This story is part of a special series by investigating shareholders' reaction to corporate corruption on Wall Street. Click here to see a full listing of stories.

Sorry, but no law can possibly protect investors who are intent on ignoring reality.

That bit of common sense certainly seems to have eluded the powers that be. Congress, New York Attorney General Eliot Spitzer, the

Securities and Exchange Commission

, the

New York Stock Exchange

-- all are either enacting so-called reforms or imposing new rules aimed at making the stock market a safer place.

It won't work.

At some point, Wall Street and Main Street alike must come to grips with the fact that corporate corruption will always exist, no matter how many new rules are imposed. In fact, requiring extra vigilance from regulators and law enforcers could suck investors into a false sense of security and make them even more vulnerable to the scams -- legal and illegal -- that Wall Street, the accounting profession and corporate America will always perpetrate.

Of course, corruption has played a role in certain stocks' declines, but it's crucial to bear in mind that the market would have fallen sharply even without the scandals. Mostly, shares have plunged this year because even after pulling back throughout 2001, they remained grossly overvalued. Regulations will never stop bubbles, unless the Spitzers of this world attempt to outlaw that basic desire in all human hearts to get rich with no work.

Shadows and Fog

History shows, after all, that the worst rules are made in times of outrage and panic. Enacted amid the anti-Wall Street fervor after the 1929 crash, the ridiculously restrictive Glass-Steagall laws kept U.S. commercial lending banks from offering other types of financial services for decades.

Politicians are at their most potent -- and most moronic -- when they can point to terrible crimes and demand that the world be legislated into perfection or perfect safety. The sanctimony and butt-covering following the popping of the greatest market bubble that America has ever seen has created an intellectual fog that obscures its real causes. Worst of all, this miasma transforms the culprits -- in this case, the individuals and mutual fund managers who were buying the likes of


at $60 -- into victims.

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?

Idiocy and Greed

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Greenberg's Rules for Recognizing Risk

Institutions Are Asleep at the Wheel

New Rules Can't Cure Ailing Wall Street

Fleecing the Shareholder: How They Do It

Inside, Outside -- We Just Want an Active Board

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.

A glance at the stock market is enough to make the case that, despite all the losses and all the moaning of the last two years, we're still witnessing unthinkable recklessness.




, to take two New Economy names, continue to trade as if filled with helium.

Let's be a little more scientific. Stocks should "yield" the same as a Baa-rated corporate bond, currently 7.4%. That means that earnings should be equivalent to 7.4% of the value of the

S&P 500

index. They don't come anywhere close. Here are the numbers. Let's assume operating earnings on the S&P 500 next year will be 10% lower than analysts' current estimates of $54.10, which would give us $48.70. On the S&P 500's index value of around 800, you get a yield of 6.1%. To have stocks yielding 7.4% on these earnings would mean the S&P 500 moving down to about 660.

If investors worried more about prices and less about the rule book, they'd be a lot better off.