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Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: Jim Willie CB who wrote (1979)	7/12/2002 12:32:48 PM
From: stockman_scott	Read Replies (1) \| Respond to of 89467

Praising the Equity Culture "...Suspicion towards Wall Street will revive, particularly if the bear market continues and the economic recovery is not as robust as widely anticipated. Then, the public attitude towards stocks and company managements could turn ugly. The "equity culture" is morphing - into what is not known, but certainly something less favorable..." -------------------------------------- Raymond F. Devoe, Jr. Recently, at the annual meeting of a charitable organization I was attending, the organization's head announced that they would have to eliminate one thousand college scholarship grants because of the stock market losses in their portfolio holdings. Money managers taking unnecessary risks with other people's money to improve "relative performance" is one thing - the game being played during the long bull market. But one thousand students having greater difficulties paying for college - or being unable to attend - brought home to me the hidden costs of a bear market. Comparable painful decisions must be taking place in countless thousands of other institutions and millions of families. The anger that I felt at this and other recent incidents in the financial world can be lumped together in the broad category of "betrayal of trust." However, recent media reports would have you believe that everyone who works on Wall Street is a crook. From Fortune's search for "The Last Honest Analyst" to The Economist's cover article on "Wall Street Wickedness" to the issue of Time magazine that ranks Tyco, Enron, Global Crossing and Adelphia according to six color-coded categories - including Executive Compensation, Insider Selling, Tax Avoidance, etc. - the bad news out of Wall Street is only made worse by the media's presentation of it. In that Time article, the darker color is "Thoroughly Rotten." Grey is "Strong Stench" and the lighter color is "A Little Fishy." Not surprisingly, Enron has three in the "thoroughly rotten" category and the rest as "strong stench." The article turns your stomach. So this is how we now rate "Captains of Industry" after the bubble bursts - rotten, stench and fishy. What irritates me most is that these highly publicized examples of "betrayal of trust" could have very serious consequences for the "culture of equities" built up during the 1990's. When I was a page boy and subsequently apprentice specialist clerk on the floor of the New York Stock Exchange I would regularly receive lectures from the floor members about the value of trust in their business dealings. They would point out that millions of dollars worth of stocks would be traded with just the word "sold." No handshakes were necessary; their word was their bond. They invariably compared what they did with real estate dealings, where nothing is ever settled until the actual closing, with lawyers and bankers involved - and the buyer or seller able to back out at almost any point until certified checks were exchanged. When I asked what happened if a member tried to renege and get out of a trade, they would stiffen. The answer would be that if it was an honest error and the stock was about the same they might release him from the trade. But if he was trying to get out of a trade going against him, or was denying that he had made the trade - he would never do business on the floor again. Such was the essence of trading in those days - and still continues that way. One of the things that always amazed foreigners is America's lack of class consciousness as far as wealth is concerned. It is a type of social contract where the poor do not envy the rich as long as they have an opportunity to become rich themselves. However, when the rich, embodied by corporate managements, arrange for massive transfers of wealth from stockholders to themselves and insiders - that social contract is violated. They are essentially taking "Other People's Money" - the title of a recent The New York Times editorial. The conclusion is "People are willing to accept the chance of losing some of their money when they invest in a public company. But they are not prepared to be robbed." Trust is something that takes a long time to build, and can be lost relatively quickly. The same thing applies for confidence in stocks. Following the 1970-71 bear market, after "The Great Garbage Market of 1968" - when another speculative bubble burst - in the 96 months from November 1971 through October 1979 mutual fund investors made net withdrawals in every month but one. I have the feeling that "The Love Affair With Stocks" has reached the stage of a trial separation now. The ongoing revelations of corporate scandals will undoubtedly continue, giving the public more reasons to be suspicious about stocks. The Wall Street Wickedness article in The Economist concludes with the quote "It is time to praise the equity culture, not to bury it under laws and lawsuits." The equity culture should be praised, but how badly it has been damaged cannot be determined now. Unfortunately, part of the American way, when large amounts of money has been lost, is to pass laws and sue. The public, Congress and Wall Street were content to look away from the corporate excesses in compensation, accounting, stock options et al during the bull market. "Suspicion asleep" is one feature of a bull market, but "suspicion drugged" would be more appropriate for the late-1990's bubble. But unless overdosed, suspicion will revive, particularly if the bear market continues and the economic recovery is not as robust as widely anticipated. Then, the public attitude towards stocks and company managements could turn ugly. The "equity culture" is morphing - into what is not known, but certainly something less favorable. Perhaps that's why I get angry at many of these revelations. It didn't have to be done that way, to betray the trust built up over a decade. _________________________________________ Raymond F. Devoe Jr. is the writer, editor and creative genius behind The Devoe Report, published by Legg Mason Wood Walker. Ray is also a frequent contributor to US edition of The Fleet Street Letter and The Daily Reckoning. dailyreckoning.com