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No one believes their bank anymore

No one believes their bank anymore
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First Published: Wed, Jun 29 2011. 09 04 PM IST

Updated: Wed, Jun 29 2011. 09 04 PM IST
I remember the moment when America’s fascination with stock investing reached its pinnacle. The point came about 10 years ago and was crystallized by a series of half-joking/half-enticing television commercials for an online brokerage firm, Discover Brokerage Direct. In the most successful of the ads, a humble tow-truck driver picks up a stranded motorist and, in the course of conversation, reveals that he has made sufficient profits trading Internet stocks to buy his own tropical island. “The only problem with owning an island,” he tells his astonished passenger, “is that you have to name it.”
What a difference a decade makes.
Last week another financial services firm, Prudential Financial, released the results of a survey of investors in which nearly 60% of those polled said they had “lost faith altogether” in the stock market. More than four in 10 said they were unlikely to put more money into shares ever again. Not just for now, while the stock market is dealing with uncertainty over a soft patch in the US economy. Never again.
Like those commercials from the Internet bubble era, the survey results may overstate the case, but they hint at an underlying truth about Americans’ relation with their financial institutions. Back then the mood was exuberant and cooperative: we’re all getting rich together. Now, the underlying mood is suspicion.
To be sure, not every American has given up on stocks. The week after Prudential released its survey, newly issued shares of the Internet music service Pandora began trading, and the price jumped 63% from the initial price of $16 to $26 (Rs718 to Rs1,166) before falling back. And as recently as April, 78% of financial advisers tracked weekly by the agency Investors Intelligence said they expected stock prices to rise. The usual percentage is 45%, so that counts as fairly exuberant.
The ordinary investors questioned in the Prudential survey weren’t being asked for a market call, however. They were asked about their fundamental beliefs about investing—basically, about their trust in the system. Their responses underscore some sad truths about that.
More than six in 10 investors say that they don’t believe that the fundamental tenants of diversification and asset allocation—the bedrock investing principles every advisers hands out to clients—really work the way they once did. More alarming for the financial services industry: nearly 70% of those surveyed said they believed few financial firms are trustworthy, and about five in six said they couldn’t think of a single financial firm they would trust. Not one. Those are pretty damning numbers.
But those results are hardly isolated. In a Rasmussen poll released earlier this month, nearly half of Americans say that the financial crisis was caused by criminal behaviour by Wall Street executives. Nearly two-thirds believe the US government hasn’t pursued Wall Street wrongdoing aggressively enough.
The question of criminality is more convoluted than angry Americans would like to admit—Wall Street was undoubtedly guilty of greed, gullibility, incompetence and negligence, but none of those are actually illegal. On the other hand, it’s not hard to see where the suspicions come from. Prosecutors have won guilty verdicts against Ponzi schemers such as Bernie Madoff and inside traders such as Robert Stanford and Raj Rajaratnam, but neither of them had anything to do with causing the crisis. The Wall Street bankers whose reckless investments were central to the crisis, however, are still in their jobs, a fact that puzzles and outrages Americans who’ve seen executives from Wall Street institutions such as Goldman Sachs and AIG appear before televised Congressional committees and, under oath, patronize their interrogators and obviously evade questions. In an impassioned article in Rolling Stone, reporter Matt Taibbi suggests that prosecutors could at least haul the Goldman Sachs testifiers up on charges of perjury.
Criminal charges aside, moreover, Americans see financial leaders as occupying a parallel universe—one in which the economy is expanding, inflation is under control and it’s safe to spend again—all completely at odds with their experience. While most Americans have not received a raise in after-inflation terms in a decade, for example, Wall Street workers shared a $21 billion cash bonus pool this year. Wall Street economists, referring to data such as the yield on inflation adjusted bonds, suggest that long-term inflation is relatively tame at 1.5% or so; yet grocery and petrol bills, the latter up 36% in the past 12 months, suggest that the reality is quite different from the theory. On the strength of their Bloomberg screens and data analysis, financial leaders from Federal Reserve chairman Ben Bernanke to JP Morgan Chase CEO Jamie Dimon insist that the economy is recovering, albeit slowly; meanwhile, on the evidence of their own lives, nearly half of Americans told a CNN/Money poll that they thought the US would enter a depression—that’s with a “d”—in the next year.
And so back to Americans and their feelings about the stock market. By allowing their distrust of Wall Street to translate to excessive caution, Americans may only be harming themselves. Goldman Sachs and other Wall Street executives may be grossly overpaid, out of touch with ordinary Americans, greedy, corrupt and even guilty of criminal fraud during the crisis. But they are not big enough and evil enough to rig the entire US stock market. Shares, by and large, reflect the expectations for the issuing companies’ profit growth, and that makes them still the best shelter most investors can get against inflation and the best vehicle to build savings—however fitfully—in the long run.
Eventually, Americans’ attitudes about stock investing will circle back to reality. Investors everywhere, after all, are an emotional and mercurial bunch. But the damage to trust in America’s financial institutions will take longer to restore, if it ever can be done. When the Internet bubble burst in 2000, Americans gave up believing, even a little, that investing in stocks could buy them a private island, or even a shortcut to financial independence. In the most recent crisis, they’ve given up believing that their financial institutions understand them or are capable of telling them the truth. That impression will take a long time for banks and brokerages to reverse, and they haven’t even begun.
Eric Schurenberg is money editor at large, AARP The Magazine and AARP.org, and former editor of Money.
Illustration by Shyamal Banerjee/Mint
Your comments are welcome at mintmoney@livemint.com
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First Published: Wed, Jun 29 2011. 09 04 PM IST