As a much younger man in 1983, I started my career on Wall Street in the Legal Department of what was then known as Smith Barney, Harris Upham & Co.  From there I served stints at the American Stock Exchange, the NASD, Integrated Resources, and eventually pursued a career as a law partner whose practice focused on securities-industry regulatory matters.  It’s been a long career.  More than a quarter of a century.  I loved working on Wall Street.   It was exciting.  We raised money.  We invested in individuals and companies with ideas.  We made things happen, and, along the way, often changed lives for the better.  Not always.  Come on – if you’ve read my columns over the years you know I’m no hypocrite.  Wall Street has been plagued by more than a few crooks, but when we stumbled, we still managed to dust ourselves off and get back up.

Do I think the sky is falling and the end near? No.  As I often say: this too shall pass.  And it will.  Unfortunately, it’s not just whether storms pass.  They always do.  The more important question is what do they leave in their wake.  This time I see far more devastation than usual. 

Many of you have asked me in recent months what we on Wall Street can do to turn things around.  You have complained to me that the industry trade groups seem unwilling to enter the ring.  You say that those in power – the politicians and the regulators – seem only to have made things worse and now seem clueless. 

Trade Groups

The independent/regional brokerage community needs an effective trade group to formulate a gameplan for recovery. Those big firms who sucked the life out of local competitors and filled the pockets of politicians with campaign donations (and dominated the regulators) never lent the small bucks to the moms and pops of our country.  Sure, now go ask Bear Stearns to raise $2 million for that private placement for the small factory just outside of town. The font of local capital formation was always the independent/regional brokerage community.  As with the deceased Golden Goose, those who strangled it seem stunned that it no longer issues golden eggs.  Where are the dollars coming from to jump start the local business that employed the town folk who paid the county's taxes which footed the bill for the services we all need and rely upon?  Where the hell were the trade groups defending these smaller firms? Show me the trenches they dug on the battlefield.  Show me the lines that these groups drew in the sand and said "here but no farther."

The hundreds of thousands of registered men and women who sell the stocks and raise the dollars need an effective trade group to protect their rights and promote the professionalism of their chosen career.  They never had one and still don't. They have ideas.  They have experience.  No one seems to care.  They continue to be disenfranchised from any meaningful role in the process while their firms fail, their offices close, and they are kicked to the curb for corporate savings.

 In recent months,  I have spoken to every trade group that would take my call (sometimes it took many of those to get one response), and I even spoke to folks looking to start new trade groups.  Sadly, I could find no place to call home.  The disaster in our markets requires more than a once-a-year effort to field a slate of candidates to oppose those nominated by FINRA; and it requires the will to push back when regulators are out of line.  Instead, I see only petitions, white papers,  masturbatory meetings, and more and more folks getting appointed to more and more useless committees and subcommittees.  For now, I am done with these trade groups and like a ronin in those Japanese samurai movies – belonging to no master – I will fight only the fights I believe in.

Politicians

In recent months, I have also spoken to far too many state and federal politicians, or, more accurately, to their gatekeepers who assure me in practiced lines that their boss takes my points seriously and would love to chat with me—in the future.  Then my email address or phone number mysteriously gets hit with tons of messages from folks looking to raise money for political campaigns.  Dejectedly, I watch the hearings where the chairs are filled with the same tired voices espousing the same failed solutions and answering the same regurgitated questions. Give 'em a show--that's about all we get for our two bits.  Yet more proof that the public always gets what it deserves.  We elected these incompetents, and we re-elect them. 

Regulators

And, yes, in recent months,  I have called and written to every regulator you could imagine.  Got back any number of polite replies.  Let’s do lunch.  Let’s have coffee. I starve and go thirsty.  Incredulously, I see new rules churned out daily beyond a beleaguered industry’s ability to absorb them.  You complain. They listen—but they do not process what you say.  It’s the same old game.  By appointment only.  The favored cronies get to whisper the same flattery in the same receptive ears.  Nothing changes.  But that those who regulate had some meaningful industry experience.   You know, Bill, if it were up to me, I’d hire you. We could use folks like you in regulation.  But for now, we’ve decided to go in another direction.

Lost on the Road

So, it is to this place in the road that you and I have come and now stand, with Alice, before the Cheshire Cat.  We ask them all: the trade groups, the politicians, the regulators—which way leads us out of here?  But they just smile and sit there content with the apparent security of their jobs.  But, compelled to give some answer lest they come off as rude, they utter a Zen-like response:

One day Alice came to a fork in the road and saw a Cheshire cat in a tree. Which road do I take? she asked. Where do you want to go? was his response. I don't know, Alice answered. Then, said the cat, it doesn't matter.
Alice in Wonderland by Lewis Carroll

Oh, can't you just hear Bob Dylan's verse?

How does it feel

To be on your own

With no direction home

Like a complete unknown

While I would love to end this column with some poetic flair of my own, I commend to you these words of author William Faulkner when he accepted his Nobel Prize for Literature:

[I] decline to accept the end of man. It is easy enough to say that man is immortal simply because he will endure: that when the last dingdong of doom has clanged and faded from the last worthless rock hanging tideless in the last red and dying evening, that even then there will still be one more sound: that of his puny inexhaustible voice, still talking. I refuse to accept this. I believe that man will not merely endure: he will prevail. He is immortal, not because he alone among creatures has an inexhaustible voice, but because he has a soul, a spirit capable of compassion and sacrifice and endurance…

On Friday June 20, 2008, I was interviewed by Ken Prewitt on Bloomberg Radio's The First Word about the government's case against former Bear Stearns hedge-fund managers Ralph Cioffi and Matthew Tanni.  Based upon the volume of favorable emails and phone calls I've gotten, my comments were well received.  If you would like to hear the entire interview, please click on the link immediately below:

The First Word Interview:

http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vi2tWu6EymYg.asf

For a copy of the wire release detailing the interview, please click:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aehDzFz37b7c

What will the prosecutors likely argue against Cioffi and Tannin?

Much like Carl Sagan's famous lines for his astronomy show, this case is about billions and billions and billions of dollars lost in the credit market. This prosecution is about criminal misconduct that contributed to that historic market collapse, which has devastated Wall Street and robbed the life savings of many investors. Cioffi and Tannin are low-life con-artists dressed in Wall Street bankers' suits--these crooks are not victims of any subprime fraud; to the contrary, they're just run of the mill fraudsters who lied in order to make more money and hide their mismanagement of the funds. We don't have to guess what they really knew or thought because we have emails from them. It's all there in lurid detail: What they knew, when they knew it, and how they conspired to hide the truth from their investors. It's time to send a message to Wall Street that the public is sick and tired of this culture of dishonesty.

What will the defense lawyers likely say about their clients?

Cioffi and Tannin had the misfortune to be standing on the beach and seeing a Tsunami wave coming right at them. They didn't cause that wave, they couldn't prevent it from hitting, and they had no way to survive in its path. These defendants were victimized by the collapse in the credit markets that took everyone by surprise, and did so with incredible speed. None of the vaunted computer models sounded the alarms. Show me a regulatory agency that issued warnings in 2006. As to the emails, those are "thoughts," and last we looked, you can't convict folks for crimes of thought. However, if you really read those emails, you will see that these defendants were petrified that the market was headed for catastrophe and they tried to do everything they could to protect their funds. In their panic, they may have done some stupid things, but stupidity is not a crime -- thankfully, otherwise we would all be in jail. At the end of the day, don't let the government make these two men scapegoats for the failure of Wall Street's regulators to do their jobs.

Stripped down to its basics, those are the battle lines on which the U.S. Attorney's and the SEC's cases will be fought. Without question, the criminal indictment and the civil complaint present compelling cases replete with troubling emails. On the other hand, more than a bit of what I read smacks of 20-20 hindsight, and I will need far more convincing that these defendants made material misrepresentations that a reasonable investor would have relied upon in deciding to remain in the funds or to invest further dollars. I am mindful that most of the investors in the two hedge funds were either high net worth individuals or financial institutions.

So, what's the Bill Singer take on this developing story?

In my opinion we've had a major fire on Wall Street. The first question is whether it was one of natural causes or arson. However, regardless of whether you determine that the fire was natural (the hedge funds simply collapsed from normal, cyclical market forces) or was arson (Cioffi and Tannin criminally mismanaged the fund and defrauded investors into adding dollars or staying put), let me add a twist.

What if I were to tell you the following?

As to the building that burned down, the building inspector was paid off to permit housing code and fire code violations. Many of the necessary inspections were late or done half heartedly. Also, the contractors were corrupt and didn't do legally acceptable construction work. Alarms were not properly installed. Sprinklers were not connected to a water supply. When 911 got the first call about "smoke," they delayed contacting the fire department. When the fire department got the call, the truck was broken and couldn't quickly respond. When the firefighters got to the fire, the hydrants weren't working.

Regardless of whether Cioffi and/or Tannin are guilty, I still say there is an unindicted co-conspirator here. The entire U.S. regulatory system has to share much of the blame for the allegations in the complaints and for the damage done to the overall economy. Our regulators are a pathetic bucket brigade with one leaky bucket trying to put out a blazing inferno. There are just too many overpaid executives not getting the job done. There are too many cronies appointed to perform critical tasks, and those folks are not up to the task. None of the lessons of Hurricane Katrina were learned. It's time to overhaul the failed system of regulating Wall Street; and "no," we don't need more regulations--you can get a hernia carrying the existing securities laws and regulations. What we need is more effective regulation, and that starts with hiring more effective regulators.

What infuriates me with the handling of this crisis is best explained by quoting two statements:

1. June 17, 2008 Press Release: Two Senior Managers of Failed Bear Stearns Hedge Funds Indicted on Conspiraccy and Fraud Charges (the United States Attorney's Office/Eastern District of New York), page 4: The United States Attorney for the Eastern District of New York is a member of the Corporate Fraud Task Force, a multi-agency group formed by President Bush in July 2002 to restore public and investor confidence in America's corporations following a number of major corporate scandals. In the past five years, the task force has yielded more than 1,200 corporate fraud convictions.

And yet this high-powered task force didn't spot the subprime crisis or the collapse of the credit markets, which have cost at least $500 billion in losses? Why didn't the Bear Stearns Hedge Fund meltdown pop up on that radar screen? What red flags did the Task Force see and what warning did they send? Is this how we restore confidence?

2. United States of America v. Ralph Cioffi, et al., at paragraph 56 of the Indictment: The United States Securities and Exchange Commission ("SEC") and others began investigating the Funds' collapse in the Summer of 2007 . . .

Absolutely incredible! The top regulatory cops in our regulatory scheme only first go into action in the summer following the hedge funds' collapse? How did they not hear of anything troubling beforehand and start an earlier investigation? And if the answer is "because . . . " then why wouldn't those same explanations excuse Cioffi and Tannin? And folks wonder what's wrong on Wall Street. Nineteen pages into the indictment, and only after 55-paragraphs of allegations, do we first learn that the SEC "and others" did anything about anything.

While we're prosecuting Cioffi and Tannin, how about we investigate those who were supposed to prevent this type of catastrophe and apparently were asleep on the job?

Quis custodiet ipsos custodes?