Commentary by Bob Thomas: Bank on greed to drive market berserk

"You're not a statesman until you can eat a lobbyist's food, drink his wine, romance his women and still say NO!"

- Flavius Bronkitus, Roman senator

Over the years lobbyists have relentlessly managed to break through barriers that were originally erected to prevent unfair competition. These legislative barriers involved anti-trust, restraint of trade, anti-monopoly and a host of others.

Today, I'm going to discuss one lobbying breakthrough that has made a joke out of Wall Street. Wall Street has always had its share of sharp-shooters, traders looking out for their own interests ahead of their clients', and widespread insider trading. But individual investors have never influenced the market. They're along for the ride.

Now, before proceeding any further, let me say that my father was a stockbroker for 35 years with one of the big "10" brokerages. He has now been deceased for 27 years, so you can see that he was a broker during the integrity years, when brokers invested their own money where they invested their clients'. Wall Street wasn't a go-go mad house because there were far fewer investors and there were safeguards. In those days the Securities and Exchange Commission was diligent.

Originally, banks were prohibited from dealing in stocks. Enter the banking lobby, and overnight thousands of new securities peddlers joined the circus, making a mockery of the stock market. The market was originally created to bring new issues (initial public offerings) to investors, but today the main thrust is frenzied buying and selling. It's now a bidding war between investors and mutual funds to buy stocks, driving prices way above their true worth.

Banks have long wanted to muscle in on stockbrokers' turf and deal in securities. Bank lobbyists eventually won the battle, and unfair competition and gluttony are the result. Unlike stockbrokers, banks have always known where to find potential investment money. It's in their own banks' savings, CDs, money market and checking accounts.

Suddenly, bank clients holding money in those accounts began receiving phone calls from bank employees suggesting they switch their bank accounts into stocks, bonds and other investment goodies. It took awhile for this strategy to catch on, but it's alive and well today. Now, couple that with TV securities hustlers and the market is the last place you want to be!

OK, so what's the downside to all of this? At any given time there are only a finite number of stocks in which to invest. What the banks and the TV hawks are doing is bringing hoards of new "investors" into the markets, driving the prices of that finite number of stocks and bonds out of sight, destroying any meaningful relationship between stock prices and the true values of the companies. Econ 101: Inflation! There is too much money chasing too few goods (stocks).

Oh, yes, we hear things like, "This stock is selling for only 12 times earnings." Big deal! And in some quarters that may sound like a real find, but compared to what? Remember, at any given time, a company's true worth equals its liquidated net assets, and there is no guarantee of that during recessions, inflation, wars, catastrophes and only God knows what.

Sure, you can make money in the market by buying stocks, hopefully at the right time, and holding them long enough to take advantage of the succession of neophyte investors being recruited by banks and brokers, who will outbid each other to pay you more for your stocks than you did. And by then, who knows, your portfolio could be selling for 30, 40 or 50 times earnings. Really, now, doesn't that smell like Ponzi? Welcome to the crap-shoot.

• Bob Thomas was the founder and CEO of a division of Emerson Process, a Fortune 500 company. He later served on the Carson City School Board and the Nevada State Welfare Board and as a state assemblyman. He also founded and served on the Carson City Airport Authority. He recently authored his new book, "Creating A World Class Company" (Amazon)


Use the comment form below to begin a discussion about this content.

Sign in to comment