I recently finished reading Infectious Greed by Frank Partnoy and heartily recommend it. The author provides a detailed look at the greed of investment bankers, who could easily suck in corporate managers because they too possessed greedy hearts. They too could lock in auditors and lawyers and investors, for everybody seemed to chase the American dream that more is good.

I particularly liked section one of the book, labeled "Infection," in which Partnoy lays out various strategies by different investment bankers to bring in more revenue. These new strategies generally focus on the creation of new financial instruments that the firms could sell to their clients. By pairing investors and issuers, the investment banker could pocket the fees for creating the instrument and crafting the marriage. Unfortunately, these new instruments moved corporate America closer and closer to financial implosion.

I find it remarkable that investment bankers thought so little of their customers that they willingly and merrily created instruments for their own benefit. Instead of worrying about the welfare of the issuers or the investors, they manufactured securities that created fees for themselves. Forget the mantra of serving one customer at a time or any other line designed for commercial consumption; the investment bankers were in business for themselves.

Even more incredible is the fact that few participants really understood the nature and the economics of these new creations. And I'm not talking about naïve investors; I have in mind the so-called professionals to whom investment bankers were pitching these derivatives. Afraid to say no and appear less than chic, finance executives said yes to these pitches by investment bankers. Apparently, however, the finance executives were incapable of valuing these derivatives, so they relied on the representations of investment bankers. When these assertions proved to be exaggerations or worse, well, those were the clients' problems!

I also found it sad but interesting how a number of corporations apparently had rogue traders who agreed to some of these deals. These traders had relatively free rein to engage in whatever transactions they wished. In other words, the business enterprise had very poor internal controls for protecting the assets of the organization.

In addition, many managers that make use of derivatives claim that they hedge some particular activity. I have come to the realization that these assertions of hedging are greatly overstated. Derivatives instead seem to be the corporate way of playing the lottery.

And where were the directors? It seems that they were too busy golfing. Sometimes managers would bring the proposals to the board of directors. The directors did not study and did not understand these new fangled products, but rather than standing in the way, they voted acceptance of these ideas. In other cases, managers did not share their plans with the board, and the board did not bother to investigate. Either way, managers could do pretty much what they wanted with respect to structured finance and derivatives.

At the same time Congress chose not to impose much in the way of regulation. Of course, when the wife of a prominent senator from Texas leads the way to avoid legislation, Congress becomes tainted. Again.

The SEC didn't do much either. Frequently it ignored the potential problems of derivatives and forgot that its mission is to be the investor's advocate. The few times in which the SEC got involved, the agency came to an agreement with the miscreants and imposed a small fine. Mere chicken feed, given the money involved in derivatives.

The risk to shareholders is immense in this setting of "infectious greed" and impotent regulation and enforcement. Because investment bankers and corporations are trying to line their own pockets, the adage of buyer beware could not be more apt.

My bottom line is this advice to investors: Look at the firm's 10-K and examine the extent to which it employs derivatives. If the corporation engages derivatives to a large extent, sell your stocks and start looking for another company in which to invest. If you find a firm that does not use them or uses them only modestly, you can consider investing in the company. If you do, save the 10-K. If later you learn that the company has lost a lot of money in derivatives activities that they did not disclose, then find a good litigation attorney. It will be your only recourse.

J. EDWARD KETZ is the MBA Faculty Director at the Smeal College of Business at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals, and columnist of The Accounting Cycle.