Tag Archives: wall street

This Ain’t Your Dad’s Wall Street

Mark Cuban does a great job explaining why Wall Street is no longer the economic engine it once was:

Over just the past 5 years, the market has changed. It is getting increasingly difficult to just invest in companies you believe in. Discussion in the market place is not about the performance of specific companies and their returns. Discussion is about macro issues that impact all stocks. And those macro issues impact automated trading decisions, which impact any and every stock that is part of any and every index or ETF.  Combine that with the leverage of derivatives tracking companies,  indexes and other packages or the leveraged ETFs, and individual stocks become pawns in a much bigger game than I feel increasingly less  comfortable playing. It is a game fraught with ever increasing risk.

So back to the original question. What business is Wall Street in ?

Its primary business is no longer creating capital for business. Creating capital for business has to be less than 1pct of the volume on Wall Street in any given period. (I would be curious if anyone out there knows what percentage of transactions actually return money to a company for any reason). It wouldn’t shock me that even in this environment that more money flows from companies to the market in the form of buybacks (which i think are always a mistake), than flows into companies in the form of equity.

He then offers up some ideas about how to return Wall Street to its original role:

My 2 cents is that it is important for this country to push Wall Street back to the business of creating capital for business.  Whether its through a use of taxes on trades(hit every trade on a stock held less than 1 hour with a 10c tax and all these problems go away), or changing the capital gains tax structure so that there is no capital gains tax on any shares of stock (private or public company) held for 1 year or more, and no tax on dividends paid to shareholders who have held stock in the company for more than 5 years.  However we need to do it, we need to get the smart money on Wall Street back to thinking about ways to use their capital to help start and grow companies. That is what will create jobs. That is where we will find the next big thing that will accelerate the world economy.  It won’t come from traders trying to hack the financial system for a few pennies per trade.

Slow Money

Responding to a piece in the New York Times about bypassing Wall Street with investment dollars,  AVC's Fred Wilson describes how he and his wife have abandoned Wall Street and have concentrated on investing in businesses they can feel, touch and understand:

We are in cash, real estate, venture capital, and private investments centered around our neighborhood and city (retail, restaurants, etc). Other than cash, we are invested in things we can touch and/or impact and understand.

As Ron talks about at the start of his piece, the never ending blowups on wall street are eroding confidence in that system. It certainly has eroded our confidence in that system. So we are staying out of it for the most part.

And he describes a movement he calls Slow Money described in this way:

“Let’s just take some of our money and invest it near where we live in things we understand, starting with food,” as the movement’s founder, Woody Tasch, puts it. He describes returns as being in the “lowish single digits,” ranging from roughly 3 percent to a few percentage points higher…

As one system seems to be failing on a regular basis, it makes sense that there are new systems that operate differently that are emerging. 

Wouldn't it be sweet justice if the titans of Wall Street were put in their place not by the toothless-so-far government regulators, but by the free market they so stridently defend but seem to only believe in if it's rigged in their favor? 

If We Only Knew

Four years after the economy melted down there's still a serious lack of understanding among the general populace as to the root causes of the collapse. It's not that the causes aren't well documented, they're just complex and opaque, and that's probably just as well as far as those driving the economic train are concerned. 

The latest example of this disconnect between economic cause and effect is the movement to blame seemingly every municipal deficit on public employees, their benefits and their unions. Obviously exploding pension obligations play a role in putting stress on the cities' or states' coffers, but those obligations were far from the only reason the municipalities started to bleed red ink. Thomas Ferguson explains in his article on AlterNet (h/t to Fec for the pointer):

What has driven cities and towns to the brink is not demands from their workforce but the collapse of national income and the ensuing fall in tax collections. Or, in other words, the Great Recession itself, for which Wall Street and the financial sector are principally to blame. But many powerful interests have jumped at the opportunity to use the crisis to eviscerate what’s left of the welfare state, roll back unionization to pre-New Deal levels, and keep cutting taxes on the wealthy. The litany of horror stories that now fills the media is ideal for their purposes…

At a time when cities and states are taking hatchets to services and manically raising fees and fares, the group’s analysis merits a closer look and a much, much wider audience.

Its starting point will be familiar to anyone who recalls the debate over financial “reform” of the last few years. In the bad old days of pre-2008 deregulated finance, bankers started pedaling hot new “structured finance” products that they claimed were perfect for the needs of clients who had thrived for decades using cheaper, plain vanilla bonds and loans. The new marvels – swaps and other forms of so-called “derivatives” whose values changed as other securities they referenced fluctuated in value – were often complex and frequently not priced in any actual market. Their buyers thus had difficulty understanding how they really worked or how they might be hurt by purchasing them...

The result, for years now, has been literally billions of dollars of losses for cities, states, and other local authorities, including school boards and state college loan agencies. Locked in by the termination fees, they can stay in the swaps and pay and pay as the banks’ payments to them dwindle. Or they can buy their way out of the swaps at preposterous prices – Morgenson indicated that New York State recently paid $243 million dollars to get out of some swaps, of which $191 million had to be borrowed.

One of the common themes found in almost every accounting of the financial meltdown has been the complexity of the financial products that Wall Street used, without oversight, to reap billions, if not trillions, of dollars in profits while setting the economy up for a massive fall. Who really knew what mortgage backed securities and credit default swaps were before the crisis? Very few people knew what they were, and even fewer understood how they worked, and that's why when it came time to start assessing blame it became a whole lot easier to point the finger at moderate-to-low income homeowners who took a too-good-to-be-true deal on their mortgages and then failed to make good. It was easy to blame them, the first dominoes, because the average person could understand what they did wrong. On the other hand the financial Masters of the Universe were happy to let the little guys take the fall while they hid behind the opaque curtain of financial shenanigans they'd hung around the rest of us.

And the banks' shenanigans were quite possibly intentional and coordinated. From Matt Taibbi at Rolling Stone (again h/t to Fec):

The defendants in the case – Dominick Carollo, Steven Goldberg and Peter Grimm – worked for GE Capital, the finance arm of General Electric. Along with virtually every major bank and finance company on Wall Street – not just GE, but J.P. Morgan Chase, Bank of America, UBS, Lehman Brothers, Bear Stearns, Wachovia and more – these three Wall Street wiseguys spent the past decade taking part in a breathtakingly broad scheme to skim billions of dollars from the coffers of cities and small towns across America. The banks achieved this gigantic rip-off by secretly colluding to rig the public bids on municipal bonds, a business worth $3.7 trillion. By conspiring to lower the interest rates that towns earn on these investments, the banks systematically stole from schools, hospitals, libraries and nursing homes – from "virtually every state, district and territory in the United States," according to one settlement. And they did it so cleverly that the victims never even knew they were being ­cheated. No thumbs were broken, and nobody ended up in a landfill in New Jersey, but money disappeared, lots and lots of it, and its manner of disappearance had a familiar name: organized crime…

USA v. Carollo involved classic cartel activity: not just one corrupt bank, but many, all acting in careful concert against the public interest. In the years since the economic crash of 2008, we've seen numerous hints that such orchestrated corruption exists. The collapses of Bear Stearns and Lehman Brothers, for instance, both pointed to coordi­nated attacks by powerful banks and hedge funds determined to speed the demise of those firms. In the bankruptcy of Jefferson County, Alabama, we learned that Goldman Sachs accepted a $3 million bribe from J.P. Morgan Chase to permit Chase to serve as the sole provider of toxic swap deals to the rubes running metropolitan Birmingham – "an open-and-shut case of anti-competitive behavior," as one former regulator described it.

Now let's be clear – if the banks' actions and the extent of their screwing of us were more easily understood we would probably have such a huge popular outcry against them that even our Wall Street-coddling Congress and Obama administration would be forced to go after their friends. As it is the average Joe is too busy trying to keep food on the table to pay much attention to this stuff, and quite frankly it's just easier to blame the deadbeat down the street than to try and figure out how guys in the pink ties and cuff links took him and the rest of us to the cleaners. Sadly the denizens of Wall Street continue to reap the rewards of their corrupt system while the rest of us get to eat cake.

If we only knew.

Sad That This Is Considered ‘Pioneering’

In an interesting article in the Wall Street Journal about Apple's retail strategy I came across this:

Still, Apple is considered a pioneer in many aspects of customer service and store design. According to several employees and training manuals, sales associates are taught an unusual sales philosophy: not to sell, but rather to help customers solve problems. "Your job is to understand all of your customers' needs—some of which they may not even realize they have," one training manual says. To that end, employees receive no sales commissions and have no sales quotas.

"You were never trying to close a sale. It was about finding solutions for a customer and finding their pain points," said David Ambrose, 26 years old, who worked at an Apple store in Arlington, Va., until 2007.

Apple lays its "steps of service" out in the acronym APPLE, according to a 2007 employee training manual reviewed by The Wall Street Journal that is still in use.

"Approach customers with a personalized warm welcome," "Probe politely to understand all the customer's needs," "Present a solution for the customer to take home today," "Listen for and resolve any issues or concerns," and "End with a fond farewell and an invitation to return."

Read more: http://online.wsj.com/article/SB10001424052702304563104576364071955678908.html#ixzz1PNc5

I find it sad that a business is considered a pioneer because it asks its front line employees to listen to customers, help them solve a problem and warmly invite them back.  I'm not shocked, hey I saw Glengarry Glen Ross too, but I am saddened.  I know many small businesses that do what Apple is being lauded for in this article, but when the Journal of Big Business Wall Street Journal points out that this is different from what you see in corporate retail America I think that's a pretty good indicator of how lots of large companies treat their customers – as raw meat for the sales mill.

Not So Desperate Housewives

The latest article from Rolling Stone's Matt Taibbi, the preeminent Wall Street basher, is titled The Real Housewives of Wall Street and it's a doozy.  First there's the story of two wives of Wall Street bigwigs who put together a company in 2009 to take advantage of federal bailout funds:

It's hard to imagine a pair of people you would less want to hand a giant welfare check to — yet that's exactly what the Fed did. Just two months before the Macks bought their fancy carriage house in Manhattan, Christy and her pal Susan launched their investment initiative called Waterfall TALF. Neither seems to have any experience whatsoever in finance, beyond Susan's penchant for dabbling in thoroughbred racehorses. But with an upfront investment of $15 million, they quickly received $220 million in cash from the Fed, most of which they used to purchase student loans and commercial mortgages. The loans were set up so that Christy and Susan would keep 100 percent of any gains on the deals, while the Fed and the Treasury (read: the taxpayer) would eat 90 percent of the losses. Given out as part of a bailout program ostensibly designed to help ordinary people by kick-starting consumer lending, the deals were a classic heads-I-win, tails-you-lose investment…

In the case of Waterfall TALF Opportunity, here's what we know: The company was founded in June 2009 with $14.87 million of investment capital, money that likely came from Christy Mack and Susan Karches. The two Wall Street wives then used the $220 million they got from the Fed to buy up a bunch of securities, including a large pool of commercial mortgages managed by Credit Suisse, a company John Mack once headed. Those securities were valued at $253.6 million, though the Fed refuses to explain how it arrived at that estimate. And here's the kicker: Of the $220 million the two wives got from the Fed, roughly $150 million had not been paid back as of last fall — meaning that you and I are still on the hook for most of whatever the Wall Street spouses bought on their government-funded shopping spree.

But this exploration into the adventures of two wives of Wall Street scions leads to bigger questions:

And then there are the bailout deals that make no sense at all. Republicans go mad over spending on health care and school for Mexican illegals. So why aren't they flipping out over the $9.6 billion in loans the Fed made to the Central Bank of Mexico? How do we explain the $2.2 billion in loans that went to the Korea Development Bank, the biggest state bank of South Korea, whose sole purpose is to promote development in South Korea? And at a time when America is borrowing from the Middle East at interest rates of three percent, why did the Fed extend $35 billion in loans to the Arab Banking Corporation of Bahrain at interest rates as low as one quarter of one point?

Even more disturbing, the major stakeholder in the Bahrain bank is none other than the Central Bank of Libya, which owns 59 percent of the operation. In fact, the Bahrain bank just received a special exemption from the U.S. Treasury to prevent its assets from being frozen in accord with economic sanctions. That's right: Muammar Qaddafi received more than 70 loans from the Federal Reserve, along with the Real Housewives of Wall Street.

I'm still waiting for the Feds to launch JERP – Jon's Economic Relief Program.  When they do I'm hitting the beach baby.