Decades ago, Wall Street and its big banks were revered and were a source of trust for ordinary investors who relied on the integrity, advice and financial guidance of these firms.
Indeed, Wall Street spent a fortune creating brand names like Smith Barney and Paine Weber, advertising a tradition of trust for their clients. Charlie Merrill brought the stock market to main street investors and created an opportunity for Mom and Pop investors to understand and buy stocks of blue chip companies.
Unfortunately, over the past two decades that trust has nearly disappeared.
Readers of this blog and securities fraud attorneys know the story too well. In the year 2000, the bursting of the tech bubble left most investors holding the bag of their destroyed life savings. It also exposed the strategy of the analysts at the big name firms on Wall Street that pumped up tech stocks while generating enormous investment banking revenues for their firms.
The 2008 financial crisis was even worse. It showed that many of these household names, like Citigroup, which acquired Smith Barney, had misled investors regarding the subprime mortgage balance sheets their firms held. Lehman Brothers, which acquired the firm that later became American Express, collapsed into bankruptcy among allegations of fraud by its senior managers.
Overseas firms like UBS and Credit Suisse allegedly have been involved in tax evasion schemes, money laundering and have even turned a blind eye towards terrorist funding.
One banker, Chris Tobe, recently highlighted this shift away from a Wall Street culture of credibility and trustworthiness in an opinion piece for MarketWatch. A former banker at a good old fashioned trust company, Tobe is appalled at the sell sell sell attitude currently permeating Wall Street.
“For over a century bank trust departments fulfilled an important role as fiduciaries and foundations for financial stability within families, churches and other charitable institutions,” Tobe writes. “But in the past couple of decades, short-term corporate and Wall Street greed stripped many communities of this valuable cornerstone, the dependable bank trust department. Most of the mega banks have gone this direction in varying degrees and some small-bank trust companies have sprung up to fill the void.”
This is not good for investors who used to put their faith in such institutions.
“As a young trust officer, it was typical of a businessman or professional to set up a trust for their widow and sometimes children,” Tobe writes. “While they may have handled their investments while alive, many felt that they didn’t want to expose their grieving widows to endless sales calls from unscrupulous brokers, who in many cases churned accounts and did hard sells on proprietary products. Most felt they created a fiduciary shark cage protecting their family’s assets.”
He continues. “Many of these men would be rolling over in their graves. Not just because the fiduciary shark cages had been dismantled — but the bankers they trusted had morphed into sharks themselves pushing proprietary products.”
Banking regulators “need to step up and protect these legacy trusts immediately from harmful, unsuitable investments and create a regulatory environment that will help end self-dealing and bring back trust to trust departments.”
Yes, the broad stock markets have recovered from the “tech bubble” and the financial crisis. This very week the S&P 500 index closed above 2000, a first. And Wall Street profits have begun to soar again.
Regardless, Wall Street firms have failed to restore their tarnished reputations and the lost sense of trust. Mom and Pop investors remain fearful of investing in stocks, despite the record highs. Tobe’s column stresses the conditions for this wholesale lack of trust in Wall Street.
And as this blog noted last week, the brokerage and financial services industries are fighting tooth and nail to bury any chance that regulators at the Department of Labor and Securities and Exchange Commission have at creating a new fiduciary standard of care to protect Mom and Pop investors in future market meltdowns.
Until investors actually believe in the integrity of large financial institutions and their U.S. regulators, there will remain a giant gap of trust between the big banks and their customers.