View from Lodi, CA: When it comes to market options, it's caveat emptor
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Once in a great while, a prominent public figure will speak out so candidly listeners are caught off guard.

Such was the case last week when Henry M. Paulson, the chairman and chief executive of Goldman Sachs, lashed out at the management and regulation of public companies.

Said Mr. Paulson, "I cannot think of a time when business over all has been held in less repute." Listen to the speech in RealAudio.

Paulson continued, "In my lifetime, American business has never been under such scrutiny."

As the nation applauded, no one reminded Paulson that American business has been caught bottom feeding before—and not that long ago.

Whenever financial disasters cause innocent investors to lose their shirts, sanctimonious platitudes and pieties similar to Paulson's echo throughout corporate boardrooms.  A few months later, things die down and business returns to normal.

Enron, Tyco and Merrill Lynch—to which Paulson indirectly referred— are the three most recent examples of corporate malfeasance.

But two huge blood-lettings occurred while Paulson was a Managing Partner in the Chicago Goldman Sachs office in the late 1970s and early 1980s.

Twenty-five years ago, the Washington Public Power Supply System (WPPSS), ill conceived and mismanaged, incurred staggering cost overruns that caused the financial collapse of four of its five proposed nuclear plants.  The WPPSS failure created the largest default in the history of the U.S. municipal bond market.

To refresh your memory, investors lost the tidy sum of $2.25 billion dollars in WPPSS bonds. For all the widows and orphans who thought that municipal bonds were the safest place to invest, WPPSS was a rude awakening.

The uproar over WPPSS had barely died down when the savings and loan scandals bilked innocent investors out of their savings and retirement funds.

So many savings and loans went bankrupt in the 1980s that the Federal Savings and Loan Insurance Corporation had to be bailed out by the federal government. This cost American taxpayers the present day equivalent of $225 billion.

In 1990, Gary Hector of Fortune Magazine wrote a scathing piece, "Where Did All the Billions Go?" The answer: into the hands of corrupt savings and loan officials, politicians for sale and sundry crooks.

Despite the tremendous cost of the bailout, nary a peep was heard from John Q. Public. The savings and loan fiasco was, in the minds of most, "too difficult to understand."

Maybe lasting change will come this time around. But don't count on it.

The New York Times is on the reform bandwagon. In a June 7 editorial, "Blunt Talk by an Investment Banker" the Times praised Paulson for his warning to corporate American to "clean up your act or we're all in serious trouble."

Paraphrasing Paulson, the Times wrote, "Clean up your act or we are all in serious trouble."

To be sure, some encouraging signs are out there. The Securities and Exchange Commission, responding to Merrill Lynch's shilling of low-grade stocks to unsuspecting investors, has approved new guidelines that must be put into effect within six months

Among the most overdue changes are that security firms may not tie research analyst's compensation to investment banking transactions. Also, analysts must use the lure of a favorable stock rating in exchange for underwriting business.

And Merrill Lynch must disclose whether it has received banking fees from the companies on which it issues a research opinion.

But the S.E.C. isn't restricting Merrill Lynch analyst's participation in pitching stocks to institutional buyers—the meat and potatoes of its stock business.

Many are hopeful that the $100 million fine imposed by New York Attorney General Eliot Spitzer will encourage a lasting separation of powers between research and banking.

As imposing a sum as $100 million is, it represents only one-third of the total spent by Merrill Lynch on postage last year. In other words, the fine is water off a duck's back.

I'm pessimistic because I've been a Wall Street insider. For nearly twenty years, I worked as a Wall Street banker. Most of those years were spent at Merrill Lynch.

The calls for reform miss the heart and soul of the Wall Street game. Wall Street only truly works when investors buy.

Despite what you've seen in the recent Charles Schwab television commercials, don't expect to hear "sell" encouragement from your broker too frequently.

According to Thompson Financial/First Call, between March 1st and May 1st, the percentage of stock analyst ratings that were "sell" or stronger were a mere 2.5%.

People still quiz me about my market opinions. I have one standard response: "Caveat emptor."

Joe Guzzardi [email him], an instructor in English at the Lodi Adult School, has been writing a weekly column since 1988. It currently appears in the Lodi News-Sentinel.

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