Thursday, September 18, 2008

Why I Won't Shed Tears For Wall Street

Call me small-minded, or vindictive, but I don't feel sorry for Wall Street.
Yes, I realize we're in a crisis and suffering through the roughest economic patch since the Great Depression. And I appreciate it isn't nice to pick on someone when they're down.
But I'll be honest, being charitable is not my first instinct here. There's part of me that resents Wall Street, especially its slew of money-hungry CEOs, cavalier investment bankers, heartless merger and acquisition specialists, and red meat-loving traders. I'll add to this lot the relentless gang of stock market pundits and pickers, who rant against even modest industry regulations or investor protections for fear of derailing their fantasy of a pure "free market" society.To each and every one of them I say: "Tough luck, folks. Your day of reckoning has come. You're getting just what you deserve."
It's too bad so many innocent people will have to pay for their avarice and hubris--especially those being tossed to the curb without work or prospects.
This is not some sudden backlash brought on by my staggering 401K portfolio or a rant sparked by uncontrolled panic that the stock market is forever down and out.
No, this resentment has been building for some time.
For more years than I care to remember I've reported and commented on business. When I began plying my trade as a pup reporter, publicly-owned companies didn't fixate on their stock prices as they do now. The stock price was an important component of something more grand: How well the company was managed; product quality; innovations; customer satisfaction--you know, the business.
And Wall Street? That was a place where companies went to raise capital for expansion and new products.
This was not a perfect dynamic. Often, top management was removed from the real world. But, on balance. I'd argue companies that focused on their knitting, and not merely pleasing shareholder interests and investment analysts, usually produced leaders in big industries like automotive, consumer products, financial services, technology, etc.
Over time that changed. Shareholders--especially institutional shareholders with ties to Wall St.-backed financial muscle--started pressing companies for greater returns. The mantra: Maximize shareholder value.
So, what mattered before didn't any longer. Shrewd CEOs quickly learned to bow to the almighty stock price or risk getting dumped. In essence, companies were being managed by institutional shareholders, backed by Wall St. investment houses.
For years, this situation has made life miserable for management teams that don't always meet or exceed quarterly profit and stock price expectations.
I recall a conversation with a CEO of a major company who ruefully told me that business wasn't the same anymore. Why? Because long term planning and investment were out and share price trumped every other concern.
Now ask yourself: How many companies have been damaged in the name of maximizing shareholder value? How many unnecessary mergers, spin-offs and other dumb deals were spawned just to give the stock a jolt? How many jobs and benefits were cut because Wall St. said that was an easy path to operating "efficiencies" and greater short-term returns?
Wall St defenders will argue that shareholders made a killing. Some did, some didn't. But I guarantee you that every investment bank involved in these transactions walked away with ample fees and never looked back.
Not satisfied with disemboweling Corporate America, investment banks turned to Main Street.
Once there, they encouraged lenders to keep making questionable subprime mortgages.Yeah, banks and mortgage lenders caused their share of problems by originating these awful loans. But Wall St. investment firms compounded the problem by manufacturing a market for these crappy credits, packaging and selling them to big and small investors globally in return for fat fees that translated into hefty annual bonuses.
Any attempt to throttle back this excess through regulation, or sheer common sense, was beaten back by Wall St.'s protector class--those bellicose traders, pundits, economists and stock gurus who blindly fight even the most minor regulatory enforcement. You know, the crew that ends up regularly on CNBC's Larry Kudlow show. Their type helped provide cover to the Bush Administration, which didn't want to stop the mortgage music anyway.
The real irony? The investment banks caused all this mischief on borrowed money. The bankrupt Lehman Brothers, the near-bust Bear Stearns (now part of JPMorgan Chase) along with "independents" Goldman Sachs and Morgan Stanley had leverage ratios in excess of 30 before it hit the fan.
That means for every dollar in the pot they borrowed $30. And these guys were being paid huge money for financial advice?
In my old neighborhood, we had a saying: If you owe someone a little money, they have you. If you owe them a lot of money, you have them.
Wall St. owes us a lot for these taxpayer-backed bailouts. Man they got us good and that's why I'm not shedding any tears.
Instead, I'm concerned that when this financial mess has passed, Wall St. is going to try and get us again.
And then we'll all have a good cry.

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