Sense on Cents

“Here, meet my client. He’s got money. In fact, he’s got a lot of money . . . I like him, I really like him!!”

So it goes on Wall Street, where brokers all too often are focused on landing the ‘big fish.’ The brokers may believe the ‘big fish’ will produce many meals (that is, real payout). Meanwhile, all too often, those structuring highly complex transactions on Wall Street view these ‘big fish’ more akin to ‘sheep’ which can be fed overpriced deals including toxic waste.  So it goes on Wall Street, just as it always went.

Who are supposed to look out for the sheep? The shepherds, both brokers and industry regulators. Are these shepherds capable of protecting the sheep? Are the shepherds’ interests aligned with the sheep, or the butchers (I mean, those structuring the complex transactions)? 

The Wall Street Journal takes us inside the meat market at Merrill Lynch this morning in reporting, Didn’t See Risk, and Got Stung:

When Merrill Lynch & Co. raced ahead of its rivals to become the king of collateralized-debt obligations last decade, pensions and hedge funds weren’t its only targets. The Wall Street firm also used its vaunted network of financial advisers to pitch the risky investment pools to Main Street.

Some of these individual investors now say they weren’t sophisticated enough, despite their relative wealth, to understand the dangers.

“We were just lambs being led to the slaughter,” said Michael Slomak, a member of a Cleveland family that he says invested $2.65 million in several Merrill-issued CDOs. He says these structured securities, typically based on a pool of debt such as mortgages, had a level of risk that was never adequately explained. The family lost all but $16,500, according to an arbitration claim the family brought against Merrill before the Financial Industry Regulatory Authority.

Risks were never adequately explained? Is that right? How can shepherds, or rather brokers, explain risks that they themselves do not understand? They can’t. While brokers individually and the industry as a whole would maintain that the brokers do understand the full nature of the risks embedded in the highly complex CDO transactions, it is my strong belief, based upon my experiences, that they had little to no understanding of the real risks. What did the shepherds understand? Payouts, that is the commissions generated on the transactions.

. . . and so it goes on Wall Street, just as it always went.

“You want a little mint jelly with that, and how about a nice Cabernet?”

LD

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