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Market crash has people stashing cash | |||
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By DAVID MOON, Moon Capital Management Ten Wall Street firms just agreed to pay fines totaling 1.4 billion for issuing marketing and sales materials masquerading as independent investment research. The Securities and Exchange Commission concluded that three firms engaged in outright fraud in their research departments. (Non of the ten firms admit or deny the charges.) The firms have agreed to have independent 'monitors' watch their investment research departments, much like Jimmy Carter goes to third world countries to monitor elections. The historic agreement does lots of things. But it doesn't do what the brokerage industry desperately needs. The agreement does nothing to restore investor trust and confidence. Last week, another group of bankers announced the formation of a new community bank. This group, headed by former Union Planters executives Armistead Smith and Joe Hambdi, is setting its sights on the highly competitive west Knoxville market. How in the world can a bank with only two employees and no assets (the bank, not the employees) hope to compete against the regional, super regional, national and worldwide super financial centers all located in Knoxville? It is all a matter of trust. In an era in which it is difficult to keep track of who owns your financial institution, much less identify and properly evaluate all of its potential conflicts of interest, there is a demand for financial services from people customers know. There always has been. I am biased. My firm is a small firm. Our clients know the owner. I prefer this business model, although there are plenty of smart people who don't. There is nothing inherently evil about large companies. And small companies can certainly be run by charlatans and crooks. There is an interesting phenomenon occurring ' one I thought I would never see. After watching their investments decimated in the last three years, people are saving money again. They are becoming more conservative ' or less aggressive, at least. Many are afraid. In late 2002, credit card borrowing experienced its largest decline in more than 12 years. Consumer borrowing increased only 3.3 percent, the slowest growth in a decade. The beneficiaries of this shift appear to be small banks. Deposits at small banks are growing. Bank analyst, Dennis Gartman, explains: 'small bankers believe their deposits are growing because they are great marketers. They believe they are excellent managers of money; but the truth is that they are simply in the way of a massive new wave of savings that is breaking upon them.' The ten firms on the SEC 'hit list' and dozens of other financial behemoths will collect a significant share of these increased savings. But they won't get it all. We have only seen the tip of the iceberg. We don't know how much consumers will save. And we don't know which of the remaining structural conflicts that exist in the brokerage industry will be made public. But we do know that small banks will be there to pick up whatever is left. David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).
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