The original purpose of the securities markets was to raise equity and debt capital for American companies. Wall Street would collect a fee for raising the capital from individual and institutional investors. Investors got to choose which companies they wanted to invest in by buying their stocks and bonds from Wall Street brokers. Back in the old days these brokers held prestigious positions in society. In fact, they were called “Customers Men”. Their clear purpose was to know their clients (make suitable recommendations) and always act in their best interests (financial fiduciaries). That all changed in 1975 when commission rates were deregulated. Deregulation spawned discount brokers who killed off the role of the Customers Man. Stockbrokers and their companies could no longer produce the same revenues, profits, and incomes.
Goodbye Customers Man, hello product salesman. Stockbrokers no longer worked for their clients’ best interests. They worked for their firms and themselves selling mutual funds and other products for 5% commissions. Mutual fund assets soared from billions to trillions of dollars. The more the sales reps sold the more money they made. A service culture became a sales culture. That may not sound dangerous until you realize that culture is investing the retirement assets of millions of Americans. And, these investors have no idea their assets are invested by salesmen who put their own interests first. See Robert Reich’s article Happy Anniversary Lehman Brothers, and What We Haven’t Learned about Wall Street Over the Past 5 Years. This is why Wall Street is currently fighting fiduciary standards for brokers. It is hard to run a profitable casino and do what is best for customers.
It began in the late 1980’s when Wall Street created the limited partnership bubble. That was followed by the dot com bubble in the late 90’s. You may remember companies with no revenue and earnings selling for $300 per share. Wall Street made billions and investors, who by now were speculators, lost trillions. Then there was the toxic mortgage bubble that collapsed in late 2007 and almost brought down the U.S. economy. Again, the Wall Street Casino made billions and investors lost trillions. Wall Street’s political connections made cheating investors legal and no executive of a major firm went to jail.
The Wall Street Casino started when politicians decided investors would be better off if commissions on the purchases and sales of securities were opened up to competition. 35 years later Dodd-Frank was supposed to address many of the excesses that started in 1975. But, the incestuous Casino called Wall Street is spending hundreds of millions of dollars on lobbyists to make sure new regulations do not limit the games investors can play at the world’s biggest Casino. Politicians had good intentions in 1975. They are Wall Street pawns in 2013.