Wall Street con games

...Yet many analysts agree that the instantaneous electronic liquidity of stocks contributes heavily to the market's instability...

...The executives, often big owners of their own company stocks, are seldom reluctant to oblige, but some of them resist sacrificing long-term company self-investment goals for short-term profits and elevated stock prices...

...And all of them should be obliged to asses the human and community costs of "restructuring" before genuflecting to the Street's bottom line...

...General Motors is a case in point...

...Firms in other developed nations raised even less from the market— Germany 3 percent and Japan 7 percent...

...PATRICIA CAYO SEXTON is the author of a dozen books on community education, women, and labor...

...The market's central function is in the resale or trading of stocks...

...Take the matter of corporate mergers and acquisitions, valued at $957 billion in 1997 alone, or 12 percent of the gross domestic product...

...In sum, the market is far from being the real economy's sugar daddy...

...Two other Street matters to mention: market corruption and heightened market-made social inequality...

...George Soros, who brought down the British currency not so long ago, claims, in The Alchemy of Finance, that "it behooves the authorities to design a system that does not reward speculation...

...on the other hand, many do not and should be let alone to pursue the best interests of the company...

...To this end I pass along these brief notes about its flaws and frailties...

...Every six months the Wall Street Journal treats us to a stock-picking conDISSENT / Winter 1999 17 test between darts thrown at stock tables and the picks of a top team of investment professionals...

...Secretary Rubin, former head arbitrageur of Goldman Sachs, insists that the "system" Soros advocates would reduce market liquidity and is not in order...

...Do we have premonitions of what might come...

...It needs new money...

...Having witnessed some ominous gyrations and plunges in the market recently, however, we may be eager to take a closer look...

...The huge bulk of the money goes into resales in the secondary market...

...From 1945 to 1995, U.S...

...The Asian debacle, ricocheting around the globe, is the nearest example of how speculators can benefit from the inability of weaker economies to defend their currencies...

...Another study concluded that many employees have the "investing acumen of raccoons" and are likely to become "roadkill on the retirement highway...

...The same motive applies to the Street, though no investors or watchdogs seem aware of how big the take is...

...Among the estimated $3 trillion or so of pension funds in the so-called securities markets are the felicitously named 401(k) plans, nonguaranteed pensions that depend on limited investment choices offered by employers and then chosen, usually willy-nilly, by employees —who presumably will thereby get into the swing of the market and put whatever they have into it...

...In some respects the market is the dominant leader, entrepreneur, and sometimes bully...

...It's the power, the money power to purchase elections, warp political democracy, and even drive down corporate-gains taxes...

...For the period ending May 29, 1998, the contest ended in a knockout victory for the darts...

...The casino can survive on its usual flow of money...

...Arbitrageurs may also profit by arranging deals and selling to corporate CEOs who want to enlarge their domains and compensation...

...Wall Street arbitrageurs typically play a lead role in these mergers and acquisitions (M&As), buying heaps of the target firm's stock when they think a deal will go through, 18 DISSENT / Winter 1999 then seeing to it that the deal gets done and profiting on the price rise in stock they own...

...It taps giant group-pension funds and initiates individualized ones (personal pensions) and it lusts after market access to the mother-lode of pension savings—Social Security...

...but one thing at a time...

...As currencies plunged, foreign and domestic banks, investors and markets, tumbled over each other, unrestrained, to withdraw funds before local currencies hit bottom...

...It's not the money alone that counts...

...Although these deals do initially raise the merged firm's stock prices, researchers claim that the stock—and profits—soon return to what they would have been without the huge merger expenditure...

...None of the money changing hands in these resales goes to the corporation issuing the stock...

...The downward spiral continued: shortterm debts could not be paid with devalued money, imports could not be bought, needed loans could not be made, and stocks could not be traded and hence plunged...

...now they were fractured...

...Among the signs of the Street's alpha status (and of its big-investor customers) is its success in pressuring corporate executives to lift their short-term profits— no matter what the cost to workers, communities, or consumers—in order also to lift company stock prices...

...The money goes only to the last owner of the stock (and to Wall Street agents handling the resale...

...Undeniably, many inept or sluggish CEOs need a strong push to make them shape up...

...The corruption that may be endemic to the market reminds us again of its kinship to the casino, which may be even cleaner because it is more heavily regulated...

...But what "order...

...Another "plus" of the market is that if the corporation enjoys high and rising stock prices, it can also borrow capital more easily from outside sources...

...Yet heavy risk always hovers over the market—for the gambler, the economy, and the whole society—the familiar reference being the market collapse of 1929 and the Great Depression and shattering world war that grew out of it...

...nonfinancial firms raised 75 percent of their financing internally, 12 percent from intermediaries such as banks, and 13 percent from the market...

...We are aware of the plus side of Wall Street as a place for some people to make a lot of money...

...Financial markets, he says, "are inherently unstable" as they now operate...

...Like the Ponzi pyramid, the Street needs more...

...The list ranges from the bottom to the very top drawer: note the recent conviction of Merrill Lynch, king of brokers, for market misdeeds...

...Meanwhile, we can only wait for the cyclone to hit the American economy...

...But in our euphoria about riches, we have neglected a critical appraisal of the market's more negative functions as an enveloping social institution and as a shaky custodian of much of our nation's wealth...

...As in the casino, luck is the reigning source of rewards...

...A recent book, Street Smarts (written by two business school profs), notes some of the Street's malpractices, as do the regular but hardly illuminating lists of diverse and innovative crimes and misdemeanors perpetrated by Wall Streeters—bad actors who invariably pay fines but are seldom prosecuted or required to plead guilt or innocence...

...Only a small part of the trillions of dollars flowing through the market each year enters the corporate real economy, in the form of new issues sold through the selective primary market...

...The less for government, the more for the market...

...The corporation gets no more resales than Ford Motor would get if I sold my aging Escort to a friend...

...China slipped but did not fall...

...Resales, of course, facilitate the corporation's sales of new stock issues, making them more "liquid" and convertible to cash than hard-to-sell real estate investments, for instance...

...Its currency shunned the global market...

...When they go for the short term, they follow a formula: sharp downsizing, reduced labor costs, union busting, outsourcing, and displacement of workers...

...Other nations are expected to follow suit...

...and any useful endeavors the involved M&A executives might have otherwise carried on also go by the boards...

...Instead, its function more nearly resembles that of the casino or a Ponzi scheme than that of a corporate helpmate...

...This is not to say that GM was a hard sell, but the scenario might have differed somewhat without the pressure...

...For the period ending August 31, 1998, the professionals barely edged out the darts for a loss of 18.8 percent to a 20.4 percent loss for the darts: the Dow fell only 13.1 percent in that period, suggesting that the "experts" are gamblers just like the rest of us, and unlucky ones at that...

...THE STREET'S role in handling ownership shares in the real economy clearly can, and too often does, give it a leg up on those who merely manage companies, a fact that is at last dawning on some socially awake institutional investors...

...The market's impact on economies is global, not only as U.S...

...The financial chaos in the global free market apparently makes it impossible to track the sources of speculative trading, but despite the International Monetary Fund's and Robert Rubin's denial that speculation played a role in Asia (in the absence of hard data, how can they know more than the layperson...

...And in July 1998, South Africa's currency collapsed, brought down by hedge-fund speculators meeting, reportedly, in the dealing rooms of London and New York...

...It needs the Dow to climb, or at least stagger, ever upward as new money comes in to feed it, otherwise gamblers will retreat to places of better, safer returns, however many lectures they get about staying in for the long haul...

...But corporations increasingly do their own financing...

...At some future date—with endorsements from such notables as Senator Patrick Moynihan —federal Social Security, the major guaranteed source of income for retirees, may yet be tapped by the market, but the bipolar behavior of the market may foreclose such a disaster, as should lessons from Britain's failed experience with personal pensions under a Thatcher-market regime—and from free-market Chile under the guidance of its guru, Milton Friedman...

...As for the real economy, an astonishing number of people assume that the market's chief, and very laudable, function is to supply the economy with capital through its sale of corporate stock, the proceeds of which are thought to sustain corporate growth and employment...

...and "gambling" is more descriptive of what goes on in its chambers than "investing...

...nor can its grade-A stock be purchased by foreigners...

...Both the economy and the politics of South Africa had been sound...

...Lucky gamblers can make money in the market, so total abstention is neither avoidable nor effective, especially in a nation of betting addicts (more than $600 billion is spent annually on legal betting...

...Economists labor to quantify (and tame) market risk, but in the view of seasoned bettors like maverick currency speculator George Soros, risk runs wild in the market and can't be captured in a neat statistical formula...

...I'm not sure I would have bought my Escort in the first place had I not known that it could be traded or resold...

...TWO VAST worlds co-exist in the capitalist universe we now know: one, the world of finance (banking, insurance, and securities markets), and two, the corporate "real economy" that produces nonfinancial goods and services and provides the underlying "fundamentals" of the securities markets...

...Then there is the loss of competition among merged corporations to be considered, the cashing-out and closing-out of viable businesses (and their workers) by some acquiring firms—and the jailing of a few junk-bond dealers and inside traders handling these M&As...

...Of course, banking also needs probing by outsiders...

...Rubin does seem to think, however, that some kind of "order" should be brought to the global financial system (sans regulation, of course) and to what is clearly a wild, cyclonic ride of capital around the world...

...The flaws are many, and they affect the real economy, the global economy, and both investors and the general public...

...Given this insatiable thirst, the market strives to sop up all available liquidity from the economy...

...And behemoth Brazil...

...market events are felt around the world, but also in the special impact that one branch of the market—hedge funds and currency speculating—has on the DISSENT /Winter 1999 19 economies of developing countries...

...According to economist Ed Wolff, between 1980 and 1997 the top 10 percent of the wealth class received an 86 percent share of total stock market gains...

...Typically employees are merely mystified by these options...

...As of September 1, 1998, there were $6 trillion in unrealized capital gains in the market, and in the 1990s trillions more were reportedly realized, cashed out...

...Who are the lucky recipients...

...Her forthcoming book is entitled Capital Strategies...

...The authorities have failed, he says, when speculators profit, "but they don't like to admit failure, they would rather call for speculators to be hung from lamp posts than engage in a little soul-searching to see what they did wrong...

...What in the world have these colossal, mysterious, unregulated, and totally un-"transparent" hedge funds been up to...

...In the political arena, it thirsts for the money going into government operations and insists (as Treasury Secretary Robert Rubin has done) that the national budget be balanced or in surplus...

...and hold out in the event of a long strike, which GM did...

...Since mid-1994, 43,400 announced deals came to roughly $3.4 trillion...

...One transparency that is available to us, however, is the simple folk wisdom that we should not leave the foxes to guard the henhouse, nor the free marketeers to determine the shape of the new order...

...Asked why he robbed banks, Willie Sutton reportedly said, "Because that's where the money is...

...it is nonconvertible, cannot be traded or attacked by speculators...

...the victim nations claim that the run on their currency was ignited by speculators who sold short (borrowed high and repaid low) both their nations' currencies and their stocks...

...And when will we start talking about it...

...Of course, the market is not all downside...

...It also found in one large firm that the top quintile of employee investors would retire with 100 percent to 110 percent of preretirement pay, while the lowest quintile would retire with only 10 percent to 15 percent and that the lowest-return receivers were largely the lowest-income earners and those with the top returns largely the top earners...

...In the meantime, millions of workers have been, and are still being, displaced from their jobs...

...Acknowledged by all parties in the big 1998 UAW strike was the pressure put on GM by the Street and big stock investors to drastically downsize its operations—despite solid profits and prior steep downsizing (remember Roger and Me...

...All for the sake of stock prices...

...their stocks rose 28.5 percent while the professional picks were unchanged...

...It was the financial industry that wreaked havoc in Asia...

...20 DISSENT / Winter 1999...

...The dangers remain, and the captains of capital can hardly expect, given the dirty names they hurl at government, to get a public bailout of a market collapse as they did in 1987...

...Yet the underlying fundamentals of most Asian economies were reportedly sound at the time, if slightly tipsy from the shifting weight of global business to China...

...Yes, Horatio, there is more in heaven and earth than is dreamt of in your philosophy...

...The assumption, of course, is off course...

...The giant Long-Term Capital Management hedge fund and its last-minute $3.6 billion rescue by the Federal Reserve, which thought its collapse might bring down the whole house of cards, give us a clue...

...As for inequalities, the frightening movement of national wealth and income to the top few is mainly the market's doing...

...Market operations are in at least one respect more like the Ponzi scheme than the casino...

...Then, of course, there was Russia...

...Does the real economy drive the market or is it the other way around...

...A recent study of high tech firms reported, for instance, that more employees could name the eight states bordering Tennessee than could give the returns on their 401 (k) plans last year...

...Although both the whole and the separate parts deserve more scrutiny than they get—especially from a left whose view of society centers on economic concerns—the part that screams most shrilly for attention these days is the stock market, the main branch of the securities markets and a place whose identity grows even fuzzier as its jurisdiction moves further into banking...