“A fine deal” for Merrill Lynch

New York Attorney General, Eliot L. Spitzer, called his settlement with Merrill Lynch for defrauding and misleading investors, “a triumph for the investing public.” Pulitzer prizewinning business reporter for the New York Times, Gretchen Morgenson, called the agreement “clearly” “a fine deal” for Merrill Lynch.

Who is right? Gretchen Morgenson.
First, give Spitzer his due. Tired of waiting for the Securities and Exchange Commission to act, he brought the first case of any state Attorneys General against Merrill, citing a 1921 New York state law, the Martin Act, which regulates securities trading. The New York Attorney General obtained incriminating internal evidence from Merrill, showing its stock brokers would recommend that investors buy stock that those same brokers thought were “dogs”, but lucrative for the firm’s investment banking business which in turn helped increase those brokers’ bonuses. Early on Spitzer talked tough. He told Merrill that he would file criminal charges against the giant company if it did not provide restitution to the defrauded investors, admit wrongdoing and restructure its business so that the stock brokers have no relations with the investment banking side of the company.

More and more damaging information was flowing into Spitzer’s office and the estimates of investor losses surged well over a billion dollars and counting. The media was reporting the deceptions, the greed and the fraud almost daily. Spitzer caught Merrill Lynch red handed. Then he caved.

The agreement provides no restitution to investors who were harmed. Spitzer not only let Merrill avoid his earlier stipulation-an admission of wrongdoing; he also agreed to the following description of his settlement: that it “represents neither evidence nor admission of wrongdoing or liability.” Instead Merrill merely apologized for failing to address conflicts of interest in the past. This language, of course, will undercut efforts by investors to take Merrill to court and win adequate restitution under the civil justice system.

Spitzer required Merrill Lynch to pay a $100 million penalty. This is less than one-third of what Merrill paid for office supplies and postage in 2001, according to the New York Times. Moreover, this money will be spread to other states, whose Attorneys General followed Spitzer’s lead, and probably cancel out their efforts to go it alone. None of the money will go to the investors.

The core of Spitzer’s agreement is the restructuring of Merrill’s way of doing business à in effect separating the influence of investment banking fees from its stock recommendations. Merrill agreed to a list of reforms which will be supervised by an independent monitor to be approved by the New York Attorney General’s office. The business press, seeking comment by Wall Street types, found very few who thought that this agreement had any teeth or that it would change the corporate culture from the outside. In other words, it is up to Merrill to change from the inside. Perhaps the many forthcoming civil suits by investors and the shareholders’ lawsuit, due to depleted stock value, will help.

For Merrill and other similar companies, the only deal which would work requires real separation of investment banking from their analyst divisions that provide investment advice to the public. Only if analysts are entirely independent of investment bankers can investors be confident they are receiving objective advice. This requires that Congress repeal all legislation from the last decade that had undermined New Deal safeguards from the 1930s for investors and go on to broaden investor protections from predations that did not exist during the New Deal.

A few weeks ago, the cover page of Business Week asked ” How Corrupt is Wall Street?” The article inside answered the question by demonstrating that Wall Street is seriously corrupt.

No law enforcement agencies or legislatures will be able to stand up to the giant financial industry unless there is (1) public funding of election campaigns, and (2) mandatory inserts in communications between the companies and investors inviting the latter to form what has been long overdue–a national association of individual investors with full time staff to represent them and be accountable to them.

There are millions of individual investors and until they organize, the companies will find ever new ways to take them to the cleaners. (For more information on a proposed financial consumer organizations, see www.essential.org)