Wall Street’s Lack of Credibility Drains Investor Confidence


The crisis in confidence dragging down the economy and financial markets is multi-factorial, but surely a significant part of the problem is that you just can’t trust Wall Street financial institutions to tell the truth about their own financial health, according to John Carney’s CNBC.com article entitled “Wall Street’s Credibility Problem.” He cites Morgan Stanley’s assertion on September 29, 2008, two weeks after the bankruptcy of Lehman Brothers, that it had a “strong capital and liquidity position.” In fact, however, almost all of its available cash was borrowed from the Federal Reserve. The firm actually reached its borrowing peak of $107.3 billion on the very same day it said it had a “strong capital and liquidity position.”

Other reasons for Wall Street’s credibility problem may have to do with the obstinate bullishness of its market predictions, or the fact that it continues to make market predictions at all. In “Why Wall Street’s Forecast Can’t Be Trusted,” J. Alex Tarquino points out that Wall Street’s predictors maintain their predictions despite the markets volatility this year. Morgan Stanley is sticking to it low-end prediction that the S&P 500 will finish the year at 1238, Deutsche Bank maintains its high-end prediction of 1550, and the Street consensus is stuck at 1400. They have not budged despite all the recent market volatility, according to the article.

But maybe the problem is not that the predictions are not revised as the markets go up and down, like the seven-day weather forecast that gets revised every day. Maybe the problem is that, despite all their supposed sophistication, Wall Street forecasters fail to admit they HAVE NO IDEA even what direction the market will go in the short term. Nobody knows. It’s unpredictable, like the weather. That’s why Robert Shiller told CNBC that the market reminds him of a spousal argument. Things can get ugly in a hurry, he said, but then, in the twinkling of an eye, they make up and everybody’s happy again. Wall Street predictions are pretentious nonsense. But Wall Street refuses to admit it because it would be bad for their brokerage business.

Earnings predictions may be a different matter. There may be some basis for a prediction. But opinions vary markedly. Research analysts as group are bullish while economists at big brokerage firms are slashing their estimates, according to CNBC.com, “On Wall St., a Big Split on Outlook.”

Maybe its best to believe no one and, if you are willing and able to take market risk at all, just go with a low-cost, broad-based Vanguard index fund.

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. For further information, please contact us.