts of money if they can cook up a new investment that can be readily sold to the public in massive quantity. It doesn’t matter whether anyone really wants or even needs the investment. If an investment can be sold, then it will be rigged up and brought to life. That’s how we ended up with far more mutual funds that invest in stocks than actual stocks to invest in. That’s how—like gnats—hundreds of dotcom companies appeared out of nowhere before they vanished along with the investors’ money. The investment bankers make their money by putting together an investment, packaging it with just enough pizazz and promises to make it seem more attractive than what’s already tried and true, and then siphoning off a percentage of the revenue raised. Generate a big enough pool of money and siphon off even a small percentage and it ends up being a million dollar payday. And because the creators are so far removed from you, the consumer, that the whole question of whether or not the investment is really any good is secondary. If a profitable scenario can somehow be spun and then given a protective coat of boiler-plate cautionary legalese (“securities involve risk … blah, blah, blah”), your financial well-being is of minor concern to those who have the opportunity to reap massive over-the-top rewards for giving the go-ahead. When you’re sitting in a conference room in Manhattan and there are millions of dollars on the table that are so close that you can almost put them in your wallet, the interests of Mom and Pop Client Somewhere Beyond the Hudson seem remote, even if you do have a conscience. All of this I realized in an instant late one sunny New York afternoon in the spring of 1983. At the time I was the relatively new manager of oil and gas marketing for the world’s largest brokerage firm. At first I found it a bit amusing that I had been elevated to the position when my most intensive previous experience with petro-chemicals had been waiting in line to buy gas at a Hertel Avenue station during the gas shortage of 1980. I soon realized that maybe it was convenient for those who developed the investments if I didn’t know much, but rather just smiled and dutifully pitched whatever product was handed my way to the legions of brokers. But my curiousity got the better of me and after digging around a bit, I began to believe that the potential for investor profits was marginal at best. I realized I might be onto something when one investment banker cornered me in the lobby of the 21 Club (our dinners paid for by ... you guessed it) and told me in colorful and direct terms that his bonus was not going to be jeopardized by my questions. Using a simple calculator and some basic logic, I soon determined that roughly one hundred million dollars’ worth of investments we had sold to our clients were going to end up essentially worthless. What made it worse was that we were continuing to market new investments by asserting that previous partnerships were going to return three dollars (not zero) for every dollar invested. After I had my findings confirmed by a veteran securities analyst, I went to my boss with the grim truth: we had burned investors and were essentially lying about it. The buck got quickly passed up the food chain until I found myself standing in a mucky-muck’s corner office overlooking the Statue of Liberty, being asked to recount my discovery. I summarized: “One hundred million down the drain and we’re out there selling more.” Before I was barely finished, the honcho—a street brawler type who had been heard to say “good for the firm, good for the broker, good for the customer … and two out of three ain’t bad”—barked, “What do you want me to do about it? Puke? I’m going out to dinner …” And with that he punched the button on his intercom to check if his limousine (paid for in part by … you guessed it) was waiting for him, grabbed his coat, and left me there thinking that I had just seen a hundred million dollars go up in smoke with nary a blip of concern. It was a chilling moment. Within weeks I took a position in the training department and began to walk further and further away from the business of money siphonment until I ended up back in Buffalo. In the nearly quarter century since that afternoon, I’ve witnessed many an investment craze and crash from the safety of the sidelines, knowing what was really going on behind the scenes. I’ve never lost sight of the fact that by the time you, the investor, buy a new investment, the real money has already been made and has been used as the downpayment on a new summer home in the Hamptons. Wall Street is powered by self-interest—which isn’t a bad thing unless no one is looking out for yours. In light of this, you might spend a few moments each day looking in a mirror practicing to say the word “no.” Hardly inspirational—but essential for your financial survival. Bruce Eaton is the author of Conquering Your Financial Stress (Times Business/Random House) and the forthcoming Radio City (Continuum). SUBSCRIBE NOW Back to the Table of Contents Back to Top