Mish on Conflict and Bias

Nothing heats up the financial web like when Michael Shedlock gets pissed off.  I loved his post on the “Pimps and Whores” of Wall Street, specifically this undeniable bit about conflict (which I talk about day and night here on TRB):

A Word on Conflict of Interest and Bias

I am biased. So is John Hussman; So is Barry Ritholtz; So is Marc Faber; So is Jim Chanos; So is everyone else. We all are. It’s impossible to not be biased by something.

However, no one in the above group gets paid to underwrite securities.  No one in the above group to the best of my knowledge gets paid commissions on transactions.

Therein lies the rub. Wall Street pimps and whores have no fiduciary responsibility to clients but they do have a vested interest to peddle compete garbage to anyone and everyone.

For that reason, I am strongly in favor of  a “hard” wall between giving investment advice and offering securities to trade. Clearly the “soft promise” by Wall Street that “we won’t do it” is insufficient.

Some may suggest this goes against my Libertarian principles. I disagree. No Libertarian should be against laws that preserve property rights and no Libertarian should be against laws designed for the explicit purpose of preventing fraud.

Interestingly, independent investment advisors such as myself  do have a hard legal requirement of fiduciary responsibility.

However, Wall Street pimps and whores do not have a legal requirement for fiduciary responsibility. Instead they duck and hide under “suitability” clauses.

That does not mean I will always be right, and indeed I guarantee you in advance I won’t be. However, I will guarantee you that I will not recommend anything I do not believe to be in the best interest of clients.

GM bonds, rating agency garbage, IPO mania, Beat-the-Street hype, and “Strong Buy” hysteria while insiders unload and firms actually bet against advice given to clients are proof of the pudding.

The fraud and the greed speaks for itself.

Stadium Status.  I’ve been defending the majority of people who work at these firms while simultaneously castigating the pinciple vs agency model itself.  It’s a nuanced argument and a hard one to make in 30 second soundbites.  But I like Shedlock’s take better for it’s truthful simplicity.

Source:

Wall Street Pimps and Whores Story Extends Far Beyond Goldman Sachs: Merrill Lynch, Citigroup, Bank of America, Morgan Stanley, All Guilty (GETA)