October 15, 1998
Inside Business Week's "Inside Wall Street"
by Louis Corrigan (TMF Seymor)
Gene Marcial's Secrets of the Street
Judging by his book, Secrets of The Street: The Dark Side of Making Money (1995), Gene Marcial may well be the most cynical -- and mistaken -- business reporter working for a major news organization. On the positive side, Marcial's book offers an entertaining, even instructive look at the underbelly of Wall Street where well-connected "insiders" enact sometimes illegal schemes to generate fat profits, usually at the expense of naive individual investors. Yet the book is marred by the kind of ridiculous and condescending conclusions that one might expect from the man who writes Business Week's "Inside Wall Street" tip-sheet column.
The book is peopled with unsavory characters, including a stock promoter who closes pump-and-dump deals with big fund managers by sending them prostitutes. Yet in this rogue's gallery, Marcial reserves his greatest contempt for you, the individual investor stuck hopelessly on the outside.
Since Marcial's column demands that he maintain a chummy relationship with stock analysts and money managers of all stripes, it's hardly shocking that he would align himself squarely with the Wisest of the Wise. Still, his book suggests that he has considerable disdain for the average reader of his column. Indeed, it seems to me that he reveals the "secrets of the Street" not so much to educate the reader or to raise the kind of public outcry that might produce meaningful reform, but mainly to show that he's privy to them.
This may sound harsh, but consider the fact that Marcial opens his book with a discussion of Ivan Boesky, perhaps the most infamous Wall Street operator of the 1980s. Boesky was convicted of insider trading in one of a series of high-profile prosecutions culminating in the case against Boesky's pal, junk bond king Michael Milken. Boesky spent nearly two years in jail and paid a $100 million fine for his crimes.
Marcial begins with Boesky ostensibly to suggest that Wall Street has always been and still is full of folks who do pretty much the same thing but don't get caught. As he writes in the introduction, "it's still business as usual for Wall Street insiders," even after the scandals of the '80s. In fact, he quotes sources who say Boesky is still secretly active in ways that he shouldn't be.
Yet Marcial seems simply desperate for us to know that he's really an insider. Indeed, his career depends on it. Why else would he insist on telling us that during the 1980s he enjoyed an occasional drink or game of squash with Boesky at the Harvard Club? Why would Marcial regale us with details of his meetings with Boesky over cocktails in the post-prison years? Such gratuitous descriptions suggest Marcial's determination to present himself as a player with first rate "gonnegtions," as F. Scott Fitzgerald's old gangster Wolfsheim would say.
"Gonnegtions" are so important because Marcial has convinced himself that insider trading and market manipulation offer "almost the only way to make the truly big bucks." Market savvy is no match for savvy in the service of insider info. "Sorry, that's the way the game is played," Marcial opines. This mantra plays out over and over: "[I]f you weren't a Turk on Wall Street, you were a turkey, an outsider trying to play an insider's game." "It's tough if not impossible to play by the rules on Wall Street and reach the very top." Blah blah blah.
Marcial does offer a couple of examples of honest money managers or stock brokers who do well by their clients. Yet, these are absolutely the exceptions not just in the book but in his understanding of how "the game" is played. Perhaps the most troubling chapter is the one in which he discusses "The Honest Stockbroker," whom Marcial actually describes as "dangerous."
"One way or another," Marcial writes, "a stockbroker just has to get 'inside.' It's awfully cold outside." While it's easy to avoid simpleton brokers, he says, an investor must watch out for otherwise successful brokers who actually aren't in the loop. "Tougher to identify are the bright people on the Street who for one reason or another just aren't in the know," he writes. "For the serious investor these well-meaning but unconnected stockbrokers are more dangerous than the fools [sic], because an investor can be dealing with one and not know it. Your portfolio can even be performing decently with such a broker, especially if the bulls are running, but you will never be in line for the big score."
Such comments would be merely annoying if they didn't reflect Marcial's deepest convictions and characterize his overall perspective. Consider his thoughts about the shift from full-service brokers to discount brokers. "[F]or the average investor I don't think the change has been good. Investors who have gone with the discount brokers are getting exactly what they pay for: next to nothing.... Basically, the average investor with a discount brokerage is on his or her own, and that's not a good place to be in the financial world."
Marcial wrote these lines before the Internet revolution really opened up the flow of basic public information and created communities of well-informed average investors. So we should cut him some slack. Still, it's hard to imagine a worldview more diametrically opposed to that of the average Fool reader -- or more oblivious to the actual investment performance of many individual investors.
Taking the Fool Portfolio as a proxy for thousands of other portfolios, one might ask if its holdings in America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> or Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> count as "big scores" and, if so, how they could have been generated without inside information. Yet that wouldn't really be a fair question because Marcial couldn't begin to explain what he's shown little desire to understand: How average investors do succeed without the special connections and inside info he deems so necessary.
Ultimately, his cynicism seems mainly a reassuring way to hide his fundamental ignorance about investing. That's not so surprising given that, like most business reporters, Marcial doesn't invest his own money. He says the only stock he owns is in McGraw-Hill, Business Week's parent. Yet, because he doesn't think like an investor, Marcial doesn't approach his rogues or their schemes with the kind of genuine disgust or muckraking verve that a more interested observer might.
It's this perspective that is sorely missed in the Boesky chapter, for example. However interesting the guy might be (and I'm sure he is), however much one may conclude that he's paid his debt to society (I'm all for forgiveness), I still think a reporter must do more than pay lip-service to the fact that Boesky was a genuine villain. Great art may depend on the writer having some sympathy for the devil, on holding back from making easy judgments. Reporting of this sort, however, requires a moral perspective.
The clearest sign that Marcial lacks moral judgment is in the alternatives he leaves one with. Faced with such a corrupt investment world, what is one to do? Marcial's message is that if you want to make a "big score" in this "game," you need to know not just what the rules are but how to bend them in your favor. You need to get "inside." Otherwise, you'll likely end up just another turkey at the professional shyster's feast.
Secrets of the Street would have been a better book if Marcial had simply stipulated that he knows the inside poop -- which he does. Hey, the guy used to play squash with Boesky, after all! Investors able to ignore the book's skewed perspective will find some quite readable and instructive stories. There are accounts of stock promoters and a look at how initial public offerings become "money machines" for underwriters and others lucky enough to get a piece of the action. There's also a discussion of the tricks by which Nasdaq market makers (still) scalp investors as well as an examination of how offshore investors can make a killing when a company sells unregistered securities (though Reg S deals have been curtailed since the book was written).
All investors need to know something about how the markets can be abused. Marcial is a pretty good guide as long as you know to laugh at his conclusions.