July, 2002

"So, you're interested in this fine little stock over here on the back of the lot. Looks a bit dusty, I know, but she's a real strong driver. Get her polished, drop in a set of floor mats and she's gonna be worth half again what you'll pay."

Now if that palaver actually came from a used car salesman, you'd have reason to be a bit skeptical, 'cause used car salesmen have a reputation for stretching the truth. Used cars are a buyer-beware market. Even so, such is likely to have been the advice of your market analysts of late, those hardworking off-the-rack guys, whose bosses wear bespoken suits and are in line for membership at Augusta National. And, like used car salesmen, the name of their game has been to push product off the lot and down the street, smoking engine or not. And, if the investment banking side of the firm sees a profitable deal down the line, shine is more important than serviceability.

It isn't supposed to be that way. Brokerage-Investment Banking firms have internal cops to watch the robbers.

There are 150,000 watchdogs in the brokerage game. They're called "compliance professionals" and they keep an eye on 650,000 stock and bond salesmen in the 90,000 branch offices of some 5,500 individual firms. Apparently they do a pretty good job, supervising systems within their individual firms "reasonably designed to prevent and detect violations by their employees." That's the language of the Industry Guidelines.

But it's a self-regulatory industry, this huge used car lot jammed with investments. And it's the biggest money game in the world. The firms who advise you on what stock is a good deal are also making piles of money as investment bankers over on the other side of the building, so sometimes things get muddy. You might even say sticky. Polishing a questionable used car can make the dealer a couple hundred extra bucks. Polishing a questionable stock can make an investment banker a couple hundred million extra bucks.

So some compliances are more important than other compliances. Way more important.

When the deal's juicy enough for the investment banking side of the firm, compliance professionals have one of two choices---either look the other way and go to lunch or lose their jobs.

Losing your job in a Wall Street firm pretty much kicks you out of the club if you're a compliance guy. Who wants someone who looks too closely at the big money deals?

Lots of compliance guys with ethics have been thrown out on the street in the past ten go-go years. Many of them sued and had their cases quietly settled. Some are still pending, but in case after case, their original alarms, overruled by the investment banking sides of the firms, have proven to be embarrassingly correct.

Investors (read that you and me and our pension funds) have lost billions. Investment bankers have made billions. The sheep have been shorn and the shepherds ran off with the wool.

As long as this system remains in place, huge profits from mergers and acquisitions will prevail over thin brokerage margins. No matter that this self-policing industry gives lip service to guidelines that "should emphasize the high value of their reputation and interest in contributing to enhanced investor protection and the integrity of the securities industry."

Integrity has proven to be a scant protection against greed, when greed gets to call the shots. Compliance guys are meant to call the shots---that's what they're there for.

It's time, actually way past time, to legally separate stock brokerage and analysis from investment banking.

The Congress could do it and might even screw up the courage to do it, if it weren't for all those pesky investment banking lobbies.

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