New Rules Can't Cure Ailing Wall Street

And that is why now we have something akin to a financial Prohibition descending on the market. Because of the overreactions of the Anti-Saloon League in the early 20th century, politicians stopped everyone from having a legal tipple. Similarly, because some executives, analysts and investment bankers have been naughty, all must face further restrictions on what they can do.

The recently reported preparations by Spitzer, the SEC and other bodies to build a set of rules designed to get rid of conflicts of interest on Wall Street will reduce the basic freedoms of many in the financial industry. In their place, investors will find an unnerving overzealousness that treats all financial professionals as degenerates. Investment bankers and analysts will have to sneak away like adulterers "to be together." CEOs will be building priest holes in their Connecticut ubermansions. Attracted by their outlaw status, Def Jam will sign up hordes of ex-Andersen auditors.

Meanwhile, investors will be dumber than ever. Let's not forget where a good part of this hysteria started: with that paragon of personal responsibility Debases Kanjilal. He's the disaffected investor who filed an arbitration suit against Merrill Lynch, claiming he lost around a half-million dollars buying stock in InfoSpace because of allegedly misleading research by Henry Blodget, then an analyst at the firm.

Yep, that's the InfoSpace that expected to create "the first global infrastructure company that delivers the services that are fundamentally changing how people around the world communicate, access information, conduct commerce and manage their lives across rapidly converging media platforms such as wireless, DSL and broadband," to quote a 2000 company press release.

That eloquent passage alone would've been enough to make a thousand short-only hedge funds descend on it. But why couldn't investors not smell the cant, too?

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That is the question that politicians and bureaucrats can't answer truthfully, because the answer is idiocy, greed and laziness. Those great qualities can't be legislated against, because in boom times no one believes that anything wrong is going on. Stupidity is seen as cleverness and vice versa. Remember how Warren Buffett was mocked for not buying tech stocks? Like an old Indian language, the fundamentals of investing were almost wiped out from the minds of the American tribe in the '90s.

But what about the outright fraud we've seen evidence for at corporations? How can we protect mom and pop investors from that? Two answers. First, you can do it with existing laws. The feds didn't have to pass any new legislation to corral the likes of Dennis Kozlowski and Scott Sullivan. No, they just had to apply old laws with appropriate vigor. The perp walks should serve as something of a deterrent.

Second, there is good old-fashioned caution. In other words, don't overpay for stocks -- because some of the stuff you buy will always fall apart for reasons you can't spot ahead of time. If you buy 20 different stocks with price-to-earnings ratios ranging between 10 and 15, the chances of losing money is lower than if you buy 20 stocks with P/E ratios between 50 and 100.

And perhaps the strongest evidence that all the new rules and tough talk aren't going to work is that, despite everything, investors still are not demanding a risk premium. They are still throwing caution to the wind, believing they will be protected by all these great new regulations.