Leland Faust - A Capitalists Lament: How Wall Street Is Fleecing You and Ruining America

Copyright 2016 by Leland Faust

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Library of Congress Cataloging-in-Publication Data is available on file.

Cover design by Rain Saukas

Print ISBN: 9781510713628

Ebook ISBN: 9781510713635

Printed in the United States of America

To Don Hill for being a marvelous mentor, perfect partner, and fabulous friend and for having the great strength of character to allow me to take credit for so much of what we did together.

To Susan for listening to Econ 101 at the dinner table for all these years and helping me refine, organize, and coherently express my ideas. More importantly, for steadfastly standing by my side as a pillar of support and love for just shy of fifty years.

Table of Contents

SECTION I

The Lay of the Street

ONE

America: We Have a Problem

W all Street is fleecing you and ruining America. You may think Wall Streets perpetual activity and financial innovations help the free-enterprise system, but in fact they cause irreparable harm to the country. This story of how Wall Street completely fools you as it skillfully makes a killing for itself, turning your money into theirs, is too vastly important to ignore. We will all continue to be at great risk and suffer if we do not force changes to this toxic system.

Investors, big and small, are continually being fleeced and have very few people on their side. Whether you have nothing to invest and are interested only in good public policy and consumer protection, or you have a nest egg of $10,000 or $10,000,000,000 (yes, many of the most wealthy are taken in, too), you need to know how the Wall Street system really works, how the benefits are distributed, how much risk is routinely taken, how Wall Street uses the media to promote its charade, and how it shamelessly misleads investors and the public.

If after reading this book you think the title is hyperbole, then I have failed in my mission. Wall Street has ingeniously convinced a large segment of the public that to oppose Wall Street is to be against the great American free enterprise system. Not so! I am a hard-core capitalist, but I am not an apologist for Wall Streets horrendous behavior. I am not a populist trying to change our core beliefs. As an independent investment advisor, Ive been both a West Coast outsider and a clear-eyed insider in the financial world. Unlike Ralph Nader and Michael Moore, who berate the system itself, Im outraged precisely because I support our regulated but essentially free market economy. Im not someone who failed and then rails. Ive worked very successfully in the industry and observed it over my entire professional career. I know it inside and out. I have represented real people with their real money and financial lives on the line. I have had to make the tough decisions on the spot. I am not a journalist or an academic looking at events or the system with the luxury of hindsight.

This book is not about bashing the American economic system; it is about bashing business as usual on Wall Street. Too many people think that free enterprise, or capitalism, has failed. I completely disagree. The free enterprise system has produced the greatest amount of economic prosperity for the greatest number of people in history. If you dont support free enterprise, please turn in your iPad and your smartphone, stop watching cable television, and never go to Google. Self-interest serves us all well. But selfish interesttaking advantage of the system by illegal or immoral actionsharms us all.

I am outraged that Wall Street constantly puts its own interests ahead of those of its customers and society. Smooth-talking yet well-credentialed hucksters selling the false promise of easy gains have hijacked our system in order to earn higher fees for themselves. Wall Street continually makes outrageous predictions designed to impress you and entice you to buy. But it is mostly a giant casino where games of chance masquerade as investments. This culture of gambling exposes us all to risks that no one should take.

Lets be clear. We are not talking about boiler-room operations and swampland shysters. We are talking about the largest, most prominent and renowned Wall Street players: brokerage firms, financial advisors, mutual fund complexes, financial center banks, insurance companies, analysts, consultants, rating agencies, government agencies, government-sponsored enterprises, the financial press and broadcast media, and many financial economists. When Wall Street firms and their employees forget whose interest they are supposed to protect and instead act only in their own selfish interest, the problem is not just unscrupulous or unethical behavior but the criminal practices that go with it.

Today Wall Street does not create wealth; it takes it from others. Wall Streets unsavory tactics assume many guisesalluring come-ons, airbrushed risks, high stakes gambling, distortions, half-truths, false promises, misleading statements, falsified research, outlandish predictions, white lies, bold lies, tricks to overcharge customers, bad deals, and outright fraud. The financial-services industry seduces Main Street investorsand surprisingly even the big players, including major corporations and other institutional investorsgetting them to take chances that no one should ever consider.

Wall Street takes advantage of uninformed customers by charging hidden fees and markups on their products. It tells clients they are paying less when in fact they are paying more. Financial prospectuses feature a picture of a grandfather and his granddaughter, implying he is investing for her securitywhen in fact the fund advertised is chock-full of risky investments.

Wall Street celebrities, worshipped by the media, use their status to hype forecasts that mislead the investing public. They consistently get the big things wrong, yet no one in the financial press seems to know or care or hold anybody accountable. Most Wall Street experts confidently predicted that the stock market would increase in 2008; instead we saw the worst decline in seventy years. A Nobel Prize winner predicted that the S&P 500 Index would fall to 400 from 1000, only to see a rise to almost 2100 by the date he specified.

Wall Street is a world where the largest firm in the industry can recommend to its customers stocks that its own internal memoranda refer to as dogs. Its a world where hedge fund operators make hundreds of millions of dollars managing funds in which their investors lose billions. Its where the most popular television personality can give his advice on the one single best stock to own, only to see it decline by 50 percent over the next year and by 95 percent over the next two years. Its where employees of the major firms do not even try to protect their clients and customers; they go out of their way to harm them in order to help either a few favored clients or themselves. Its where too many people have disdain for their very own clients and customers, display arrogance without limit, and have a sense of entitlement that never ends.