Wall Street WARZONE

Wall Street’s “Too-Political-to-Fail” Investment Bankers: “Greed is Very Good!”

by Paul B Farrell, JD, PhD
| | 4/8/2010

Gordon Gekko is alive and his motto “greed is good,” rules Wall Street more than ever today. And at the top, the investment bankers are the chairmen of the joint chiefs of the central command in the “War to Control the Investor’s Mind.” Wall Street’s bankers are indeed leading the charge, in full command, using all the psych-ops weapons in the behavioral finance arsenal to maximize the effectiveness of their propaganda and hype machine in the battle to capture and dominate the minds of America’s 95 million Main Street investors.

When I joined Morgan Stanley in the early seventies it was a relatively small “family,” several hundred people who knew each other. But today, things are different. Morgan Stanley now has roughly 60,000 employees worldwide, and like all the other giants, only one thing matters, living up to Gekko‘s motto and getting independently wealthy. How else does an investment bank like Goldman Sachs amass $20 billion for year-end bonuses. Very simple: You use the “Iron Law of Wall Street” to maximize the returns to the million or so insiders in Wall Street’s War Machine, increasing their take by reducing the returns to America’s 95 million average investors.

Wall Street bankers, the “commanders-in-chief,” believe they rule by divine right, one even proclaimed it proudly in an ad back in the seventies: “If God Wanted to Do a Financing, He Would Call Morgan Stanley.” And yes, even after the credit meltdown, bailouts and shifting into the shadowy protection of the Fed, they all feel that way. But just who is America’s “new investment banker?” We know the familiar names: Morgan Stanley, Goldman Sachs and so forth. What about the secretive private equity firms, Blackstone, KKR, Apollo and Carlyle? Or, as financial power shifts overseas to oil-rich nations or sovereign states funds and Asia, how do they fit in with Wall Street and its very muddled “private-equity-hedge-fund-mega-merger-buyout-investment banker” trend (or whatever it’s being called lately)? The new trend’s hot, but is it really over? Or starting? Or same-old-stuff, nothing new, just constant flux?

Outside the box—the world’s new “shadow banking system”

Frankly folks, whatever it is—and most of the “little guys” on Main Street don’t have a clue—it’s got a long way to go. We’re way past the leading edge of a whole new chapter in American Capitalism, and the investment bankers are, for now, still in the mysterious epicenter of power, as the Chairmen of the Joint Chiefs in “Wall Street’s War to Control the Investors Mind.” So let’s search for the right label. Seriously, the media’s going bonkers with the name game. The “billionaire-maker trend” is the most descriptive term for me. Why? Because nothing’s really new. This trend is just a sequel to the late-nineties, with a twist. Back then it was IPOs. The little guy got a chance to buy stock, although founders, venture capitalists and investment bankers became the billionaires.

Throughout history, wealth has power over the masses

This new trend also has deep historical roots: Like the de Medici’s power in financing global trade during the Renaissance, Caesar’s financial power in ancient Rome, and JP Morgan’s power financing railroad and steel industries. Throughout history, capitalism has been Adam Smith’s “invisible hand” at work, although individual fingers often shock our conscience with their greed. But unless you’re an Utopian idealist, the truth is: Throughout history 90% of the economic power in every empire, nation and society has been controlled by 10% or less of the people, the moneyed elite, even today in democracies, especially in the American democracy.

The rich rule the poor and middle-classes. And today their lobbyists have all the money necessary buy votes and elect a Congress favorable to the members of the capitalist elite, regardless of which party rules. Here’s an overview of the news media’s discombobulated inability to describe and label the latest version of this massive historic trend—one that describes the evolving new Wall Street investment bankers and their monstrous octopus-like tentacles wrapping around and into all the other twenty five allies and their businesses described in this book:

  • Fortune. “The Expanding Universe”
    Today there are fewer IPOs for the little guys to participate. And Wall Street loves it that way. They don’t want the little guy, gadflies and investor activists messing things up participating in management with the big money, at the front end or anytime. So now the smart money can get rich and become billionaires without sharing with the unwashed masses, by cutting out America’s pesky 95 million individual investors. More money’s been raised in 2006 by Blackstone, Carlyle, KKR, Bain and other private-equity buy-out firms than in the heyday of 2000 mania. These new “investment bankers” control over $1.2 trillion and leverage $26 trillion in derivatives.And their roster of “human capital” is their key to success, including many former political, financial and business power-players who in the past would settle in as board members on IPOs: George H. W. Bush, IBM CEO Lou Gerstner, Nixon’s Commerce Secretary Peter Peterson, British Prime Minister John Major, Ford CEO Jacques Nassar, Secretary of State James Baker, SEC chairman Arthur Levitt, Treasury Secretary Paul O’Neill, to name a few. These are the select few of heavy hitters who can open doors worldwide, earning huge rewards in their retirement.
  • Newsweek: “Bursting Another Sort of Bubble”
    “So is it Bubble Alert Time? Yep.” A bubble of 9,000 hedge funds playing with $1.2 trillion in equity, leveraging huge debt. But like most of the media, they struggle with the new bubble’s name, inventing a clumsy name, “Alternative Assets,” a vague term whose very vagueness is a cover-up for their underlying goal: A massive historic effort to deregulated the securities industry, moving it back into the shadowy pre-1934 underworld where billions and billionaires were created in virtual secrecy.
  • Investment News: “Blaming Sarbox for the slump in IPOs a bum rap”
    Lobbyists point out that five years ago 90% of the dollars raised by foreign companies were raised in the US. Today only 10%. So Treasury Secretary Paulson and SEC Chairman Chris Cox are siding with Wall Street and Corporate America insiders in another aggressive push to kill the disclosure provisions of Sarbanes-Oxley (Sarbox) that were passed not too long ago to protect the little guy from a new round of corporate and fund scandals.A separate report by the Committee of Capital Markets Regulation (a group of special interest insiders which critics call a “wolf in sheep’s clothing”) offers a novel argument: America over-reacted to the Enron-WorldCom scandals. So they say we’re now over-regulating and too much accountability makes Wall Street less competitive globally! Investor advocates say Sarbox’s not the problem. If Wall Street is less competitive, the real culprit is Corporate America’s blind rush to globalization and outsourcing: “You could repeal Sarbox [and big global firms would] still list overseas,” says Barbara Roper, a director at the Consumer Federation of America, because of weaker investor protections on their exchanges.
  • CNNMoney/Fortune: “The private equity boom is breathtaking”
    These guys presented an in-depth survey of the positives: “It’s not just making investors rich, the wave is changing the mindset of corporate managers everywhere,” with results: “Private equity firms returned 22.5% vs 6.6% for the S&P 500, says Thompson Financial.” Here’s how: They attract the best managers with huge incentives, set short-term goals and specific performance measurements, and with minimum disclosure demands, the team focuses on goals without distractions (that often take 40% of a manager’s time) from the SEC, media, politicians, pesky gadflies and investor advocacy groups. Unfortunately, billions are siphoned off by this new ” Wall Street financial entity—and Main Street investors never get to participate as they did in IPOs back in the nineties, only later, after the new insiders take what they can out of the private company and a leaner company is again taken public.
  • BusinessWeek: “Gluttons at the Gate”
    But the other side’s darker says a cover story about negatives. These unregulated deal-makers take advantage of buy-out companies using “slick new tricks” in four ways: Siphoning off huge one-time fees and dividends, ongoing withdrawals, quickly flipping companies like “condo-flippers” during the housing boom. Worse yet, many load up “companies with so much debt that their credit ratings are suffering; some of them even ending up in bankruptcy.” Then the company is finally taken public, after the bankers and buddies skin it.
  • Time: “Below-the-radar investments for the rich”
    Buried in Time’s article is this disturbing fact: “Hedge-fund manager James Chanos of Kynikos Associates started a Washington-based trade group this year.” Rest assured, folks, all 9,000 funds are one massive, well-financed special-interest lobby that can buy whatever Congressional votes they need to assure they’ll not only get a license to continue operating in the shadows making billions, but get even more protection by watering down Sarbox and other legislation.
  • The Journal: Private equity, Wall Street’s New Business Model
    The Wall Street Journal points out that although the Blackstone private equity group’s “business model has transformed Wall Street,” there’s hypocrisy in their taking the firm public. For years their founder Stephen Schwarzman “has been unsparingly calling public stock holding ‘a broken system’ and criticizing the 2002 Sarbanes-Oxley corporate accountability law as having ‘taken a lot of the entrepreneurial zeal out of a lot of corporate managers.’ As for quarterly earnings reports , he has said, create a ‘tyranny’ for public companies. Or maybe Blackstone’s boss smelled the coming peak and was tired after thirty years; just wanted to cash out before the next crash. In any event, these few players are among the joint chiefs in the war to control the investors’ mind.
  • Economist: “Revolution in finance, the dark side of debt”
    The truth is, Corporate America hates the regulatory spotlight, and Wall Street’s investment bankers are helping them avoid it. They hate issuing new securities that trade on exchanges. They hate annual meetings exposed to little shareholders. They prefer private equity financing arranged outside the regulated banking system, plus leveraged credit derivatives traded off the exchanges, which now have a total notional value over $650 trillion. Consequently, in the recent era of cheap money, investment banks and their private equity buddies have been soaking up so much capital there’s little left on the table for normal channels, and Wall Street’s banker in the middle of the transformation.

The Economist calls this historic shift a “revolution in finance.” But it’s much bigger than even they imagine, and in the epicenter are Wall Street’s leading investment bankers. This revolution is part of a larger trend that began in the last decade, a rapid reversal of the early 20th century investor protections that created the SEC, Investment Company Act, AntiTrust Laws, Glass-Steagall Act, and other laws requiring disclosure and oversight. The truth is, Corporate America and Wall Street’s bankers are in a defacto conspiracy to dismantle all these protections, so they can operate in the shadows, as they did pre-1940.

By early 2007, the message was so loud, from so many quarters, you couldn’t miss the relentless hoopla about this new “investment banking/private-equity/hedge-fund/mega-merger/buyout” trend. But that term’s too darn clumsy. The truth is, Wall Street’s in transition to a new world order, increasing, expanding and consolidating its power over the financial markets, over the sources of capital, over the economy, and over the minds and pocketbooks of America’s clueless individual investors. Meanwhile, journalists are struggling to define this new world order: The truth is, they are all part of the emerging new Wall Street “billionaire-maker’s” club … the new American “investment banker.”

FirstPubDate: Dec’06

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