Wall Street Greed

By now you've read the story about Bear Stearns, a company whose stock was selling for more than $170 per share a little over a year ago, that was sold to JPMorgan for $2 a share. Over $20 billion of market capitalization was reduced to $236 million in 14 months. This meltdown is a result of the extraordinary greed that dominates Wall Street and costs investors billions of dollars per year.

Wall Street is loaded with smart people. They are experts in their respective fields with IQ's that are off the charts. So how can so many smart people make such horrendous mistakes? In the case of Bear Stearns, company executives bet the firm's future on the continuation of a hot real estate market and securities that were backed by subprime mortgages. Apparently no one at the firm realized real estate was over-heated and that subprime mortgages were incredibly risky. Or, they didn't care.

Bear Stearns is not alone. Company after company, many of them Wall Street's most recognizable names, have written off billions of dollars of assets for the same reasons. As a side note, these are the same companies that paid billions of dollars of fines for cheating investors. In both cases the judgment of the executives who run the companies is highly suspect. These companies took big risks and cheated investors to maximize short-term profits that drive stock prices, executive bonuses, and the value of stock option programs.

Political pundits say the main motivation of politicians is not to serve the public, it's to be re-elected. This self-serving motivation has created a national debt of almost ten trillion dollars because balanced budgets cost politicians votes. They don't have to care about the long-term consequences of their actions because they retire or are voted out of office. Only future politicians have to deal with the impact of their actions, but they can blame their predecessors for the problems.

Politicians have pressure to be re-elected and CEOs have pressure to produce short-term profits that boost stock prices. CEOs are re-elected when their boards let them keep their jobs. Plus, they are rewarded with massive bonuses, sometimes $100 million or more, when they produce enough immediately recognizable profits. These CEOs are rewarded to take major risks and like the politicians, they don't have to be concerned about the long-term consequences of their actions. If they make major mistakes they simply walk away with their millions that are guaranteed in contracts and let their successors deal with the consequences.

Unless you owned Bear Stearns' stock you might be asking how this debacle impacts you. There may already be a major impact, you just don't know about it yet. For example, Wall Street executives at hundreds of other companies influence or control the advice you are being given. They have the same motivations as the executives who were responsible for the meltdown at Bear Stearns. What you should learn from the Bear Stearns debacle is that industry executives are willing to put company needs for profits ahead of your needs to achieve your financial goals.

There is one more risk you should be aware of. These Wall Street companies are marketing machines. They have spent years and hundreds of millions of dollars researching the needs and concerns of investors. Then they have crafted advertising messages and sales pitches that tell you what you want to hear. Their goal is to win your trust and control of your assets. That's because they have to gain control of your assets to maximize profits. You may want to dig a little deeper when your friendly advisor tells you not to worry because this debacle doesn't impact your financial interests.

Paladin Registry surveys have documented that who your advisor works for is more important than ever. Does your advisor work for a company that has taken billions of dollars of write-offs and has paid billions of dollars of fines for cheating investors? Or, does the advisor work for you by putting your financial interests first with no conflicts of interest?

Advisors who work for you are an alternative source of advice that could positively impact your financial future. They are independent professionals who don't work for one of the major Wall Street firms. They are the ideal type of financial professional because they are Registered Investment Advisors or Investment Advisor Representatives, acknowledged fiduciaries, and they work for fees. High quality, independent advisors also provide written Codes of Ethics, comprehensive disclosure statements that describe potential conflicts of interest, and professional profiles that describe their credentials, ethics, business practices, and services.

A recent Spectrem Group Perspective Report says there is a growing trend toward using independent professionals. For example, the report showed 65% of sophisticated Ultra High Net Worth investors use the services of independent advisors so they receive objective advice and personalized solutions. Most of these knowledgeable investors had gone the Wall Street route in the past, but they were disappointed with their results and concerned about conflicts of interest. The biggest conflict of interest was a greed-induced need to maximize companies' short-term profits at the expense of their clients.

Authored by Jack Waymire

• Co-founder of the Paladin Registry (www.PaladinRegistry.com)
• 32 Years of financial service industry experience
• CEO and Chief Investment Officer for 21 years
• Author of the best-selling book, "Who's Watching Your Money?"

This editorial is for information purposes only and is not intended to be financial, tax, or legal advice. We strongly recommend you use the services of a qualified professional for these types of advice and services. Please view the Terms of Use document at www.paladinregistry.com for additional conditions that apply to this information