Tag Archives: Wall Street

Why Wall Street Isn’t Useful for the Real Economy

By Lynn Stout – In the wake of the 2008 crisis, Goldman Sachs CEO Lloyd Blankfein famously told a reporter that bankers are “doing God’s work.” This is, of course, an important part of the Wall Street mantra: it’s standard operating procedure for bank executives to frequently and loudly proclaim that Wall Street is vital to the nation’s economy and performs socially valuable services by raising capital, providing liquidity to investors, and ensuring that securities are priced accurately so that money flows to where it will be most productive.

The mantra is essential, because it allows (non-psychopathic) bankers to look at themselves in the mirror each day, as well as helping them fend off serious attempts at government regulation. It also allows them to claim that they deserve to make outrageous amounts of money.

According to the Statistical Abstract of the United States, in 2007 and 2008 employees in the finance industry earned a total of more than $500 billion annually—that’s a whopping half-trillion dollar payroll (Table 1168).

Let’s start with the notion that Wall Street helps companies raise capital. If we look at the numbers, it’s obvious that raising capital for companies is only a sideline for most banks, and a minor one at that. Corporations raise capital in the so-called “primary” markets where they sell newly-issued stocks and bonds to investors.

However, the vast majority of bankers’ time and effort is devoted to (and most bank profits come from) dealing, trading, and advising investors in the so-called “secondary” market where investors buy and sell existing securities with each other.

In 2009, for example, less than 10 percent of the securities industry’s profits came from underwriting new stocks and bonds; the majority came instead from trading commissions and trading profits (Table 1219).

This figure reflects the imbalance between the primary issuing market (which is relatively small) and the secondary trading market (which is enormous). In 2010, corporations issued only $131 billion in new stock (Table 1202).

That same year, the World Bank reports, more than $15 trillion in stocks were traded in the U.S. secondary marketmore than the nation’s GDP. more>

Does Wall Street Do “God’s Work”? Or Even Anything Useful?

By Lynn Stout – In the wake of the 2008 crisis, Goldman Sachs CEO Lloyd Blankfein famously told a reporter that bankers are “doing God’s work.”

This is, of course, an important part of the Wall Street mantra: it’s standard operating procedure for bank executives to frequently and loudly proclaim that Wall Street is vital to the nation’s economy and performs socially valuable services by raising capital, providing liquidity to investors, and ensuring that securities are priced accurately so that money flows to where it will be most productive.

There’s just one problem: the Wall Street mantra isn’t true.

Corporations raise capital in the so-called “primary” markets where they sell newly-issued stocks and bonds to investors. However, the vast majority of bankers’ time and effort is devoted to (and most bank profits come from) dealing, trading, and advising investors in the so-called “secondary” market where investors buy and sell existing securities with each other.

In 2010, corporations issued only $131 billion in new stock (Table 1202). That same year, the World Bank reports, more than $15 trillion in stocks were traded in the U.S. secondary marketmore than the nation’s GDP.

So, what benefit does society get from all this secondary market trading, besides very rich and self-satisfied bankers like Blankfein? more> http://goo.gl/n3EdoD

Larry Summers And Flat-Earth Economics

By Steve Denning – In 2005, the chief economist of the International Monetary Fund, Raghuram Rajan, made a speech at Jackson Hole Wyoming in front of an all-star gathering of the world’s most important bankers and financiers, including Alan Greenspan and Larry Summers.

Rajan explained that “because pay was tied to short-term returns, financial managers would want to take so-called ‘tail risks’: risks that almost always paid off with higher returns, but when they went wrong would be catastrophic. That way, most of the time the managers would take home a higher pay packet. If the risk did materialize, they might be fired: a small cost compared to the super-sized bonuses they got while the going was good. Similarly, because these managers’ pay was set relative to their peers, financial managers were incentivized to follow the herd.”

The speech was not well received. more> http://tinyurl.com/nhkbovb

Updates from CHICAGO BOOTH

SEC dissemination in a high-frequency world
By Dee Gill – The researchers documented a lag between the time certain subscribers to the Securities and Exchange Commission’s direct feed received insider trading news (Form 4 filings) and when that news was made publicly available on the agency’s website. These subscribers are typically hedge funds, investment banks, and news organizations that pay for a direct feed.

The research found subscribers sometimes received, and traded on, the news up to a minute before it became public, as explained by the Wall Street Journal.

The SEC was apparently unaware of the issue, and is now working to fix it. more> http://tinyurl.com/m3eusqv

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Occupational Hazards of Working on Wall Street

By Michael Lewis – “I’m going to Goldman,” is still about as close as it gets in the real world to “I’m going to Harvard,” at least for the fiercely ambitious young person who is ambitious to do nothing in particular.

One moment this herd of graduates of the nation’s best universities are young people — ambitious yes, but still young people — with young people’s ideals and hopes to live a meaningful life.

The next they are essentially old people, at work gaming ratings companies, and designing securities to fail so they might make a killing off the investors they dupe into buying them, and rigging various markets at the expense of the wider society, and encouraging all sorts of people to do stuff with their capital and their companies that they never should do. more> http://tinyurl.com/mrv2zxm

Why The U.S. Remains The World’s Unchallenged Superpower

By Jonathan Adelman – The United States is the world leader and likely to remain there for decades.

It has the greatest soft power in the world by far. The United States still receives far more immigrants each year (1 million) than any other country in the world.

The United States leads the world in high technology (Silicon Valley), finance and business (Wall Street), the movies (Hollywood) and higher education (17 of the top 20 universities in the world in Shanghai‘s Jaotong University survey). The United States has a First World trade profile (massive exports of consumer and technology goods and imports of natural resources).

Right now, there is no one on the horizon that will overtake or even seriously challenge the United States, however ailing, for at least the next decade or two. more> http://tinyurl.com/lnlzv3v

6 lessons the financial crisis should have taught

By Brett Arends – Many people lost their homes, their savings or their jobs. Financial plans were shredded. College funds and retirement accounts were drained. Here are six lessons that we should have learned.

  1. Ignore Wall Street‘s optimistic forecasts
  2. The people in charge don’t know much more than you
  3. Debt is dangerous
  4. We are more risk-averse than we think
  5. Simple is beautiful
  6. Cash isn’t trash

more> http://tinyurl.com/paqqq43

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The NSA Wants America’s Most Powerful Corporations to Be Dependent On It

By Conor Friedersdorf – The federal government, Wall Street, Silicon Valley — all are centers of power. In fact, entities within each sphere are powerful enough, on their own, to warrant constant vigilance. The NSA has constant access to troves of private communications. So does Google.

What ultimately restrains powerful entities is their separateness.

The diffuseness of power in America has long been a strength. But we’re rapidly undermining it. I don’t just mean that we’re increasingly federalizing everything, and concentrating power in the executive branch, though we’ve done both of those things. What I mean is that, during the last two presidencies, a series of events, including the 9/11 attacks and the global financial crisis, have led to increasingly, uncomfortably close ties between Big Finance, Big Telecom, Silicon Valley and Washington, D.C. more> http://tinyurl.com/mjx5rat

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