Wall Street Failed You: Investment Banking Edition

 

Worldwide Invest Better Day 9/25/2012

It seems crazy to say this now, but there was a time when investors didn't view Wall Street as an antagonist. Perhaps they even saw The Street as an investing ally.

Those, of course, were the wild halcyon days of the late 1990s, when the best way to make money in stocks was to buy pretty much any stock, and hang on for the ride. It was a raging bull market, and the Wall Street machine was bringing exciting new stocks to rabid investors.

Since then, though, we've found out that Wall Street is most definitely not the friend of the average Foolish investor. When Wall Street isn't ignoring individual investors, it seems that they're actively looking for ways to get between investors and their hard-earned money. The following are three clear-cut cases that illustrate exactly how the Wall Street clan has failed you.

Dotcom double-talk
There were a lot of ingredients that went into the irrational exuberance that characterized the Dotcom bubble. There was the advent of the Internet age, which brought with it very real advancements and some great companies that are still with us today. Then there were the "entrepreneurs," who were looking to strike it rich, even though they had little more than a vague idea and a web domain. There were also the average Joes off the street, who suddenly fancied themselves stock savants.

It would have been tough for any of that to have had the devastating impact that it did without the ugly contributions from Wall Street. As Internet intoxication took over, Wall Street was ready to capitalize, turning even the cruddiest of companies into shiny, hyped-up IPOs that they sold to delirious investors. In many cases, the Wall Street analysts recognized the steamy pile of horse manure that they were selling for what it was but, thanks to cooperation between the analysts and investment bankers, they still happily slapped a "buy" rating on the stock.

This was far from a niche practice and, eventually, after investors had swallowed stomach-churning losses,  the Securities and Exchange Commission imposed penalties amounting to more than $1 billion on pretty much every big player in the industry, including Goldman Sachs, JPMorgan (NYSE: JPM  ) , Morgan Stanley, and Citigroup (NYSE: C  ) .

The (un)real estate bust
As above, there were plenty of parties to point fingers at after the U.S. housing market and financial system melted down between 2007 and 2009. But wouldn’t you know it? Wall Street just happened to be at the center of this bust, as well.

This time around, it wasn’t Internet stocks and IPOs, but mega doses of leverage, coupled with an alphabet soup of securities from MBSs to CDOs and the dreaded CDS. Like a sick game of musical chairs, the banks kept right on playing until the music stopped. When it did, it was an absolute mess. Bear Stearns all but failed and was subsumed by JPMorgan, while Lehman Brothers crashed all the way to Chapter 11 bankruptcy. Insurer AIG (NYSE: AIG  ) needed to be propped up by billions of dollars from the government, as did banks from Bank of America (NYSE: BAC  ) and Citigroup all the way down to small community banks.

In the wake of the mess, Wall Street has had to cough up billions in penalties and compensation for transgressions ranging from allegations of misleading securities investors, to improper foreclosures and predatory lending practices.

And it just doesn’t stop
In case you thought that Wall Street might have lost a step after fueling two major financial market blowups and recessions in the course of one decade, think again. In many ways, business on Wall Street is a zero-sum game. If they’re winning, somebody else is bound to be losing. And for recent confirmation, we don’t need to look further than Facebook (Nasdaq: FB  ) , which is now considered perhaps the worst IPO of all time.

In the build-up to Facebook’s IPO, Wall Street fired up the hype machine, and managed to sell the deal to institutional and retail investors alike at an egregious price that has since withered by roughly 50%. There are claims that information was withheld behind the scenes that would’ve soured investors’ view of the company. Maybe that was the case, or maybe it wasn’t -- it doesn’t really matter. The point is this: The banks involved did what they had to do to get the best price for their clients and serve their own bottom line. Wall Street does what’s best for Wall Street and, if that means fleecing you along the way, so be it.

The lesson for you
Should the specter of Wall Street prevent you from investing in the stock market at all? Of course not! However, what the past decade-plus has clearly shown is that, if Wall Street is selling, you need to be very careful about buying. Feel free to consider Wall Street’s next hot thing, but be sure to do plenty of homework before you risk your money. Better still, let Wall Street have its latest and greatest investment "opportunity" and stick, instead, to tried-and-true investments that Wall Street ignores.

As we count down the days to The Motley Fool’s first annual Worldwide Invest Better Day, we’re discussing ways that Foolish investors can avoid pitfalls of the financial markets and become better investors. To follow along with all of the great investing education, click on the bar below.


 

The Motley Fool owns shares of Citigroup, Facebook, Bank of America, and JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of American International Group, Goldman Sachs Group, and Facebook. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Matt Koppenheffer owns shares of Bank of America and Morgan Stanley, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFoolor Facebook. The Fool’s disclosure policy prefers dividends over a sharp stick in the eye.


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  • Report this Comment On September 17, 2012, at 7:26 AM, captainccs wrote:

    Wall Street is just a street. If you don't know the directions on Wall Street maybe you shouldn't be cruising on Wall Street or maybe you could get a map to Wall Street so that you can cruise it safely.

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