The myth of the populist stock market

Wall Street analysts are predicting another great year for the stock market in 2004, and Americans are again pouring their savings into stocks. Tens of billions of dollars have flowed back into equities since last summer. As the Dow and Nasdaq soar, more money is likely to follow. There are also signs of a revival of the '90s myth of the populist stock market -a myth in which Wall Street gives everyone on Main Street a shot at a better life.

Can Americans possibly fall once more for this nonsense? Maybe. The scandals of recent years, most lately in the mutual-fund industry, have done little to debunk the notion that Wall Street is geared toward ordinary investors and that stocks offer a universal path to wealth creation. At the height of the boom, however, the bottom three-quarters of American households owned less than 15 percent of all stock. Barely a third of households hold more than $5,000 in stock. Most Americans have more debt on their credit cards than money in their mutual funds.

Stock-market gains have reflected the top-heavy ownership patterns. Between 1989 and 1997, the most recent year for which there is good data, 86 percent of stock market gains went to just the top 10 percent of households. Yet when the market tanked, it was often ordinary investors who felt the sharpest pain - pain that many will cope with well into retirement. According to a March survey by Greenwich Associates, major retirement pension plans lost $1 trillion from the beginning of 2000 through beginning of 2003.

Apart from getting burned by the vast scams in tech stocks, those ordinary Americans who did try to benefit from the last bull market got mauled in myriad smaller ways. Thousands of Americans are suing financial firms over things like hidden fees and inflated commissions, dishonest investing advice, and reckless trading practices. In the past two years, investors have filed more than 2,000 cases alleging "churning" by their brokers - that is, unnecessary trading to rack up commission fees.

Today, as middle-class investors go back into the water, the sharks are still there. While many investors will make gains if the market continues to rise - and stocks are probably a better place to put your money than under a mattress - the crackdown so far on Wall Street abuses is not very reassuring. Big firms like Merrill Lynch got only a slap on the wrist for misleading investors and admitted no wrongdoing. In 2002, New York Attorney General Eliot Spitzer helped to extract a $1.4 billion settlement from America's top 10 brokerage firms, but not a single individual in those firms faced criminal charges or admitted personal responsibility.

Although it's too early to predict the final outcomes of the mutual-fund investigations - which revealed yet more unfair practices that hurt ordinary investors - it appears that the accused in these cases are also headed for a soft landing, given the lax laws governing the fund industry until recently. In all, it's hard to see why future wrongdoers on Wall Street will be deterred by any of the punishments that authorities have meted out so far.

Meanwhile, self-regulation, the first line of defense against bad behavior by brokerage firms, remains something of a joke. The National Association of Securities Dealers is notorious for its lax discipline of miscreant brokers who prey on investors. NASD remains ill-equipped to police more than 600,000 securities dealers in the US or to dutifully investigate the 5,000 or so consumer complaints it receives every year.

And the biggest cop on the Wall Street beat, the SEC, still lacks the muscle to really do its job, despite all the lessons learned during the past few years about the costs of weak regulation.

The SEC's weakness has been driven home anew by the mutual-fund scandals. The SEC failed to prevent - or even notice - these scandals, not only because it lacked the staff and expertise to adequately police the nation's 13,000 mutual funds, but also because special-interest money blocked stronger reform efforts in Washington. Indeed, in the wake of the corporate scandals that began with Enron, the financial-services industry has stepped up its efforts to influence lawmakers.

In the 2002 election cycle, securities and investment firms gave $59 million in campaign donations, according to the Center for Responsive Politics. These firms have already contributed more than $20 million toward the 2004 election. That money comes on top of the $30 million-plus a year the industry spends on direct lobbying.

Investors on Main Street think good times are here again. Yet amid signs of a returning bull market, there is plenty of evidence that Wall Street has not fully mended its ways.

In this climate, the most important asset for any smart investor is a long memory.

• David Callahan is research director at Demos, a public policy group in New York. His new book is 'The Cheating Culture: Why More Americans Are Doing Wrong to Get Ahead.'