You Can’t Trust These Jerks…
Anybody watching the news lately (or anytime in the last ten years for that matter) has heard something about corporate corruption and Wall Street.
A while back it was Enron…
Enron was the darling of Wall Street in the late 1990s and early 2000s. At one point, Enron stock traded for over $90. For years, company executives relentlessly pumped the company and its stock.
Why would anyone worry? On the surface, Enron showed amazing profits and investors had every reason to believe the hype.
But eventually some “accounting irregularities” (also known as lying) came to light…
It turned out that company executives were willfully engaging in corrupt practices to hide huge amounts of debt. But that wasn’t all! Much of the profits Enron was posting were due to accounting gimmicks.
When the truth finally came out, investors got nailed for millions. Retirement accounts and pensions went up in smoke as Enron stock became worthless. Turned out the whole thing was a scam.
Employees of Enron were hurt the worst as many had their life savings wrapped up in the stock.
Then came WorldCom…
This story went pretty much the same as Enron. Corporate executives lied their butts off to hide a failing business. They pumped the stock all the while knowing it wasn’t worth a hill of beans. Once again, investors were left holding a bag of you know what…
These two scandals made it hard to trust Wall Street. It was hard to know which companies were “cooking the books”.
But eventually, investors got back in the game. People thought the worst had to be behind them.
Enter the credit crisis…
By golly, it turned out the worst was yet to come!
Only this time the scandal nearly imploded the whole financial system and life as we know it. In 2008, commercial and investment banks were dropping like flies.
Companies like Bear Stearns, Lehman Brothers, and Washington Mutual all went up in flames. Investors got hosed once again, as the markets went into free fall.
Now, some will argue this wasn’t really a scandal. They say it was just a culmination of a few bad things happening all at once. A perfect storm if you will.
I say it’s another scandal caused by corporate greed.
You see, the banking system nearly imploded once before in the U.S.
Back in the early 1930s during the Great Depression, banks were failing left and right. Years of excess speculation and fraud had banks on the ropes.
To counteract this problem, Congress enacted the Glass-Steagall Act in 1933.
This act aimed to curb rampant speculation by banks (some economists theorize this speculation caused the bubble and eventual stock market crash in 1929).
In a nutshell, the act provided the separation of commercial and investment banks. Commercial banks were no longer allowed to speculate in the securities markets.
A perfectly good law and one that remained on the books for over half a century…
That is until 1999.
Under intense pressure, (read: large amounts of banking lobbyist campaign donations) Congress repealed the Glass-Steagall Act.
Once again, commercial and investment banks were indistinguishable. Commercial banks like Citigroup (C) were once again doing business in the securities market.
We had commercial banks dealing in mortgage backed securities and collateralized debt obligations. These tricky securities turned out to be ticking time bombs. Institutions holding them couldn’t get rid of them fast enough.
Personally, I find it very interesting that less than ten years after the repeal of Glass-Steagall, our financial system was melting down once again. Was it merely a coincidence? I don’t think so…
You may be asking, “So what the heck is your point?”
My point is this… Be careful with how you invest your money right now. The markets are up big since the March of 2009. Here we are a year later and many markets are still making new highs.
Let’s be clear, I’m not recommending you stay away from the markets completely. Having your money locked up in a savings account or money market fund isn’t going to do you any good.
I recommend you be nimble with your money. Now is not the time to buy and hold. Look for short to medium term trends in the markets. Control your risk and don’t be afraid to take a quick profit.
By staying flexible, you can avoid being a victim of the next Enron, WorldCom, or banking meltdown.
Category: Stocks
