Pay No Attention to that Man Behind the Curtain


Josh Brown’s terrific book, Backstage Wall Street, does an excellent job illuminating what Wall Street wants to hide from clients and investors.  Like the Wizard in The Wizard of Oz, the Street would have us pay no attention what is really there — “behind the curtain.”  Yet once in a great while the Street rats itself out so that we get to find out, without a shadow of doubt (if you still had any), what the big investment houses really think about what they do and who they do it to.

It isn’t pretty.  

The now-defunct Bear Stearns won a noteworthy 2002 litigation involving former Fed Governor and then-Bear Chief Economist Wayne Angell over advice he and the firm gave to a Bear Stearns client named Count Henryk de Kwiatowski (really) after the Count lost hundreds of millions of dollars (really) following that advice (back story here). The jury awarded a huge verdict to the Count but the appellate court reversed. That Court decided that brokers may not be held liable for honest opinions that turn out to be wrong when providing advice on non-discretionary accounts.

But I’m not primarily interested in the main story. Instead, I’m struck by a line of testimony offered at trial by then-Bear CEO Jimmy Cayne . Cayne apparently thought that Bear could be in trouble so he took a creative and disarmingly honest position given how aggressive Bear was in promoting Angell’s alleged expertise. Cayne brazenly asserted that Angell was merely an “entertainer” whose advice should never give rise to liability.

Economists are right only 35% to 40% of the time, Cayne testified . “They don’t really have a good record as far as predicting the future,” he said. “I think that it is entertainment, but he probably doesn’t think it is” (and I doubt that the Count was much amused).

Cayne even noted that Angell did not have a real job description at Bear. “I don’t know how he spends most of his time,” testified Cayne . “He travels a lot and visits people and has lunches and dinners and he is an entertainer.”

Notice that Cayne did not even pay lip service to the idea that clients were entitled to the firm’s best efforts based upon the best research (or even their best research).  Moreover, he did not seem to think that the Count deserved honesty together with competent advice.  For Cayne, the goal was simply to be entertaining and to make sales. That the Count lost hundreds of millions of dollars was merely collateral damage (and not even necessarily unfortunate at that).

To look at the Count’s case a bit differently, in an odd sense, Cayne was precisely if hypocritically correct. As both Josh and I have noted before, we’re in the Wall Street “silly season” of predictions and forecasts for the New Year. There is nothing inherently wrong with them, and they can be very entertaining indeed. But you shouldn’t take them any more seriously than Jimmy Cayne did.

And you should always be aware of who has (and especially who doesn’t have) your best interest in mind – practically, realistically and legally.

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