A Global Crisis of Confidence in US Financial Markets

There’s a comprehensive and fascinating article in the January 3 issue of The New York Times that should be must-reading for all public relations (PR) and investor relations (IR) consultants who serve financial services companies, including private equity firms and commercial and investment banks. “The End of the Financial World as We Know It,” by Michael Lewis and David Einhorn, begins with a provocative statement: “Americans enter the New Year in a strange new role: financial lunatics. “

As proof of their thesis, authors cite “the strange story of Harry Markopolos,” a former investment officer who tried, for nine long years, starting in 1999, to explain to the SEC that Bernie Madoff, the man who engineered the biggest global Ponzi scheme ever, couldn’t be anything other than a fraud. In response, the SEC undertook a slapdash investigation of Madoff and pronounced him free of fraud.

The Madoff scandal is just one example of a systemic problem … and it’s not just a matter of insufficient oversight of the financial services industry.

According to Clusterstock, many of Madoff’s investors were well aware that his returns were impossibly good, so he had to be cheating. However, they never considered the possibility of a Ponzi scheme. They thought that the scam involved insider trading … and that’s precisely why they chose to invest with Madoff!

In many cases, the Wall Street swindler’s investors willfully chose to become complicit in their own defrauding by ignoring the old adage that “if it sounds too good to be true, it probably is. “

The Role of Blogging in Financial Communications

For PR and IR professionals interested in the role of blogging and the social media in financial services, private equity, and investment banking communications, check out the article by Davis D. Janowski in InvestmentNews that addresses the conflicting views of blogging held by financial advisors, the Financial Industry Regulatory Authority (FIRA) and the Securities and Exchange Commission (SEC).

Financial advisors see their blogs as “a harmless, inexpensive technology” that facilitates communication with their clients. FIRA views blogs as ads that require supervisory review. And the SEC contends that blogs should be treated as a company statement.

The bottom line? To avoid compliance problems, be aware of what you are saying in your blog. Keep your communications general and avoid mentioning specific transactions, products or equities by name. For more information, check out these links:

• Certified Financial Planner Board of Standards’ recently updated Standards of Professional Conduct
• “FINRA Provides Guidance Regarding the Review and Supervision of Electronic Communications”

• The SEC’s “Commission Guidance on the Use of Company Web Sites”

Private Equity: A Failure to Communicate?

It appears that private equity firms — in both Europe and the U.S. — are suffering from an insufficiency of public relations.

“Private equity has reached a ‘critical point’ in Europe and needs to act fast before Brussels imposes legislation on the industry,” says Jonathan Russell, managing partner and global head of buyouts at 3i Group PLC and the new head of the European Private Equity and Venture Capital Association (EVCA), in a recent interview in the Financial Times.

Private equity firms are facing sharp criticism in Europe, where at least one leading politician has branded them “locusts.” In the U.S., they are loath to publicize returns and fiercely guard the specifics of the companies they own, despite demands from media and political groups for more transparency.

Russell admits that private equity’s own failure to communicate is partly to blame for the political backlash. “We have a fundamental gap here,” he says. “There is an impression of private equity born out of partial knowledge and some prejudice around that, some of which has roots in reality, but a lot doesn’t.”

Several of my clients in New York City are private equity firms. Through strategic PR, we have found a way to bridge the gap between secrecy and transparency to find a happy medium that works for all parties.

A Word to the Wise

“Mind the gap,” warns a recent article in the Financial Times earlier this month. FT columnist John Plender offers substantial evidence that “income inequality in the U.S. is at its highest since that most doom-laden of years: 1929.” And, I would add, it doesn’t bode well for the image and reputation of retail and investment banks and hedge fund and private equity firms.

Here are just two of the gasp-inducing indicators Plender cites, which were the result of an analysis of Congressional Budget Office figures by Jared Bernstein of the Economic Policy Institute:

• Between 1979 and 2005, the pre-tax income for the poorest households grew by 1.3% annually and middle incomes grew by less than 1%, while the income of households in the top one percent grew by 200% pre-tax and — even more shockingly — by 228% post-tax.

• The result of this lopsided distribution of income growth was that, by 2005, the average after-tax income for the bottom fifth of households was $15,300; for the middle fifth $50,200; and for the top 1%, just over $1 million.

The subprime mortgage crisis and the collapse of the American housing market has left negative equity in its wake … also anger about a system that gives banking executives huge bonuses when the economy is booming, while taxpayers pick up the bill when banks fail.

This is certainly a public relations challenge, but it’s not just a PR challenge. It’s a fundamental operational issue that also needs to be addressed by the entire financial services industry — including banks, investment banking, hedge fund management and private equity firms and their professional associations — to avoid regulatory backlash … or worse.