Fixing Wall Street: a first step toward restoring customer trust in the system.

AuthorMayer, Martin
PositionThe United States

More than half a century ago, Fred Schwed, Jr., who had survived the greatest of all financial market booms and busts, told the story of a tour bus of Nebraska farmers taken to downtown New York. The guide pointed out Trinity Church and the Morgan bank and the Stock Exchange, and waved at the docks in the East River at the foot of the hill. "There," he said, "you see the yachts of the great Wall Street brokers."

One of the farmers' children worked up his courage to ask a question: "But where," he said, "are the customers' yachts?"

It is no surprise that the operators of the casino can make money when the players don't. One of the most-trusted short-term market indicators is the put/call ratio in the options exchanges, where individual customers play a larger role than they do in other markets. The more the public buys puts, anticipating a market decline, the more likely the market is to rise; the more the public buys calls, expecting to profit from a market rise, the more likely it is that the market will fall. Subject to the caveat that pigs never make money, "contrarians" who assume the public is wrong are year-in, year-out the most likely winners in the market.

But the system was organized years ago with one important structural corrective for the disadvantages any visitor suffers playing on the other team's home grounds. The liaison between the financial market institutions and the public was an insider called "the customer's man." Over time, his living (it was almost always a "he" in those days) was his relationship with the people he persuaded to buy and sell securities. Their willingness to trust his judgment was his bread and butter, and it was buttered on the customer's side.

To a significant degree, the customer's man worked not for his employer but for the customer. If he felt that the firm was pushing bad stuff to his clients Or loading them with unnecessary costs, he could go across the street to another firm and take his clients with him. Today that protection for the customer is gone: the individual broker he deals with has signed a "non-compete" contract promising that if he leaves the firm that now employs him he will not ask his customers to go with him.

In Fred Schwed's day, brokerage firms were partnerships--indeed, corporations could not be members of the New York Stock Exchange--and Wall Street life was a tangle of longterm relationships. Companies that issued stocks and bonds did business year after year with the same...

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