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The Honolulu Advertiser

Posted on: Saturday, May 25, 2002

Investment firms must improve credibility

The $100 million settlement agreed to by Merrill Lynch is the latest — and certainly not the last — major chink in the armor of credibility of America's investment community.

It began when it became apparent that major companies led by Enron were cooking their books to imply profitability where losses were legion.

Now we're told Merrill is the first of the big brokerages to be taken down for mixing investment banking with advice for its investment clientele, a clear conflict of interest that resulted in their brokers encouraging buys of stocks they privately acknowledged were dogs.

Other brokerages have the same problem, and New York's aggressive attorney general is hot on their trail.

But meanwhile, what of investor confidence? Some commentators suggest that the blame actually resides with what Federal Reserve Board Chairman Alan Greenspan suggested in 1996 was "irrational exuberance." They'd have you believe that when the high-tech bubble burst on Wall Street two years ago, taking about $5 trillion of investor net worth with it, it was the investors' fault — not their brokers, who touted the high-tech stock they bought, nor the accountants who lulled investors into buying and holding stocks that were in fact in deep trouble.

These commentators are strong believers in "caveat emptor," let the buyer beware. But they are forgetting that the investment climate has undergone huge change, with millions of thoroughly unsophisticated investors led to believe that double-digit returns were automatic for their 401K holdings.

And if President Bush has his way, and individual-directed investments become part of every worker's Social Security nest egg, that lack of sophistication will increase exponentially.

In short, the need to restore credibility of corporations, their accountants and brokerages has never been greater.