Sep. 8–When I was in graduate school, I noticed two classmates, both of whom happened to be relatives of right wing dictators, copying my answers.
When I confronted them about the cheating, one replied, “Pedro, my family owns Nicaragua. His family owns Laos. Do you really think we’re competing with you in the job market?”
To them, it was just a little cheating. I assumed it was Banana Republic morality. Now I realize I owe an apology to all Banana Republics, the countries not the store. The people ruling these countries are amateurs compared to the leaders of Wall Street.
Here the rules are simple. It’s fine to make millions, as long as no one, except for the campesinos (investors and employees) are hurt.
Analysts shaded recommendations to make millions in investment banking bonuses. No one lost, except for investors who bought the stocks. Of course, the analysts whispered the truth to their big accounts, so the big guys rarely got hurt.
Brokerage firms allocated hot IPOs to people who could bring them more banking business. On Wall Street, this was called “spinning.” In other Banana Republics, it’s called bribery.
Companies artificially inflated their earnings. With analysts promoting the stocks, CEOs cashed out of billions. No one was hurt, except for some shareholders and workers. But in Banana Republics you can’t worry about everyone.
Companies, like Conseco, granted hundreds of millions in loans to their executives and directors. These were loans they didn’t have to pay back if they were short of cash. I wrote a column about WorldCom lending $400 million to its CEO at 2.14 percent interest. My bank wouldn’t give me the same terms. I guess that makes me a campesino.
CEOs, like Sam Waksal, dumped stock ahead of bad news. Sam got caught. But other CEOs and corporate officers are constantly whispering inside information to friends. That’s what friends are for. I know hedge fund managers who live off inside information. Getting a tip about an earnings disappointment lets them make millions. No one loses — except the people who don’t get the tips.
Mutual funds pay for office equipment, even family vacations through brokerage commissions. It is just small change that slightly lowers the returns. It really isn’t hurting anyone, except for investors in the funds.
This week, we found out that a hedge fund and a bunch of mutual funds had come up with an ingenious system that allowed the hedge fund to make trades based on the closing prices, when no one else could.
This came in especially handy when there was late breaking news that would surely shape trading the next morning. The hedge fund and the mutual funds made millions. Only individual investors lost, and their individual losses were minuscule.
All this little cheating by the those at the Banana Republics of Wall Street is hurting everyone, and we’d all be better off with a level playing field.
Peter Siris ([email protected]) is a New York hedge fund manager.
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