Wanted: Wall Street Values
Federal investigations into major investment banks and securities firms over subprime-linked activities, the indictment and arrest of two former Bear Stearns hedge fund managers on charges of intentionally misleading investors about two hedge funds that imploded and the collapse of the auction-rate securities market give new meaning to the need for greater accountability and transparency on Wall Street.
In the wake of the credit crunch that began with the subprime mortgage crisis, the past year has witnessed daily news headlines touting stories of Wall Street scandals, corporate trickery and staggering financial losses for millions of investors. A recent Gallup poll tracking investor optimism shows investor confidence has fallen to its lowest level in five years.
What was once revered in the financial world is now ridiculed. Respected Wall Street names - from Bear Stearns, to UBS, to Merrill Lynch - are the subject of numerous state and FBI probes concerning securities fraud, insider trading and the use of deceptive marketing practices to put clients in investments that posed unnecessary and considerable risks.
The current troubles of Wall Street have prompted U.S. Treasury Secretary Henry Paulson to urge the federal government to step up its plans to overhaul the nation's financial system. Paulson initially unveiled his reform efforts following the near collapse of Bear Stearns in March. He now says ongoing market turbulence has created a greater sense of urgency to implement his plan.
Paulson's proposal is being called the boldest reform for Wall Street since the Great Depression. Among other things, the effort gives much broader powers to the Federal Reserve, creating a watch dog-type role that would enable it to access information from financial institutions and step in when necessary to prevent a repeat performance of that which happened in the near collapse of Bear Stearns.
Putting Paulson's plan into action, however, may prove challenging. As reported in a June 19 article on CCN Money.com, implementing any part of the proposal requires legislative approval - something that is considered unlikely in an election year. In addition, several key congressional Democrats reportedly already have shot down the plan, according to the article.
Much of what's happening on Wall Street could have been avoided entirely if the market operated with more transparency and accountability. Having information - factual information, not false promises - surely would have prevented thousands of investors from getting stuck with now-illiquid auction-rate securities that many brokers initially told them were as good as cash investments.
Better risk management on the part of the nation's investment banks and securities firms surely would have saved the American taxpayer all the countless dollars being spent by the government for its investigation into the subprime deals of Wall Street banks and mortgage firms whose losses in subprime loans and related securities now total nearly $400 billion.
Greater accountability and transparency on the part of the nation's credit-rating agencies surely would have deterred the conflicts of interest that exist between the agencies and many debt issuers, a relationship that some say was a major contributing factor in the subprime mortgage crisis and resulting credit crunch.
Wall Street cannot survive without the trust of the investing public. And right now that bond of trust is severely broken. In today's world, the lines between Main Street and Wall Street are increasingly hard to distinguish. The actions taken by a Bear Stearns manager or a Citigroup hedge fund ultimately create consequences for millions of people across the country.
The bottom line: Accountability is everybody's business - a concept Wall Street needs to keep in mind as it tries to restore investor confidence. It might also be wise to remember something Reporter Anise Wallace wrote more than 20 years ago in a New York Times article: “Confidence is an elusive and ephemeral quality, but one that is critical to the functioning of the financial markets.”
Two decades later, her words ring more true than ever.
Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
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