December 29, 2009

The Return of Investor Confidence? In 2010?

In October 2008, former SEC Chairman Arthur Levitt told Congress, "The key problem plaguing our markets is a total breakdown of that trust--investor confidence." Current SEC Chair Mary Schapiro spoke early and often on restoring investor confidence, as she did in February, just days into her new post:

"At a time when investors are appalled at the ways of Wall Street, it is there that change must begin. A strong and reinvigorated SEC will be on the beat like never before to catch wrongdoers. But there needs to be a new era of responsibility on Wall Street and throughout our markets to ensure that wrongs don't occur in the first place. The sooner that Wall Street works to repair its own problems, the sooner investors will once again find the confidence to invest in what should be the finest markets in the world."

Important words, no doubt. Particularly so as a snapshot of consumer attitudes right now is not a pretty picture and suggests there is a long road to travel before investor confidence returns.

Public opinion

Anti Wall Street; not anti business: A CNN poll, conducted from December 16-20, shows that 45% of the participants believe there is "too little" regulation of "the stock market and financial institutions," as opposed to "too much," (29%). In contrast, 50% of those surveyed believe there is "too much" regulation of "business and industry," compared with 30% who believe there's too little regulation.

A Bloomberg poll, conducted from December 3-7, further suggests public angst is not, generally, "anti business," but is specific to "big financial companies" and Wall Street. "Big financial institutions" are viewed as enriching themselves "at the expense of ordinary people," say 54%, versus having a "vital function that enables the economy to grow," as 39% indicated. In terms of "favorable/unfavorable" impressions the difference is stark. "Small business" is viewed favorably by 92% versus unfavorably by 3%; while "Wall Street execs" are viewed favorably by 18% of participants--and unfavorably by 66%.

Not confident in government: Also, a Time poll (October 26-27), suggests that the public is not confident of the government's handling of the financial crisis. In terms of "taking steps to avoid another financial crisis," President Obama gets better, but not good, grades as compared with other actors: 42% give the President a score of "excellent or good" versus 55% "only fair or poor." The president's score far exceeds "Democrats in Congress," who were rated 22% "excellent or good" versus 73% "only fair or poor;" "Republicans in Congress,"--rated by 13% as "excellent or good," and 82% as "only fair or poor." "Federal government regulators" received 14% "excellent or good" responses, compared with 75% "only fair or poor." And, finally, "Major banks and other Wall Street financial institutions," had the worst showing, with 7% of participants rating them as "excellent or good" and 88% "only fair or poor."

Still need more regs. Not surprisingly, perhaps, 59% of the public believes there "should be more regulation of Wall Street than we have had in the past," versus 23% who say there shouldn't be. This may be associated with the public view--75% to 18%--that Wall Street financial institutions, "will return to business as usual now that Wall Street has started to recover," and not "learn from their mistakes and...change the way they do business." As to whether "the United States could suffer another financial crisis in the next few years as a result of Wall Street firms taking too much risk," 85% of the public is "very concerned or somewhat concerned," while 14% of the public is "not very concerned or not at all concerned."

The lack of confidence in Congress is hardly limited to handling the financial crisis. A Gallup Poll (December 11-13) rates public approval/disapproval of Congress near historic lows, with 25% expressing approval, and 66% expressing disapproval. (This is an improvement from October's 21% to 71% rating, which was lower than even Richard Nixon's "approval" in 1974, 24% approval to 66% disapproval.) Further, Gallup's annual "Honesty and Ethics of Professions" poll (November 20-22) reveals that 55% of the public ranks members of Congress as having "low or very low honesty and ethical standards," versus only 9% who rank them "high or very high." This is the lowest score of the 22 professions ranked. In comparison, "stockbrokers" ranked somewhat higher than Congress: 45% of participants ranked stockbrokers as having "low or very low honesty and ethical standards," compared to 9% who ranked them "high or very high."

Is public sentiment as negative as the data suggest? Is there any silver lining to the pessimism that flows from 85% of the public claiming to be concerned that another "financial crisis" may be just around the corner? On the surface it's sure hard to see one.

Frank Luntz, a Republican pollster and communications advisor to Wall Street, (Merrill Lynch is on the client roster), puts it bluntly, "Washington and Wall Street are the two most hated terms in America. This is what I don't understand--you hear these Wall Street people talking about bonuses knowing the public is outraged....I can't get the CEO organizations to listen to me; they don't want to admit mistakes."

Chairman Schapiro suggests Wall Street must "repair its own problems," while Luntz calls on executives to "admit" mistakes. In my next blog, I'll offer some modest "repairs" that might help address mistakes and accelerate the return of investor confidence.

Knut A. Rostad (kar@rpjadvisors.com) is the regulatory and compliance officer at Rembert Pendleton Jackson (RPJ), a registered investment advisor in Falls Church, Virginia, and chairman of The Committee for the Fiduciary Standard. The views expressed here are his own and do not necessarily reflect views of the Committee.

Read more of Knut Rostad's Regulatory Reason blog posts:

Partisanship on Steroids December 14, 2009 Passage of the financial reform legislation in the House is historic and important. It may also be, unfortunately, short-lived in the current, toxic partisan environment. Peter Drucker for Wall Street Czar November 24, 2009 Drucker would advise Wall Street to ask what retail brokers think. About being a fiduciary, brokers might "surprise" execs. Many would say "Bring it on!"...
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