A WELL-KEPT SECRET...

Here are two new Lion of the Left posts!  Enjoy!

"...It is one of Wall Street’s best kept secrets:  Securities firms are allowed to selectively confer with favored large investing clients about crucial information as they prepare IPO's." (WSJ-5/24/12)

     Facebook was about to go public, but companies like Morgan Stanley called up "special" (meaning rich) clients and told them Facebook's initial valuation had dropped in the week leading up to the IPO.  (Initial Public Offering)  This meant the initial share price was too high.  Many of the "special" clients sat out the first few days of trading and didn't buy any shares and didn't lose any money.

     Meanwhile, average investors, without the secret information, jumped in.  A 52-year-old retired medical-device salesperson bought 3,000 shares at $42 a share and lost $30,000.  Another bought 2,000 shares and lost $18,000.  This scenario was repeated over and over again.  The rich and powerful clients were warned, while the average investor was left in the dark.

     We have watched a series of high-powered brokers brought down recently on charges of insider trading.  One got 11 years in prison.  We are told insider trading "games" the system and gives a few select individuals an unfair advantage, yet numerous big investors were warned about Facebook's sliding value even as the company raised its initial share price.  They avoided huge losses for their clients, not because they are better...faster...or smarter, but because they had inside information.  What's the difference?

     Wall Street banks are spending millions lobbying Congress to water down the Dodd/Frank financial services reform legislation.  They are pouring money into Republican congressional coffers and showering Mitt Romney with their largesse.  Obama is anathema to them for having the audacity to want new regulations to rein them in.  At the same time we watch J.P. Morgan lose somewhere between $2 and $5 billion and watch their chief executive officer, James Dimon, admit not even he understands what his bank was doing.  Now, while analysts are privately trash talking Facebook's value, the privileged elite are warned, but for the average investor it is caveat emptor.

   How do the 1% become the 1%?  They cheat.  The system is rigged.  The benefit from special treatment, under-the-table deals and a political system where their money prevents government from imposing prudent restrictions on their activities.  The big banks are bigger than ever having swallowed most of their competition with the government's help.  The fed opened its discount window to big banks and allowed them to borrow at almost 0% interest and then they turned around to lend (not very much) or re-invest in the very same shaky products which pushed the financial system to the brink of destruction in the first place.  J.P. Morgan lost billions playing around with credit default swaps.  Yet, Wall Street is fighting tooth and nail to stop reform of the whole collateralized debt system.  Reformers want to make it more transparent.  Wall Street likes things in the dark thank you.

     Dodd/Frank still leaves us with banks which are too big to fail.  These banks need to be broken up and reduced in size so they can better be regulated and risk controlled.  The Volker Rule needs to be strengthened.  (Republicans have been trying to weaken it every day since it was proposed)  Banks cannot be allowed to play financial chicken with federally insured deposits.

     I don't know how many more examples you need before you say enough is enough, but imagine what could have been done with the trillions of tax dollars which were used to prop up the banks.  The housing crisis and the student loan debt crisis as well as more economic stimulus all could have been implemented and Americans would be back at work, consumers spending and a weak economic recovery would be robust.

     The Wall Street Journal summed it up best when it concluded, "...instead the lackluster (Facebook) deal...has illustrated that pockets of the financial world remain firmly stacked in favor of the industry's biggest players."

     Those pockets are huge and they continue to resist any attempt to level the playing field.  They have help from a presidential candidate who promises to kill Dodd/Frank and further de-regulate the financial and banking industries.  James Dimon is thrilled to here this...the rest of us?  Not so much...