Defying gravity with our money

The New York Times offers an excellent op-ed piece by author Michael Lewis (”The Next Big Thing,” “Liar’s Poker”), which concludes that the collapse of Wall Street doesn’t just involve greed and a focus on the short-term. It also rests with the Securities and Exchange Commission, which is supposed to serve as a regulatory agency to police investments but has utterly failed at the task. 

One of Lewis’s points is that the SEC’s rating system used to determine the safety of investments it regulates is woefully inaccurate. Bond ratings like “Triple A” grade are based on politics, not reality.

Further, the $700 billion in TARP funds approved by congress is being doled out without oversight and doesn’t address the root of our financial problems: financial organizations and businesses that acted irresponsibly should be allowed to fail, albeit with government help to ensure an orderly sale of their healthy assets, rather that propped up with the same management and business models.

I’ve interviewed Lewis on TV and found that his positions are based on research, not personal philosophy. And his article brings me to an experience I’d like to share. 

2001: I sold my company to a firm called AppliedTheory, which was listed on the NASDAQ, and because of the amount of stock I accepted in the deal, I was legally considered an “insider,” privvy to inside information that restricted my ability to trade its stock.

But behind the scenes, what I saw involved smoke and mirrors. Every analyst who covered AppliedTheory gave us a “Buy” rating, essentially assuring investors that we were safe. As an insider, however, I knew we were coasting downhill fast. Among other things, we were classifying certain types of revenue as “recurring,” which Wall Street craved, when in reality the revenues were much less sustainable.

AppliedTheory filed Chapter 11 just after I bought back the assets I had sold them. As many other companies in the dot-com industry tanked, I figured that outrage from investors would lead to regulations designed to prevent this sort of thing from happening again.

But as Michael Lewis points out in the New York Times piece, little has changed. Lewis’s point is that lack of oversight, the politics and relentless short-term focus on profits represent a far greater danger to our financial future than the Bernard Madoff scheme that’s getting the bulk of our attention. The government can’t protect us from ourselves, but it can demand transparency so our investment decisions are based more on facts than mirrors.