On May 9, Facebook's upper brass had a meeting with financial analysts to tell them the company's revenue should be on the low end of projections, according to the Associated Press. That was bad news, especially considering Facebook was about to sell stock publicly for the first time.
The analysts for the nation's major investment firms then took that information and handed it out to their biggest whales, according to a series of lawsuits. Regular investors -- the working man who maybe got excited about the chance to own a bit of the website he wastes time on at work -- got screwed.
And that's where you shouldn't be surprised. The stock market these days is a sucker's bet. It's built on the principle that the average worker will never pull money out of the market, no matter the cloudy
projections, no matter if it actually makes sense to invest.
The
stock market is in essence a gamble. You're betting on the idea that
stocks will eventually increase. But most working people have their life
savings stocked away in 401ks with major tax penalties if they take out
the money. We've invested in a bet where there's no
option but to keep your money on the table.
That's where we get
screwed. It doesn't matter if Ben Bernanke came out today and
declared the economy was about to implode. Financial analysts would
still tell you to keep your money in the market. If they didn't, if they
told us to cash our 401ks and money market accounts, it would lead to
an economic meltdown. So instead, the big investment banks can sneak
information to its biggest investors, like Morgan Stanley reportedly did with the Facebook IPO, and leave the little man in the
dark. Or they can take out bets that the economy is about to crash
without telling the rest of us.
That's exactly what happened with JP Morgan Chase,
which lost $2 billion by betting on shadowy indexes, like one called
CDX IG 9, which benefits if major institutions falter. JP Morgan lost
that bet, but consider that the bank was putting down billions of
dollars of risk on a bet that the economy would suffer, all while
telling little investors like us to continue putting away as much money
as you can possibly afford into your 401k.
Financial analysts
will tell you to look at the long term. Pull your money out now and
you'll lose the benefit when the stock market rebounds. Such an argument
ignores the fact that 401ks have been a poor place to put your money.
An excellent analysis on mymoneyblog.com
shows that 401ks over a 20-year period managed just a 4.48 percent
return, less than half the return of investors in the stock market. You would've done better in that period to stick your money in treasury bills, something few financial planners would recommend.
The
reason for that discrepancy is that money thrown into a 401k largely
sits there in whatever accounts you picked when HR asked you to fill out
a bunch of forms. It doesn't matter if that off-shore small-cap firm
you picked has imploded, because most of us just throw away those
depressing 401K reports we get in the mail. Investors in the stock
market, meanwhile, are largely the big-money investors getting
information from the investment banks that isn't passed down to the
regular joes. They're told before the market crash of 2007-09 that things look shaky, while investment banks continue to push small investors into the market.
So
Congress has begun an investigation into the Facebook IPO, and there will likely be another probe into allegations of insider
trading. But what won't be studied is whether it's a sign of a larger
problem, that the market itself is built on the idea that the 99 percent makes an investment in a system where they're expected never to pull their money back.
If they did that at a casino table, you'd walk away.
Eric Barton is editor of New Times Broward-Palm Beach. Email him here, or click here to follow him on Facebook.