Three cheers for former Morgan Stanley broker Dana de Windt.
As reported in the Wall Street Journal (5/24/08, page B1), de Windt waged a four year battle against the mighty firm, not from the sidelines, but from the belly of the beast, while employed as a top producing broker at Morgan Stanley.
The focus was on bond marketing and excessive markups ( so commonplace in securities firms as to be unremarkable) and on one very nasty issue, that wiped out over 90% of value as it lost its investment grade rating.
This time it was personal. His own father owned $65,000 of these toxic bonds.
Two lessons to be learned from this episode:
1. Not every broker is a slime-ball
It just seems that way.
The big money comes so fast and so easy once you’ve built a book of clients, that moral lassitude takes hold and your ethics go into a blind trust.
Wall Street is a rules-based culture, rather than a values-based culture. The paperwork is overwhelming, as brokers and their firms work to diligently build in their defenses by burying investors with prospectuses, disclosures, and mandatory arbitration clauses.
There may have once been some tenuous relationship between the regulatory overkill and concern for the client, but that has been lost in the mists of time, ground to dust as the lawyers searched for the safety of numbing boilerplate and document dumping.
Brokers learn to get along to go along. It’s not a question of right or wrong. It’s one more item on the to do list. “Run this past legal, and then you’re good to go…”
There are horror stories of individual bonds being marked up a half dozen times as they ricochet among broker dealers before being dumped on the ignorant retail client. With zero disclosure.
All according to the regs. All perfectly legal. It’s the rules…stupid.
To have a successful insider challenge this ethos is like finding a politician who refunds unneeded campaign contributions. It’s theoretically possible…but just barely.
2. Virtually all broker-sold debt is of dubious quality
The rating agencies are either hopelessly corrupt or appallingly inept. Supposed watchdogs like the SEC and FINRA are like all regulatory agencies, captive to and firmly in the orbit of the industry they supposedly regulate.
And the nexus of hedge funds, leveraged buyout shops, and derivatives manufacturers have conspired to transform debt from the supposedly conservative portion of a portfolio to the riskiest.
Ask any of the corporate treasurers who were left holding the bag when auction rate securities liquidity vanished this past year. Not only are bonds no longer real bonds…cash equivalents are no longer equivalent to cash.
Look up any big name broker website, and go to their section on asset allocation. They will describe fixed income as the anchor that keeps your portfolio from going askew during turbulent markets.
This was doctrine during the Jurassic era of portfolio management. Well run companies earned their AAA rating, and debt was safer than equity.
That was then. This is now.
The dominant theme in the hot money market is leverage…and leverage is enhanced by inventing new iterations of debt. Which accelerates the degradation of corporate debt.
And then the cycle goes into hyperdrive.
In the idiom of the street…never steal in slow motion.
You are safe only by contracting U.S. treasury debt or insured CDs. Anything else is at best an aspiration, and should not be dignified with the heading of “fixed income”.
Far from investing my money with these thieves, I wouldn’t trust them to change the oil in my car.
(footnote: Morgan Stanley paid $6.1 million in fines and restitution….on $59 million of bonds in question. Not to worry. It’s just a cost of doing business.)