For those of you who are familiar with my writing, you've probably seen me use the term "Wall Street exists to separate you from your money."

It occurred to me the other day that I need to justify that opinion. Therefore here is a partial list of reasons why you should keep your money out of the hands of the Wall Street crooks and banksters. This article will not encompass every way that Wall Street steals from average people like you and me, but it might inform you of a few ways that you may not have been aware of.
As the old saying goes, "Forwarned is forearmed."

So without further delay, here's a list of ways that you are being robbed, day after day, year after year.

It's Always A Good Time To Buy!

On October 18, 2001, all 15 stock analysts tracked by Thomson Financial/First Call rated Enron a "buy". In fact, 12 of the 15 rated it a "strong buy". On November 8, 2001, of those same group of analysts, 11 of the 15 still rated it as a "buy". Only one of them rated it a "sell".
On December 2, 2001, Enron was bankrupt and tens of thousands of stockholders were broke. This was also at the tail end of the dot-com implosion when stock analysts often gave buy signals right up to the point of bankruptcy for hopeless internet companies.
Because of these buy recommendations, a lot of the Wall Street insiders were able to unload these worthless stocks to suckers like you and me. But this blatant greed sometimes has a backlash.

After Enron the word on Wall Street was " reform". Wall Street was going to fix the mess they had created. Even President Bush, with his strong ties to Enron, joined in for the call for reform.

So now, more than six years after Wall Street was going to clean up the stock analysts mess, what are the results?

Today, after the Nasdaq bust and the outbreak of the deepest financial crisis since the Depression, only about 5 percent of all stock recommendations on Wall Street advise investors to sell, according to Bloomberg.

Now granted, that's better than just 2% "sell" ratings during the dot-com heyday, but that only makes it just short of worthless.
At least 40% of all the stocks in the S&P 500 decline on the average year. Another large percentage hardly go up at all.
Large investors like hedge funds do their own research rather than listen to these stock analysts. You should to.

On A Rating Of 1 to 10

In 2002 Wall Street buzzed with talk of reforming the stock analysts. In 2008 the talk is reforming the rating agencies. I'm not holding my breath.
While the stock analysts were peddled to suckers on Main Street, the rating agencies are a prerequisite for Wall Street banks and brokers. They are such an important part of the system that they must register with the SEC.

Credit ratings are written into the regulators’ rulebooks as the basis for bank capital requirements, and dictate how fund managers allocate their assets. For example, AAA ratings are a prerequisite for money market funds, the pooled vehicles that invest surplus cash and which have liquidity and safety of capital as their primary concerns.

In view of this important status, the rating agencies themselves have to be approved by national regulators – in the US, for example, an agency must be granted Nationally Recognized Statistical Rating Organization (or "NRSRO") status by the Securities and Exchange Commission.

There are three rating agencies - Fitch Ratings, Moody's Investors Service, and Standard & Poor's Ratings Services - that dominate the nitch for the entire world's markets, and all of them are based on Wall Street.

And the rating system is now completely broken.

However in the last decade a whole new area of business opened up, one far more lucrative than the bread and butter business of analysing company balance sheets or government accounts. The boom in structured finance – best described as the repackaging, restructuring and resale of existing debts – placed the ratings agencies in a qualitatively different role. Instead of rating already extant bond issues, they became intimately involved in the issuance process itself, advising the investment bankers and their clients on how to obtain the necessary ratings for their new loans.

The structured finance bond issuance production line offered fat fees to bond underwriters (the investment banks) and to the rating agencies. Moody’s alone earned nearly US$1 billion a year from rating structured finance issues in 2005 and 2006, dwarfing revenues from the more traditional activity of rating government, municipal and corporate bonds.

With such earnings on offer, a conflict of interest inherent in the agencies’ remuneration scheme started to lead them increasingly astray. The agencies had always been paid by the issuers themselves for rating new bonds. Historically this had not been seen as a major problem.[...] In the area of structured finance, this built-in conflict of interest had far more grievous repercussions.

The rating agencies began coaching the companies that packaged up groups of bonds on how they could get higher ratings for their issuances. It's sort of like a teacher helping the student write an essay to get the grade he wants.

This phony rating of structured finance was happening at the exact same time of the housing bubble, thus exacerbating an already dangerous financial distortion. No one knows exactly how many mortgage-backed bonds wound up on Wall Street with a AAA rating, but you can be certain it was in the hundreds of billions of dollars worth. The entire scam is so large and so ambitious that the world's financial system is still in danger of freezing up.

Those overrated bonds were then sold to foreign investors, pension funds and 401k accounts. They seemed to be everywhere. At some point, they probably wound up in your portfolio.
The rating agencies made lots of money. The Wall Street banks that packaged up the toxic financial waste made lots of money.
Whoever bought the overrated, overpriced junk lost money. Those people were often regular Joes like you and me.

Of course the rating agencies denied any responsibility for the mortgage meltdown, but then the stock analysts denied they did wrong as well. Will the regulators crack down on the rating agencies? Don't make me laugh.

The most recent report of the President's Working Group, chaired by Treasury Secretary Henry Paulson, obliquely threatened new or stricter regulation for many financial institutions, but side-stepped the question of rating-agency regulation. The report suggested rating agencies may be doing enough on their own by making voluntary fixes to the way they rate structured financial products.

Oh, and did I mention that the rating agencies didn't downgrade Enron out of investment grade until just four days before it went bankrupt?

The 401k Scam

I find it stunning just how many working people still believe in the 401k system. For instance, the stock market today is at the same level it was at in 1999, yet a vast majority of Americans will still tell you that they are "in for the long haul".
Can't people do math? Don't they realize that if they had put the same money in a bank CD for nine years that they would be much further ahead?

But that isn't even the best reason you shouldn't participate in the 401k system. The best reason to avoid a 401k is the fees.

What most of these workers don't know is that fees, rebates and revenue-sharing agreements among employers, 401(k) administrators and mutual funds -- many of them buried in the fine print or not disclosed at all -- are slowing the growth of their nest eggs. The U.S. Department of Labor lists 17 distinct 401(k) fees, including ones for record keeping, legal services and toll-free telephone numbers.

Hidden fees of 1 percent can reduce a worker's 401(k) returns by about 15 percent over 30 years, says Stephen Butler, president and founder of Pension Dynamics Corp. in Pleasant Hill, California, a 30-year-old retirement plan consulting firm.

Of course fees of only 1% fees is an optimistic scenario. Of the nearly $3 Trillion in 401k funds last year, there were $89 Billion in fees. That comes out to about 3%.
According to a survey, 83% of Americans don't know how much they are paying in fees, and a majority didn't realize they are paying any fees.

The vast majority of 401k cash is invested in mutual funds. As Gregory Baer and Gary Gensler explain in their book "The Great Mutual Fund Trap", this is not good news for the small investor.

"Over a five-year period, only about 20% of actively managed stock funds perform well enough to earn back their fees and loads. In five more years, it will be a different 20% that accomplished the same task."

The biggest problem with 401k's in my opinion is the illiquidity of them. Once you have money in there you usually can't get it out without leaving your job, and even then you are faced with daunting penalties. No professional trader would ever put his life savings somewhere that he couldn't cash out when he needed to.
Illiquidity is a major issue. On Wall Street the price of a product falls the more illiquid it is. But the average 401k investor still pays a high retail premium to participate in the most illiquid product he/she will ever engage in (outside of a house).

But it doesn't end there. There are also two other major problems with 401k's that won't show up until decades later.
1) 401k money is tax-deferred, not tax-free. Therefore, by putting money into a 401k and getting the tax break now, you are making a bet that taxes will not be significantly higher a couple decades from now when you retire.

Will taxes be significantly higher when you retire? Unless the federal government simply defaults on its Social Security and Medicare promises then taxes will have to be raised significantly. Even if they aren't, 401k's are a very questionable investment for the lower and middle class.

The lifetime tax increase and spending reduction experienced by low and moderate income
households from participating fully in 401(k) and similar tax-deferred vehicles arises for three main reasons. First, withdrawals of tax-deferred balances push households into higher tax brackets in old age. Second, contributions to tax-deferred retirement accounts lowers one's tax brackets when young and, consequently, the size of the tax break from itemizing mortgage interest and other deductions. Third, and most importantly, withdrawals of tax-deferred balances when old can trigger much higher levels of Social Security benefit taxation under the federal income tax.
[...]
As can be verified in Table 12, for a young couple with $50,000 in initial annual earnings that earns a 6 percent real return, partaking fully in the typical 401(k) plan raises lifetime tax payments by 1.1 percent and lowers lifetime expenditures by 0.4 percent. The lifetime tax hike is 6.4 percent and the lifetime spending reduction is 1.7 percent for such households if they receive an 8 percent real rate of return. These figures rise to 7.3 percent and 2.3 percent, respectively, if taxes are increased by 20 percent when the couple retires.

2) All of those Baby-Boomers are expecting to use those stocks and bonds to fund their retirement. To put it another way, starting next year and increasing every year after that for more than a decade, the number of people who were buying stocks and bonds are increasingly going to be selling those stocks and bonds (the WSJ estimate $300 Billion a year, every year).

For someone like me, still more than two decades away from retirement, that means all my investments on Wall Street are going to be coming under increasing selling pressure. What kind of return on investment (ROI) can I really expect when the number of people only selling stocks and bonds increases by several million every single year? Some say that foreign investors will snatch up those stocks and bonds. But with almost all of the industrialized world (and China) aging at the same time, the context isn't rational.

The simple fact of the matter is that the bull market in stocks and bonds of the 1982-2000 period isn't going to be repeated in our lifetimes. Instead, a long-term bear market is much more likely.

"The 401(k) system today in the United States has been an acknowledged failure."
- Alicia Munnell, director of the Center for Retirement Research at Boston College's Carroll School of Management

Admittedly if your employer matches your 401k deposits then the math changes dramatically, then a 401k makes a lot more sense. It's hard to turn down free money.
However, if your employer doesn't match your deposits then you should abstain for this product and do your own savings. Just like people did for thousands of years.

The Naked truth of illegal Shorting

Now we get into something a little more obscure. While you may think that this doesn't effect you, if you have a 401k or an IRA, it effects you just as much as everyone else.
First you need a definition.

Naked Shorting: Ordinarily, traders must borrow a stock, or determine that it can be borrowed, before they sell it short. But due to various loopholes in the rules and discrepancies between paper and electronic trading systems, naked shorting continues to happen.

While no exact system of measurement exists, most point to the level of trades that fail to deliver from the seller to the buyer within the mandatory three-day stock settlement period as evidence of naked shorting. Naked shorts may represent a major portion of these failed trades.

Naked shorting is illegal because it allows manipulators a chance to force stock prices down without regard for normal stock supply/demand patterns.

To put this in a way that everyone can understand: people are selling things that they don't own.
The most famous instance of this practice involves Overstock.com Inc., but it afflicts small businesses everywhere.

SCHNEIDER: In March 2005, the Senate Banking Committee confronted then-SEC Chairman William Donaldson with a story about Frank Dobrucki's company, the Nevada-based real estate holding company, Global Links. An investor named Robert Simpson had set out to prove that small companies were indeed frequent targets of abusive naked short sellers.

Simpson placed an order for $5,000 worth of stock in Global Links. That got Simpson ownership of all 1.1 million Global Link shares in the market. Not some of them, all of them.

UNIDENTIFIED: There were no shares available to be borrowed, and yet in two days, there were over 50 million shares traded. That's clearly something that needs work.

SIMPSON: I was absolutely blown away when I bought 1,282,050 shares, which equated to 111 percent of the issued and outstanding. I just couldn't even fathom that. So, it wasn't just crooked, it was Wild West times 10.

SCHNEIDER: The day all this started, trading in Global Links opened at 10 cents a share. Within a second, the price dropped to a penny. An hour and 16 minutes later, Global Links stock was trading at eight one-hundredths of a penny. Prices dropped 99 percent in less than two hours.

Global Links CEO Frank Dobrucki wrote shareholders telling them the selling of Global Links shares was evidence of illegal trading.

This is nothing but theft, plain and simple. And yet I haven't seen any stories of people going to jail for it. I don't know exactly how people do this, but I don't really need to know it. All that really matters is knowing that is is going on.
If you are interested in learning more, and you have an hour to kill, this presentation should give you all the information you need. More audio presentations can be found here.

So you have to ask yourself a simple question: would you play a casino game with your real money when you know ahead of time that the game is rigged?

Silly Rabbit, Trading Is For Insiders

Unlike Naked Short selling, the term insider trading is known to most people. Most insider trading is legal and ethical.
How much insider trading isn't legal and ethical? No one knows and no one will ever know for certain, but a Senate investigation in 2006 repeatedly used the term "pervasive". The investigation started off by quoting the figure of 41% in cases of corporate buyouts.

You don't have to look very hard to see news articles making the claim that illegal insider trading is widespread. Just do a quick Google search.

What I consider to be a more accurate portrayal of the amount of insider trading in the markets is the defense of the practice.

It has never been entirely clear why insider trading is illegal. The insider does not cause the outsider to trade at just the wrong time. The insider simply takes advantage of the fact that an outsider is always there to take the other side of the trade.

"The other side of the trade" is also known as the "money losing side of the trade". Don't fall under the false impression that this is the only article defending illegal insider trading.

Once again, like naked short sales, we find a market that is tilted against the average 401k investor. You may still beat the market if you aren't an insider, but you will have to beat a rigged game to do it.
This is an important concept to understand. Most people will claim that they wouldn't bet even a small amount of money on a rigged game, yet they will continue to put their entire life savings in the hands of Wall Street despite knowing ahead of time that they will be robbed in the process. Why?