As background, in the mid 1990’s, I was heading major insurance and brokerage units for Citigroup…two on Wall Street: Citibank Investment Services and Newbridge securities; the later doing execution and clearing for major players in more than 42 countries. In the late 1990’s I was CEO of a publicly traded high tech company trading on the NASDAQ and went through a secondary public offering—investor road shows, working with investment bankers,the works. I’ve also raised private equity for several start-ups and lived with the consequences of investor disappointment. So…I’ve been inside the beast and feel I have an informed perspective on the question…what is Occupy Wall Street all about?
There’s so much smoke in the air, answering the question isn’t easy. Everyone has an under informed, unmovable opinion. What’s worse, they’re all right, they’re all wrong…because every opinion is prima facie. It’s only correct from one local perspective, based on incomplete information, and where the speaker happens to be positioned on the American socioeconomic grid.
Here are the first few grounding points everyone in this discussion needs to have toward understanding the mess we’re in and the anger that’s currently being demonstrated in the streets…and maybe one day helping to unraveling it:
1) When I was taking the cram course for the Series 7 back in 1986, the instructor’s first statement coming out of the gate was “The stock markets are a Ponzi Scheme, if they weren’t the stock markets, they’d be illegal in every state and most countries.” He then spent a full week telling us why, and instructing us on how to navigate those treacherous waters while staying out of jail.
2) The stock markets are secondary markets—nothing more than gaming casinos that started with a few guys hanging out under a tree on Wall Street (what was then a pasture) making book.
a. If you own a common stock, you have no real claim or connection back to the company that issued it, other than at liquidation when you’re standing behind all the other creditors getting pennies on the dollar until there’s nothing left for the common shareholder.
b. A stock’s only true value is if another fool is willing to buy it again in the secondary markets for more than what you paid for it.
c. If you took that stock certificate to most company’s headquarters and wanted to sell it back to them, they’d think you’re nuts and call security—they have nothing to do with it once it’s ‘floated’, other than the periodic hype they are required to produce for Wall Street (i.e. new releases and reporting) intended to keep the action rolling.
d. Be aware, Wall Street doesn’t care if that news is good or bad, as long as it moves the price; the investment community makes money off us regardless of which way the price is moving—stagnation is the only thing they fear.
e. The markets count on new tiers of investors coming in over the top of the current tier to keep the market inflation going (the classic upside down pyramid of a pyramid/Ponzi Scheme).
f. Huge amounts of capital are siphoned out of the investment pool up front by the Wall Street insiders ‘making the markets’. On a $1B funding event, as an example:
i. The intermediary advising on the deal and putting the players together typically get 7% or more–$70 million off the top.
ii. The bankers taking it public typically get 15% or more—another $150 million off the top.
iii. For the investors that brought the $1B into the new tier created by the offering, $220 million or more leaves the pool on day one.
g. The brokers making book so the stock can be traded (yes, that’s what they call it—making book) take more out of the system with every transaction in the spreads they create between bid and ask while actively trading that stock from their own accounts—definite conflict of investor interest—but that’s how Wall Street works.
h. The stock markets are closed systems—for one investor to make a dollar another investor has to lose a dollar, or new money needs to keep coming in to cover the withdrawals (classic pyramid/Ponzi dynamics).
i. There’s no true value created in the stock markets, in spite of what Wall Street pundits and their economists will tell you.
j. With each new tier of stock price inflation, Wall Street functionaries (the ‘house’ in Vegas terms) are siphoning off investor dollars depleting the pool; new money needs to keep flowing in or the tier collapses (classic pyramid/Ponzi collapse, but Wall Street is allowed to just call these events ‘market adjustments’).
3) We used to have laws in place like Glass-Steagall and other restrictions—protections for the public—that have since been removed to the benefit of Wall Street insiders by the politicians they now control.
Here’s where things started to go wrong:
1) Capitalism is not Wall Street, yet over the past few decades we have allowed western capitalism to be defined by Wall Street insiders and their ever expanding need to bump the inverted pyramid (Ponzi scheme) to the next tier to avoid a collapse and allow them to continue ‘skimming’ huge “””profits”””.
2) Here are some of the contributing factors that allowed this to happen and why it continues:
a. With the best of intentions, in the mid 1960s Congress passed social legislation launching the Great Society reforms.
b. What for 150 years had been seen as the ‘privileges’ of living in a free society became ‘rights’ (entitlements) to which that society has been held hostage ever since.
c. For the first time in US history (except in time of war) the law was changed to allow deficit spending to fund these programs, creating an overhang of sovereign debt that just keeps growing and will never go away.
d. As expenses for social programs increased, and the consequences of out-year funding began to loom large, public and pension fund monies began shifting to riskier and riskier investment strategies, moving from safe income producing securities to other equities hoping for higher returns through capital appreciation—like desperate unemployed households going to Las Vegas with the few bucks they have left to roll the dice—Wall Street welcomed them with open arms.
i. Safe investment=I pay you X, you pay me Y at periodic intervals for as long as I hold the stock=fixed income strategy (dividends)
ii. Risky investment=I pay you X and hope some later investor will pay me X++=capital appreciation strategy (pyramid/Ponzi scheme)
e. With these investments of public monies, suddenly city, state, and even federal governments (i.e. legislatures) had a vested interest in keeping the whole thing afloat. The stage was set for a lot of bad behavior at all levels of public administration.
i. Wall Street was now in a position of leverage and could make demands that would have been unconscionable just a few years earlier.
ii. One by one the laws that were created (Banking Act of 1933 and others) to protect all of us from the ravages of market speculation have been repealed or eroded to allow more money to come in—rising market caps giving us a false sense of prosperity—economists going into overdrive to rationalize it for the public, Copernican practitioners at their best.
f. As this shift occurred and Wall Street became the master of our economy, the profile of CEOs running companies shifted to better serve Wall Street interests:
i. CEOs must now be “street credible”—willing to do anything necessary to make the numbers regardless of social consequences—recruited more for their flash and dash than their ability to run a business, and they’re rewarded with exorbitant sums of money for simply creating higher market caps, not anything of rear social or economic value.
ii. Board advocates for the employee and the customer have become almost non-existent…it’s all about serving Wall Street now.
iii. Current CEOs and boards will argue otherwise, but look at what they demonstrate (layoffs, off-shoring, etc), not what they say—there’s a huge gap between their walk and talk. Our unemployment numbers are the smoking gun.
3) There was a time when capital appreciation wasn’t what drove investing, regular dividends where what was expected.
4) There was a turning point in the capital markets several decades ago when capital suddenly became ‘free’ (no requirement for dividends) and all that was expected from a company was to provide periodic news to entice new investors into the current investment tier lifting it to the next level of the upside down pyramid (classic pyramid/Ponzi dynamics).
Here’s the bad news: The solutions won’t come from the current generation of economists, lawyers, legislators, etc—they’re locked into the current paradigms and can’t see beyond the rules and rhetoric they’ve been taught were the truth. They’re Copernicans, trained to believe that the universe (capitalism) revolves around the sun (Wall Street) and all the other rules of our financial and political universe have been distorted to fit into that model. The solutions being thrown around demonstrate the point, all serving special interests and Wall Street—sucker bate for the general public. They stir up emotions and keep us all arguing and chasing the wrong things:
1) Putting billions into stimulus packages hoping that in five years time it might have a positive effect…News Flash: it just fuels the next tier in the Wall Street pyramid/Ponzi scheme.
2) Further deregulation on the speculative activities that got us into this mess in the first place…News Flash: do you really want to take the few remaining shackles off of Wall Street making the looting of pension funds and public monies even that much easier?
3) Sacrificing basic human services like Education, Medicare and Social Security…News Flash: these services are what define any civilized society, without them, what are we…what have we become?
So…where do we place the blame for this mess? Please don’t let me see any pointy fingers…everyone and no one is the answer. It wasn’t any one individual, any one political party, any one administration, any one change in the law or Fed policy, or any single time period…it wasn’t even Wall Street’s fault…they were just being Wall Street. Our current situation was a death by a thousand cuts over a period of four decades, perpetrated by intelligent, well intended people working with the facts they had available to resolve the issues and problems of the day as best they could…the city council that found it easier to move pension funds into riskier investments to make the budget numbers work instead of dealing with labor entitlements head-on; every congressman who over the years voted to deregulate the constraints on market speculation to get PAC money or forestall an ugly ‘market adjustment’ on their watch…the list of contributors is endless.
So…what do we do about it? Anyone who offers you a quick answer to that question is either ignorant, a liar, or a fool. There is no good answer, only least-worst alternatives. It is possible, however, to start a dialog that will eventually lead us out of this swamp back to dry ground, but a number of things need to happen first in order for that to become possible.
1) First, the solutions won’t come from a single set of answers (party platforms), it won’t be about who wins the next election, it needs to be a multi-partisan dialog over time—a journey of collaboration and trust between all Americans.
2) The culture needs to change: the good news is that we are the culture…it changes the instant we change. My entire working life I’ve watched top performing professionals come into a new job and make decisions during their tenure that achieved their numbers and made them look good (layoffs, off-shoring, etc), but left the organization and the economy in worse shape when they left it than when they found it…corporate America has long been in a downward spiral. I cover some of the dynamics and what we might change in the book I’m writing, but we need a generation of corporate executives who are willing to die on the beach in order to leave things in better shape for the next guy coming up behind them…until finally, we’re out of the hole we dug for ourselves. I haven’t seen that breed of executive in a very long time, except maybe in our military services. Every player going forward needs to be willing to work together and, if necessary, die on the beach if we really want to get out of this mess.
In gymnastic, if something is wrong you always start with the head to fix it. If you fix the position of the head, all the other body parts will follow and fall into place. In our current mess, the head of the beast is JOBS…fix that and a healthy economy will follow. But everyone is blaming everyone else for creating the unemployment situation and everyone is expecting the other guy to do something to fix it. The president is blaming congress, congress is blaming the president, business is blaming regulation and taxation, marchers are blaming Wall Street, bla bla bla bla bla—it’s all smoke—opportunists pushing personal agendas. Let me clear the air. Those responsible for getting rid of the jobs in the first place were the CEOs of every company that’s gone through downsizing. When it started, most of their companies were profitable, had healthy cash flows, and good market positions, but somehow they all got into the same downward spiral. Why? Because they’d taken free capital from Wall Street and their stocks weren’t moving—share prices were stagnant—Wall Street needs price movement to make money. So the members of their boards that represent Wall Street started pressing; the CEOs respond by reducing the expense side of the equation with layoffs, squeezing out numbers each quarter that cause a momentary uptick in their stock. But the gratification is only momentary and must be repeated over and over. It’s like a prize fighter trying to make weight by sawing off a leg before they get on the scales, then another leg next quarter, then both arms the next time—until nothing’s left and someone has to come in and suture the parts back on (stimulus), just so that CEO and board can keep repeating the process.
Wall Street is not to blame for this behavior—if you’ve taken money from the devil you’re expected to do the dance. Both the blame for the current economic situation and the only possible solution rests squarely on the boards of each and every company. It’s the board who decides a company’s sources of capital and the consequence of those decisions. What they thought was free money from the capital markets wasn’t free—it comes at a terrible price. It’s the board’s responsibility to balance the risk/earnings equation for a company. It’s the board who hires the CEO. Only the board can decide to dump their current “street credible” flash and dash and replace them with one of the thousands upon thousands of experienced, competent executives sidelined by the current crisis…and for a low to middle six figure salary…not the tens of millions they’re paying their current flash and dash. Only a CEO makes the hiring and firing decisions in a company—not congress, not the Fed, not the President—our government has nothing to do with job creation so let’s stop expecting them to fix the problem! The only people who can create jobs are the CEOs. The performance objectives and compensation of every CEO need to change putting job creation at the top of the order–boards need to change the performance metrics of their CEOs to include more than just increasing a company’s market cap.
The job situation starts to reverse itself the moment boards decide stock price needs to take a back seat for a while, until we get our economy healthy again. The beauty of this approach is that it doesn’t need to wait for any changes in the law, constitution, or bailouts—board members just have to decide one day to start doing it. It’s a self-help program reminiscent of what America used to stand for and can start today with immediate impact. We need a decade where boards focus on producing real value in the marketplace (not market cap) and on as much job creation as their balance sheets can support and still be marginally profitable. I’ll offer more in later communications.
Are there changes in public policy that might help facilitate this shift? Sure, but we would need to challenge or sacrifice some of the sacred cows. Here are a few thoughts from my book:
1) Capital should not be ‘free’…when it is, it incents the wrong behaviors. If all companies were required to start paying dividends to their common shareholders, boards and CEOs would have to radically change the way they currently run their companies; they’d have to get back to creating real value and real profits to service those obligations.
2) In order for banks to operate in most local jurisdictions, they are usually required to demonstrate to local regulators that they are returning something to the communities in which they operate…that’s why they make a big deal of employee participation in things like United Way and matching charitable contributions. Quarterly job creation metrics which boards and CEOs are measured against might modify their current behavior of habitual job elimination in order to make their numbers. It forces them to put more energy into managing the more difficult side of the profit equation…on increasing revenues instead of habitual cost cutting. Most of the layoffs I’ve seen in recent years weren’t trimming fat…they’ve long been cutting away at bone and muscle, often outsourcing or off-shoring core competencies turning what were once great companies into hollow shells.
3) Etc…I have some creative insights into the healthcare debate as well.
In closing my first communication with the group, Occupy Wall Street is a demonstration of public anger, the fallout from everything I’ve described above. The movement has not yet found a voice that can clearly articulate what they’re mad about; they just know they’re mad. And it isn’t going to go away. What we need to do is provide that movement with direction and focus, channeling that energy into constructive solutions to what has become a very complex social problem. With the right dialog, we can provide the required lens. Please join the dialog and add your voice…and encourage others to engage as well. Thanks!