Over the five-year period starting with Dean Witter in 1995, up until April of 2001, I witnessed market booms and busts, huge mergers and acquisitions, changes in fundamental laws, and the birth of Internet trading. Let’s walk through a few memories of the not so distant past, and try to reflect upon the status quo of 2010.
After the merger of Morgan Stanley and Dean Witter, I was promoted to "research coordinator". I was the liaison that had the access to all the proprietary research on Wall Street. I was always in a state of perpetual panic and fear of missing a vital research report or press release. I found myself interviewing CEOs of Fortune 500 companies, and other analysts on Wall Street. Plus I had to manage my portfolios of investments and give seminars to investors. Every once in a while I would check my metrics against a list of my competitors, which merely grew shorter and shorter. The atmosphere at Morgan Stanley was about rewarding excellence with more responsibility. They started awarding me with more clients and investors trying to test my ability to maintain my level of efficiency. They were in for a surprise because they didn't know my limits; I was cutting through it like a hot knife through butter. I was surfing the markets, digesting press releases, earnings reports, economic figures, conference calls, and then reselling the data to my investors and sales force in an easy-to-understand format. Remember our training motto was "one investor at a time"; therefore, we had to tailor the presentations for the needs of the clients. I was so wrapped up in the moment I couldn't see the future of greed and devastation.
The fundamentals of the market were undergoing dynamic changes on at least two fronts. The first was the repeal of the Glass Steagall Act from the 1930s and the second was the birth of online trading. From my perspective it boiled down to the merger between Morgan Stanley (MS) and Dean Witter (DW). Each had their advantages at the time although they were going in two different directions. MS was an institutional firm that was renowned for its underwritings and research, DW was known for its conservative style and huge distribution outlets. The synergies were supposedly ideal. As they repealed the Glass Steagall Act, the research reports became even more unreliable. In fact, Wall Street lobbyists forced politicians into creating laws that stipulated that every research report must include a caveat, which absolved the analysts or the brokerage house of any responsibility. We went from "one investor at a time" all the way over to "buyer beware".
The second fundamental change was the birth of online trading. This was a serious dilution of the controls of the brokers. The series 7 was a systemic control that kept the consumers from self-prescribing medication, and it kept investment bankers from gouging the market. The brokers were fiduciaries who were to measure the suitability of the clients with the "know your customer rules". Online trading gave Morgan Stanley and the investment bankers the freedom to earn investment banking commissions, without the nagging concern of investor complaints. The role of the brokers was diminished substantially, as the portals to investing were flung open.
In 2010, the newspapers are full of articles about bankruptcies and litigation on a sovereign level. At the root of the issue, the likes of Goldman Sachs and Morgan Stanley have invented theoretical insurance policies called the credit default swap (CDS). They literally created a market where they can underwrite and earn commissions without any credit analysis. We scan the news, and we hear politicians complaining from around the world. They literally sound like the retail investors of the late 1990s in the Internet bust. To make the situation even worse, the investment bankers literally took the humans out of the equation. The market makers on the exchanges have suffered the same plight as the brokers. The exchanges are being run by Algorithmic Trading Platforms, they are commonly referred to as Quants. These mathematicians are running computer models based on historical data to find trends. They are more oriented for correlation versus the true function of the markets, which is price discovery through supply and demand.
At this point in history we are all witnesses to computerized traders and artificial demand, along with government intervention in the free markets. Even the staunchest advocates of capitalism and free markets are using terms like TARP (quantitative easing and stimulus packages). The true communists in China must be baffled by the mind-bending logic of this mess. We at The KIN Consortium firmly believe that the days of computerized quantification versus true investor sentiment are at an end. Islamic banking has arrived with collateralized debts called sukuk. The return of the days of fair market value are at hand.
(Khalid I. Natto ([email protected]) is chairman & CEO of The KIN Consortium.)