What's the Difference Between Wall St. Banks and Used Car Salesmen?

used car salesman
used car salesman

Nobody expects someone selling them a used car to point out all of its flaws. And if you believe the salesperson who tells you that those pants look absolutely fabulouson you, you either have amazing self-esteem, or you're deluding yourself about what people will do to earn a commission.

So why should we expect Wall Street financial institutions to be any more trustworthy than the lemon-hawker down the street?

Many people are pointing at the latest controversy over Facebook (FB) as another egregious example of Wall Street excesses. Yet even with a Reuters report saying that Morgan Stanley (MS), JPMorgan Chase (JPM), and Goldman Sachs (GS) secretly reduced their estimates of the social media giant's future revenues in the last days before the companies helped underwrite Facebook's IPO, you shouldn't be shocked. Rather, you should simply realize that you can't trust investment sellers any more than you can trust a used car dealer.

Here's how the Wall Street brain thinks

Put yourself in the shoes of a big Wall Street firm: You're getting a huge fee to sell the most popular IPO in history. Everyone is clamoring for as many shares as they can get.

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But at the last minute -- long after everything should be set in stone -- some bad news comes out on the company doing the IPO. It's released in a public SEC filing, but you know many buyers won't read long legal documents. After doing some research, your investment analysts say that their past impression of the company was too optimistic.

Now on one hand, you represent the company and want to get as much money from the IPO as you can. But some of your best clients want to buy shares, and you don't want them to get burned. So you start calling them to tell them about the news and your research.

Only after the IPO do ordinary investors learn about the ramifications of the company's bad news.

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Trust no one

Ideally, the company shouldn't have waited until the last minute to give its bad news. In a perfect world, the underwriter should have told everyone about its findings -- at the same time.

But consumer protection laws notwithstanding, the only real way to protect yourself is to trust no one completely and remain skeptical up to the bitter end before you make any major purchase. Unless you can independently confirm everything someone tells you -- whether you're buying a car or making an investment -- don't put a single penny of your money at risk.

You can follow Motley Fool contributor Dan Caplinger on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of Goldman Sachs.