Lies your broker tells you

This is an auspicious day for this column, marking the exact anniversary of the launching of Global Agenda, five years ago. At that time I wrote to the then-editors of the economic section that “This is going to be a column of unremitting doom and gloom, as befits the world in the first decade of the 21st century.” Well, that was right: the column has (largely) been that and, although it may not have seemed so in the first couple of years, that has indeed befitted the global environment for this decade – a decade that began with the bursting of the tech bubble and a global recession artificially neutered by massive central bank intervention, and is ending with the bursting of the twin mega-bubbles of credit and real-estate and a global recession that will be long and harsh, despite the best efforts of central banks and governments to dilute its severity.

Today’s column carries the same headline that the first column did, on November 21, 2003. Much has changed in the interim, but the inherent tendency of brokers and financial advisors to tell their clients inexactitudes, nonsense and outright lies is largely unchanged. Change it will change,  as change it must —  because the crisis of confidence between investors (small and big) and those who claim to serve them demands a new ‘business model’ in the financial services industry. Indeed, the largest brokerage firm in the US, Merrill Lynch, no longer exists as an independent entity – mainly because its senior management persuaded itself that its true mission was the pursuit of ever-higher profits for the firm (and hence higher bonuses and more stock-derived wealth for themselves) irrespective of the risks taken along the way.

The past year has provided extraordinary revelations of how the top people at a long list of financial institutions in the US and elsewhere destroyed their companies by riding roughshod over the basic rules of banking, investment and management generally. One of the obvious lessons that everyone should have learnt from this is to discount anything a financial executive says – and the more senior the speaker, the weaker his or her credibility. That this is so is easily demonstrated. Why this is so is more complicated, but stems from the iron rule that ‘where you stand is where you sit’ – i.e. that your position on an issue is generally derived from your position in an organisation or in society at large.

Bankers, brokers and financiers could not conceive in 2007 – and many still cannot, even today – that their entire world could melt down. That would have required them to accept that the financial system in which they spent their working life was a house of cards. Everyone now knows that it was, but those who should have known it soonest and best were obliged to live in denial, if they were to keep their jobs, their career-paths, their rapidly-increasing wealth and, in many cases their psychological well-being (aka sanity).

In most cases, the denial mechanism is what caused them to spout rubbish throughout the long and painful fall from the pinnacles of make-believe in early 2007 to the (interim) depths of anguish in late-2008. They are, for the most part, not inveterate liars and con-men. That is what makes them so dangerous – because if they were criminals, most of their customers would see through them at some point and react accordingly. It is precisely because they fervently and fully believe what they say at every point – “the worst is behind us”, “the recovery should begin in (a point 3-6 months down the road)” and, worst of all, “these are just paper losses, in the long run the markets will recover” – that they are able to so consistently lead themselves and their client sheeple down the road to financial annihilation.

There is, currently, a chance that the wholesale assumption by governments of the basic function of the money, bond and inter-bank markets, namely lending, and the effective nationalisation of both losses and loss-making institutions, will stop the rot and end the collapse. Genuine, clear-eyed, analysts – defined as those who warned in advance of what was impending and thus earned the right to still be given a hearing – are split as to whether this positive outcome is probable or possible. But all agree it exists.

At the same time, these analysts also note that there is a chance – of greater or lesser probability – that these efforts may fail. If so, much more trouble lies ahead for the world. If your broker, advisor, counsellor or whatever still can’t see both sides of the risk/ reward equation, much more trouble lies ahead for YOU. A useful guideline for the next few months may be the famous summation of the greatest ever stock market collapse, that of 1929-1932: “It was not those who bought GM at $100 and sold at $50 that lost all their money, it was those who bought at $50 and sold at $2”.

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