The recent insider trading allegations in the US and UK can only add more fuel to the fire of public opinion when it comes to financial institutions.
It’s understandable that the authorities are channelling their efforts into the crime – they want to show the public that they are clamping down on financial institution misdemeanours, and insider trading is quite frequent, and can be uncovered relatively simply by sifting through trading data.
In the scheme of things, profits for insider traders are pretty small. One case recently brought against a UBS investment banker and two others indicates that they made between them $1 million. Split three ways, one wonders why they bothered, but to an irate public, it’s just another example of bankers and their greed.
A poll of more than 1,000 adult US citizens in March by Selzer & Co revealed the obvious – 57% of those surveyed said they had an unfavourable view of Wall Street.
Bankers are thick-skinned, however, so let’s imagine they care little about their unpopularity. But there is more at stake here than simple mud-slinging.
The general public no longer trusts that their money will be safe in equity markets. If the game is rigged from the inside, and if no one knows what is going on in financial institutions that can bring about a market crash, why risk investing?
The sentiment is not merely anecdotal. Trading volumes are dropping – largely because mutual funds are running out of cash as retail investors are backing out. US equity mutual funds have suffered net outflows this year, and in one week in March investors pulled out $1 billion from European equity mutual funds.
Some bankers argue that investors are simply worried about the double dip, so are being cautious. Let’s hope so. But the following statement cited by one head of ECM at a large investment bank is worrying. He says his firm has been discussing at board level what it will do with its equity businesses if investors don’t come back. That’s huge. And the implications for economic growth should equity markets be out of favour indefinitely would be very grave indeed.
You can’t fault the Financial Services Authority and SEC for catching some small criminals, but can someone try to instill some confidence in the equity-investing public?
