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Author: TParadiso Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 532  
Subject: Wall Street hasn't learned its lesson Date: 1/20/2003 9:03 AM
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Calling Mr. Ripley

Many think me a cynic. Some prefer to dismiss my constant railings that our political and business leaders are, for the most part, disingenuous in their desire to enact true reform. Of course, it's just a quirky coincidence the majority of those who believe I hold a misguided “glass half full” attitude are the very people who have a vested interest in maintaining the status quo.

Take for instance the case of Wall Street. I blasted New York Attorney General Eliot Spitzer and the SEC for a sellout of biblical proportions when they let the investment firms off the hook for what has to be considered one of the biggest frauds ever perpetrated on the American public. A little melodramatic? Hey, I'm a marketing guy and that's my spin.

In fairness, the counter argument states a quick settlement was necessary to help restore confidence among the investing public and to get the economy back on track. They claim protracted legal proceedings with uncertain outcomes would continue to stifle the recovery. They would dismiss the timing of the settlement (in the midst of the holiday season) as serendipity, and the product of a diligent effort by all involved.

As with any effective propaganda there is a grain of truth to these arguments. It is entirely possible that putting Wall Street on trial might have inhibited any economic recovery. There is also no question achieving guilty verdicts were far from certain. And face it, the public prefers not to address such issues head on and risk potential upheaval. All true.

What is also true is the failure to address the systemic problems that caused the deceit in the first place guarantees we'll be faced with a similar situation in the future. Call me crazy, but I'd prefer to deal with the potential short-term pain to achieve the long-term gain.

So why do I continue to flog this dead horse? For good reason. Over the weekend, The New York Times reported an interesting little tidbit that perfectly illustrates why this settlement was a bad idea and virtually ensures future scandals. What did they report? Inquiring minds want to know. Glad you asked.

In a story worthy of Ripley's Believe It or Not, evidently some of the Wall Street slime bags (those are my words not those of the Times) are trying to get their insurance companies to fork over the dough to pay the fines. I had no idea one could get insurance against fraud. There's a novel way to solve the problem of overpopulated prisons and an overburdened court system. Buy anti-indictment insurance. Here's a question: if someone steals the money to pay for the premiums for this type of insurance are they covered? Where's Alan Dershowitz when you need him?

I don't know about you, but things like this make my hair bristle. The nerve of these lowlifes! They blatantly lie to investors for no other purpose than to reap huge personal rewards. Their political buddies take advantage of an apathetic public to let them slide by paying what amounts to $1.4 billion in “hush money.” And instead of considering themselves lucky to have “learned their lesson” so cheaply, they have the audacity to try and rip off the public further by having the insurance industry foot the bill for their transgressions.

Not exactly a sign of repentance. More like a continuation of the outrageous greed that caused the market to collapse in the first place. It is certainly not the attitude of someone who has recognized the errors of their ways.

The American International Group and Chubb, two large insurers have requested regulators include a clause in the final settlement that mandates the firms pay the fines themselves. What a novel concept. The fact it is even necessary to discuss something that should not be in question illustrates how broken the current system is.

You'll be happy to know Mr. Spitzer is in favor of ensuring the fines be paid by the transgressors. “As a matter of public policy, fines and penalties should not be recoverable from any insurance policy,” he said in a statement read by a spokesman. The cynic in me believes the public policy Spitzer is referring to is his own public relations policy. Given he failed to issue a single indictment and all the headlines proclaimed the huge fines he extracted from The Street, having those fines paid by insurance companies might put a damper on that line item of his resume.

Granted, the chances are slim the investment firms will recover any of the penalties from insurers. Most firms have already taken charges against earnings to cover the fines and penalties, highlighting yet another “salt in the wound” systemic flaw. The $100 million settlement with Merrill Lynch is a case in point. Because it was characterized as a civil settlement and not a fine, it is likely tax deductible and taxpayers may subsidize as much as $30 million of the $100 million. The cynically challenged would chalk this up to nothing more than an overlooked technicality. I on the other hand believe Spitzer and the SEC were quite aware of this unethical and self-defeating corporate subsidy. If they weren't, you can add stupidity to the list of descriptors appropriate for these so-called public servants.

Be that as it may, you're probably curious on what basis the likes of Citigroup and A.I.G. would even attempt to recover the cost of the fines. It turns out the Sarbanes-Oxley Act, last year's corporate overhaul bill is partly to blame. The bill calls for any fines collected by regulators to be used as restitution for harmed investors. Seems like the right thing to do, though in this case it's almost impossible to properly execute.

Some insurance policies treat investor restitution in a similar fashion as damages awarded in court, making them potentially recoverable. The irony is if the fines and penalties are paid to the government they are not recoverable. Thus, if we stiff those who were harmed, then those who caused the harm are forced to foot the bill. On the other hand, if we attempt to make people whole, the perpetrators of the crime slide and the public is screwed yet again with higher insurance premiums. Makes perfect sense to me. Still think me a cynic? As a self-professed marketing guru I prefer to describe myself as a realist. I have to go now. Mr. Ripley is on the line.
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