Why is Trust in Wall Street Banks Declining?


As Wall Street continues to question why its business is declining, a recent Financial Industry Regulatory Authority (FINRA) arbitration case provides part of the answer. The arbitration panel ordered Bank of America Merrill Lynch (Merrill Lynch) to pay $1.38 million to an investor who lost money in a complex structured product composed of pooled loans that were sliced into tranches with varying payouts and risks. While the basic claim doesn’t sound particularly egregious, the underlying facts were.

The investor, Mr. Hayes, an engineer and entrepreneur, reportedly told his broker not to take any risks with his money. His broker sold him a collateralized loan obligation known as Lyon Capital Management VII. More specifically, Mr. Hayes was sold the equity or E tranche, which is the riskiest slice. His entire investment would be wiped out if the value of the loans in the pool declined by even one-half of 1 percent, which they did.

Mr. Hayes’ claim was based on an allegation that Merrill Lynch valued the loans at cost when it knew that the loans were worth less than the cost when it sold the security to Mr. Hayes. (“A Wipeout That Didn’t Have to Happen,” Gretchen Morgenson, New York Times). Merrill Lynch should have told Mr. Hayes that he would have an immediate loss upon the purchase of the investment. The arbitrators apparently agreed (though, as usual, they did not disclose the reasons behind their decision).

Ms. Morgenson’s article shows why Mr. Hayes (and others like him), who used to trust financial institutions, no longer trust them. “I was a trusting client, and it was like a bad dream,” Mr. Hayes was quoted as saying, adding: “I had a lot more assets in the bank, and it was unfathomable to me that they would deliberately do this to even a small depositor.”

Even after winning his case, Mr. Hayes remains angry. He said: “I no longer trust any financial institution.” With the greatest of understatement, Ms. Morgenson remarked that she believes that Mr. Hayes is not alone in his distrust of financial institutions.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.