Cover image for Take on the street : what Wall Street and corporate America don't want you to know, what you can do to fight back
Take on the street : what Wall Street and corporate America don't want you to know, what you can do to fight back
Levitt, Arthur, 1931-
Personal Author:
First edition.
Publication Information:
New York : Pantheon Books, [2002]

Physical Description:
x, 338 pages ; 25 cm
General Note:
Includes index.
Added Author:
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HG4521 .L339 2002 Adult Non-Fiction Central Closed Stacks
HG4521 .L339 2002 Adult Non-Fiction Open Shelf

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Investors today are being fed lies and distortions, are being exploited and neglected. In the wake of the last decade's rush to invest by millions of households and Wall Street's obsession with short-term performance, a culture of gamesmanship has grown among corporate management, financial analysts, brokers, and fund managers, making it hard to tell financial fantasy from reality, salesmanship from honest advice. In Take on the Street, Arthur Levitt--former chairman of the Securities and Exchange Commission--shows how you can take matters into your own hands. At once anecdotal (names are named), informative, and prescriptive, Take on the Street expounds on, among other subjects: the relationship between broker compensation and your trading account; the conflicts of interest inherent in buy-hold-or-sell recommendations of analysts; what exactly happens--and who gets a piece of the action--when you place an order; the "seven deadly sins" of mutual funds; the vagaries and vicissitudes of 401(k) investments; how accountants engage in sleight of hand to fake impressive company performance; how to find the truth in a company's financial statements; the real reason for the Street's hostility to full disclosure; the crisis in corporate governance, and, given these shenanigans and double-dealings, what specific steps you can take to safeguard your financial future. With integrity and authority, Levitt gives us a bracing primer on the collapse of the system for overseeing our capital markets, and sage, essential advice on a discipline we often ignore to our peril--how not to lose money. From the Hardcover edition.

Author Notes

First appointed in 1993, Arthur Levitt was the longest-serving S.E.C chairman. He served as chairman of the New York City Economic Development Corporation, chairman of the American Stock Exchange, and was the co-founder of a brokerage firm that eventually became Citigroup. He lives in Connecticut.

Reviews 3

Booklist Review

Levitt was the longest-serving SEC Chairman (1993^-2001) and was instrumental in making changes to protect individual investors from fraud and level the playing field through equal access to information. This ultimate insider reports that a culture of collusion still exists between brokers, underwriters, analysts, and mutual-fund managers--all eager to make sales and keep the Wall Street casino churning. He shows what really happens when you place an order through your broker, and he reveals the "seven deadly sins" that mutual-fund managers make, such as the hidden costs of fees and the tendency to overtrade, which usually lowers returns. Despite the current bleak market, he continues to tout the advantages of investing over time and has lots of advice on how to protect yourself and make relatively safe financial decisions. He keeps to a fairly traditional approach, as expected, steering clear of Wall Street's obsession with short-term results and market timing. This is solid, understandable advice for the conservative investor. --David Siegfried

Publisher's Weekly Review

Levitt, the Securities and Exchange Commission's longest-serving chairman, supervised stock markets during the late 1990s dot-com boom. As working Americans poured billions into stocks and mutual funds, corporate America devised increasingly opaque strategies for hoarding most of the proceeds. Levitt reveals their tactics in plain language, then spells out how to intelligently invest in mutual funds and the stock market. His advice is aimed squarely at small, individual investors, as he explains how to look for clues of malfeasance in annual reports, understand press releases and draw more from reliable sources. Woven throughout are his recollections about the SEC boardroom fights he oversaw. While most of them serve to illustrate a point about the market and its machinations, some passages, often outlining a failure or frustration, are oddly apologetic. In particular, when addressing the origins of recent corporate scandals (e.g., those involving Enron and Arthur Anderson), his effort to lay the responsibility equally on indifferent legislators, special interest groups, greedy CEOs and, perhaps most of all, lazy investors, makes it clear that Levitt wishes to avoid criminalizing corporate officers' actions. (After all, many of them are his friends and colleagues.) The final chapters, detailing how stocks are bought after they're ordered ("Pay Attention to the Plumbing") and retirement plans are structured ("Getting Your 401(k) in Shape") return to practical, profitable advice. One in particular, "Beware False Profits: How to Read Financial Statements," is worth the book's price. Levitt's mini-MBA course-sans the lifelong club connections-should be mandatory reading for anyone with a dollar invested in the stock market. (Oct. 8) Forecast: Levitt's high profile, coupled with his authority and integrity, will make him a man in demand by the mainstream media. A 150,000 first printing, a big plug to booksellers from the publisher at BookExpo this past May and a big advertising push may put this business book on the bestseller lists. (c) Copyright PWxyz, LLC. All rights reserved

Library Journal Review

Good advice to individual investors from the longest-serving chair of the Securities and Exchange Commission. (c) Copyright 2010. Library Journals LLC, a wholly owned subsidiary of Media Source, Inc. No redistribution permitted.



Chapter One How to Sleep as Well as Your Broker If they have it, sell it. If they don't, buy it. That was the whispered joke on Wall Street in 1963 when I joined the brokerage firm of Carter, Berlind & Weill. It was only half in jest. It betrayed the callous attitude many brokers had toward their clients. Brokers are supposed to advise you on which securities to buy and sell, depending on your financial resources and your investment objectives. They offer garden-variety stocks, bonds, and mutual funds, or such exotic instruments as convertible debentures and single-stock futures, to help you shape a portfolio that fits your needs. Brokers may seem like clever financial experts, but they are first and foremost salespeople. Many brokers are paid a commission, or a service fee, on every transaction in accounts they manage. They want you to buy stocks you don't own and sell the ones you do, because that's how they make money for themselves and their firms. They earn commissions even when you lose money. Commissions can take many forms. On a stock trade, the commission is a percentage of the total value of the shares. For a mutual fund there are up-front commissions, or sales loads, which are paid when you make an investment. There also may be back-end commissions, or deferred loads, which are paid when you take your money out. On bonds, brokers don't charge commissions. Instead, they make their money off the "spread," or the difference between what the firm paid to buy the bond and the price at which the firm sells the bond to you. Warren Buffett, the chairman and CEO of Berkshire Hathaway Inc. and one of the smartest investors I've ever met, knows all about broker conflicts. He likes to point out that any broker who recommended buying and holding Berkshire Hathaway stock from 1965 to now would have made his clients fabulously wealthy. A single share of Berkshire Hathaway purchased for $12 in 1965 would be worth $71,000 as of April 2002. But any broker who did so would have starved to death. While working in the early 1950s for his father's brokerage firm in Omaha, Neb., Buffett says he learned that "the broker is not your friend. He's more like a doctor who charges patients on how often they change medicines. And he gets paid far more for the stuff the house is promoting than the stuff that will make you better." I couldn't agree more. In sixteen years as a Wall Street broker, I felt the pressures; I saw the abuses. "Levitt, is that all you can do?" Those stinging words rang in my ears at the end of many a week as I struggled to join the ranks of successful Wall Street brokers at Carter, Berlind & Weill. Eleven of us worked out of an 800-square-foot office on 60 Broad Street, in the shadow of the New York Stock Exchange. I divided my time between buying and selling stock and scouting for companies that might want to go public. When I joined the firm, America was riding high. A postwar economic boom that began in the 1950s marched onward through most of the 1960s, encouraging companies to look to Wall Street to finance their expansion. The growth in jobs and overall prosperity produced much wealth, and people flocked to the stock market in search of easy money. It was a heady time, and I wanted to be a part of it. I was thirty-two, and though I had no Wall Street experience whatsoever, I started calling potential clients right away. The competition among the partners was intense. We shared one large office so we could keep a watchful eye on one another. Arthur Carter kept a green loose-leaf binder on his desk, and in it he recorded how much gross-the total amount of sales-each of us was responsible for each week. Every Monday morning I stared, terrified, at an empty calendar page, worrying how I was going to generate a respectable $5,000 in sales. When we reviewed the results on Friday, there would be much scolding and finger-pointing. If I wasn't the lowest producer, I joined the others in berating the one who was. Our mandate was to grind out the gross and recruit new brokers with a proven knack for selling. But on the Wall Street I knew in the 1960s and '70s, the training of new brokers was almost nonexistent. Brokers were hired one day and put to work the next cold-calling customers. At all but a few firms, research was primitive. Starting salaries were a pittance, forcing brokers to learn at a young age that they had to sell aggressively to survive in the business. The drive for commissions sometimes motivated supervisors to look the other way when aggressive upstarts bent the rules. Today the brokerage industry is a lot more sophisticated. Nowadays brokers sell dozens of savings, retirement, and investment products, and insurance, real estate, and hedging instruments to reduce risk. But with half of all American households invested in the stock market, brokers' responsibility to the individual investor is greater than ever. Good People in a Bad System Sadly, the brokerage industry still has numerous flaws. That's not to say that all brokers are commission-hungry wolves on the prowl for naive investors. Some are; others are just inept. Most are honest professionals. They are good people stuck in a bad system, whose problems remain fourfold. First, some brokers are not trained well enough for the enormous tasks they are expected to carry out. Second, the system in which brokers operate is still geared toward volume selling, not giving objective advice. Third, to increase sales, firms use contests to get brokers to sell securities that investors may not need. Most brokers rarely, if ever, disclose to their clients how they are paid or how their bonuses are structured, even though such disclosures would go a long way to resolving the conflict-of-interest problem. Fourth, branch-office managers and other supervisors, who are paid commissions just like their brokers, have an incentive to push everyone to sell more and to turn a blind eye to questionable practices. Brokers come in many stripes. There is the full-service variety, employed by the large brokerage houses advertised on television: UBS Paine Webber (part of Swiss bank UBS), Morgan Stanley and Salomon Smith Barney (part of Citigroup). The largest of the full-service firms is Merrill Lynch & Co., which employs roughly 14,000 brokers in five hundred or so U.S. locations. Merrill calls its brokers "financial advisers." They manage more than 9 million customer accounts worth $1.3 trillion. Not only do they help clients determine their investment goals and pass on customer orders to their trading desks for execution, but they also provide research from in-house analysts and give advice on a wide range of securities. For these extras, customers pay more. The average commission paid to a Merrill Lynch broker in 2000 was about $200 per transaction. Then there are the discount houses, which give minimal advice or none at all. Many do not provide proprietary research, although they may make available research produced by other firms. Investors are charged a moderate commission or pay a flat fee for each trade. Online brokers can be either full-service or discount, though most are discounters. For a flat fee of $9.95, one leading online broker lets customers order up to 5,000 shares. Research and advice were not on the menu when online trading first began, but some online brokers, such as Charles Schwab Corp., have moved upstream into the full-service realm by offering research and advice to customers who maintain a minimum balance. There's a saying that compensation determines behavior. Firms never seem to run out of novel ways to use commissions to motivate their brokers-and take more money out of your pocket. One popular system is the grid. Typically, brokers receive a percentage of the commissions that they generate, ranging from 33 percent to 45 percent. As their commission sales increase, they can jump to a higher payout level on the grid. Imagine it's December 27. Your broker's payout rate is 33 percent. He has generated $470,000 in commissions so far this year. But if he gets to $500,000 by December 31, his payout rate jumps to 40 percent, applied retroactively. This means your broker can earn a windfall of $44,900 in additional compensation just by generating $30,000 in commission sales in four days. Unless a firm's ethical culture is impeccable, the temptation to sell anything to anyone, no matter how inappropriate, is overwhelming. It's also common practice for firms to pay large, up-front bonuses to lure a star broker away from his employer. Such bonuses can equal or exceed an entire year's pay. This sum is paid on the presumption that the broker will bring his customers with him to the new firm by telling them "the big lie"-that his new firm offers better customer service and more sophisticated research. The broker, of course, never reveals that the new firm is paying him a huge bundle to move. In such cases, customer accounts are bargaining chips that brokers use to increase their personal wealth, not their customers'. Once a broker moves to a new firm, he must produce. And that means the broker is more likely to push unwanted or unneeded products, especially those paying higher commissions. Instead of, or in addition to, an up-front bonus, brokers sometimes get what is known as an accelerated payout. This means that instead of the normal 33 percent to 45 percent of the gross commission on every trade, the broker receives 60 percent or more of the commission for several months, or even several years. The justification for enriched payouts is that brokers who jump to a new firm will be preoccupied for months with administrative details involved in account transfers and helping to orient clients at the new firm, leaving little time for salesmanship. But the reality is that such payouts boost the broker's incentive to meddle in client accounts and increase the volume of trading activity. Commissions distort brokers' recommendations in many other ways. Some firms, for example, have special arrangements to sell mutual funds in exchange for above-average commissions. If a Merrill Lynch broker knows he'll get 25 percent more money for selling a Putnam mutual fund over an American Century fund, guess which fund the broker will try to sell you? Most large brokerage firms today sponsor their own funds, and may try to steer you to one of those. That way, the fee you pay to the manager of the mutual fund remains in-house and adds to the firm's profits. The problem is that brokerage firm funds don't necessarily perform better than, or even as well as, independent funds. According to Morningstar Inc., a fund research company, as of June 30, 2001, the five-year annualized returns of independent funds was up 8.28 percent, and for broker-sponsored funds only 6.92 percent. One of the worst cases of broker abuse I ever saw took place at Olde Discount Corp., a Detroit-based firm that is now owned by H&R Block. At its height in the mid-1990s, Olde had 1,185 brokers in 160 branches. In 1998, Olde and its senior management, including founder Ernest J. Olde, without admitting or denying guilt, paid $7 million in fines to settle charges by the Securities and Exchange Commission and the NASD. The regulators accused Olde managers of creating an environment that encouraged brokers to make trades in customer accounts without the customers' permission, sell stocks and bonds that were not suitable to client needs, and falsify customer records. The company often hired recent college grads to flog stocks that the firm had placed on a carefully chosen "special ventures" list. These stocks were picked, not because they suited the investment needs of clients, but because Olde held the shares, many of them highly speculative, in its inventory. Olde then marked them up in price and made a profit off the spread between what it paid and the price at which it sold the stock. The SEC found that Olde's compensation structure paid brokers substantially more if they sold stocks from this select list; brokers who did not meet a quota of select stock sales were sent packing. If customers said they could not afford to buy the recommended stocks, Olde brokers were trained to persuade the client to use margin, which involves borrowing money from the brokerage firm to purchase shares. The firm's two-page account-opening forms included a margin agreement, but many customers didn't understand that they were requesting a margin account. Why You Should Avoid Buying on Margin Your broker may recommend that you buy shares with money borrowed from his firm at a fixed interest rate and using your shares as collateral. He may argue that trading stocks "on margin" lets you use the power of leverage to amplify your stock-picking prowess, the way professionals do. Tell your broker you are not interested. Margin borrowing is very risky and, for an individual investor like you, should be avoided at all costs. Margin simply means buying assets with borrowed money. Such loans are highly profitable to the brokerage firm. They are marketed on the premise that if you invest more without fully paying for the securities, you can lift your returns beyond what you'd otherwise get. Leverage is a wonderful tool in a rising market. Here's how it works. Say you buy 100 shares of a stock at $50 a share. Normally, you would have to pay your broker $5,000, plus commissions. With a margin loan, you could borrow up to half that amount, and pay only $2,500, borrowing the other $2,500 from your broker. If the stock price rises to $75, and you decide to sell, you get $7,500 ($75 ´ 100 = $7,500). Of course, you have to repay the $2,500 loan, plus interest. But you have gained $5,000 with an initial investment of only $2,500. Sounds good, except that the process moves swiftly in reverse in a declining market. You could be required to sell your stock to cover the loan or, worse, your broker could sell your stock without consulting you in order to pay off the loan before the market declines further. In the market plunges of 2000 and 2001, many leveraged investors could not raise enough money from the sale of their stock to repay their loans. Again, say you buy 100 shares of a stock at $50 a share, putting up $2,500 and borrowing the other $2,500 from your broker. But the value of your shares declines to $25, or $2,500 for 100 shares. You have now lost all your initial investment of $2,500, and you still owe your broker interest on the loan. Excerpted from Take on the Street: What Wall St. and Corporate America Don't Want You to Know / What You Can Do to Fight Back by Arthur Levitt, Paula Dwyer All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.

Table of Contents

Acknowledgmentsp. ix
Introductionp. 3
1 How to Sleep as Well as Your Brokerp. 17
2 The Seven Deadly Sins of Mutual Fundsp. 41
3 Analyze Thisp. 65
4 Reg FD: Stopping the Flow of Inside Informationp. 87
5 The Numbers Gamep. 105
6 Beware False Profits: How to Read Financial Statementsp. 144
7 Pay Attention to the Plumbingp. 175
8 Corporate Governance and the Culture of Seductionp. 204
9 How to Be a Playerp. 236
10 Getting Your 401(k) in Shapep. 257
Appendix Power Gamesp. 285
Glossaryp. 309
Indexp. 319