Published CommPro.biz 2014.05.06

Walking the Edge of the Razor Blade

It would be hard to find anything gone farther astray from its intended purpose in our society than our capital markets. The New York Stock Exchange and all other such entities in the world of finance as played in the United States have forgotten their purpose, to create a source of capital for Capitalism. Instead they have succumbed to enriching the players. Those who manage the markets have allowed the investment banks and the traders to run the show. The exchanges’ purpose is to support the companies listed, not the bankers and traders.

The investment banks have strayed far from their purpose to aid in the creation of capital and to “make a market” for those “going public.” They have wandered off into the world of legalized gambling, having convinced the Congress that laws against gambling should not apply to them. It was a easy step from there into the toxic derivative instruments that plunged the world into the recession where we little folk still struggle. Traders serve little or no purpose except to generate fees for the markets and their middlemen. This is especially true of the latest breed, those rigging the markets with penny skimming high-speed trading.

These ills are just the latest in the distortions that have increasingly plagued the markets. The whole crazy focus on “Playing the Market” instead of investing has corporate management aiming for short-term goals instead of long-term growth. All it takes to unseat an otherwise great CEO is an unexpected-could-happen-to-any-company event. Take Target’s CEO Gregg Steinhafel, who joined the giant retailer right out of college and worked himself up the ladder. Since moving into the top job he has been walking the razor sharp edge between upscale department stores and grungy discounters.

Steinhafel has moved Target deftly along, playing the quarterly results game and introducing new merchandise lines without losing the chain’s flair for quality and value. His foray into Canada has not gone as well as hoped, but it’s not altogether bad and it’s far from a bad idea. Then came the massive waiting-to-happen-to-someone breech of Target’s credit card systems. While the chain lost volume, it’s a testament to Steinhafel’s solid management style that Target did not lose more. And truth be known, the fault lies more with our banking sector’s refusal to move to a more secure RFID based credit card system a generation ago with the rest of the world.

We understand that in the current climate Gregg Steinhafel had to pay the price for what happened under his watch. But there is a lesson to be learned here, and every publicly held corporate CEO has to be thanking their lucky stars that they aren’t in his shoes. They should take the ethical and moral high ground and use their clout with the Congress to focus on long-term financial health. The Wall Street anything goes Wild West financial world is bad news for everyone, for the people, for investors, for corporate America.

Published CommPro.biz 2014.04.29

Ethics, Easy, Right? Wrong!!

Nothing to it, ethics is simple. All you have to do, is do “The Right Thing.” The problem comes when “The Right Thing” is not all that simple. It isn’t easy to speak up when your job is on the line. It isn’t even easy to speak up when a friend drops an inappropriate “F-Bomb” or worse makes an always inappropriate racist joke. A lot has to do with personality. Some are gifted with the ability to speak up in such situations. Others, who would never behave unethically, are just not able to speak out against unethical behavior. Some don’t want to alienate anyone.

And while the day-to-day situations we face are important, there are other cases where we must act; especially in the workplace. We have to act if a fellow worker is taking shortcuts that could endanger others, or just not providing service at the level promised. We have to act when we know the company is cooking the books as they did at Enron, or in the Libor scandal. When millions are being ripped off as they were when Enron manipulated energy costs. Even worse, hundreds of millions were hurt when a handful of traders manipulated Libor, impacting every entity and every person paying interest in every corner of the globe.

Some of these examples are illegal, others are unethical. Too often people fail to understand that the ethical line is drawn far from the legal line. Compliance and ethics get mashed together; corporate responsibility for ethics is given to legal counsel. Bad move, attorneys are trained to stay inside legal bounds. Some companies never learn. Hewlett Packard hired another lawyer to oversee ethics replacing Kevin Hunsaker, a lawyer who narrowly escaped jail time when he advised that a witch hunt for a Board of Directors leak was legal. It wasn’t legal and it was miles from ethical. If Hunsaker had based his advice on ethics, it would have saved all those involved worlds of trouble.

High speed trading, the practice of literally manipulating the stock markets could not be more unethical. Its practitioners dart in and out in milliseconds seeking those about to buy a stock, beating them to it and jacking up the price the buyer ultimately pays. Grandma’s pension fund and others lose. These buccaneers of our capital seas cry out that what they do is legal. At the moment so it is, however, it is far from ethical.

It is not always easy to see the ethical line and sometimes it is not easy to hew to that line. It takes practice and sometimes courage. It takes a willingness to risk everything from the loss of a friend to the loss of a career. You will likely find other friends, but you may not find another job. However, if you remain silent to keep a job, you will forever wish you had spoken out. And that job will grow heavy and seem sour every day when you cross over the threshold to your workplace.

Problems We Know How to Solve, “Piracy”

A host of issues plague our nation that I have no idea how to cure. However, I can make some disappear. The ones I have in mind are protected by powerful special interests although it would be hard to find anyone who would consider them beneficial to society or our nation.

Piracy is generally frowned upon at almost all levels in America, indeed in the world. However, the same electronic trading that has modernized our capital markets has opened the way for traders flying the Jolly Roger to make a mockery of the market’s purpose. Be it stocks, bonds, commodities, derivatives (yes there are good derivatives), or anything other financial instrument, there is but one reason for them to exist; to support our economic system. To put the “Capital in Capitalism.”

Unfortunately that purpose has been lost in what has come to be known as the “Casino on Wall Street.” “Playing” the market, as it’s called, has long been a problem. A focus on short term gains has pushed aside solid growth as the players –it would be wrong to dignify them with the title investors– jump in and out of market instruments. But now a new breed of players using sophisticated software and massive computers have created a new way to game the system, High Frequency trading.

Algorithms allow them to race alongside the flow of electronic orders in the markets not unlike the sea going pirates of old that they emulate. They jump in and out in nanoseconds, thousands of times in a few minutes picking up a fraction of a cent here and there. They are daytraders on steroids. High Frequency traders contribute nothing to the companies they trade, worse they drive up prices for legitimate traders looking to improve their long term holdings. Often those entrusted with little folks’ life savings.

How does the Casino on Wall Street get away with gambling that is illegal in New York State as it is in most states? Simple. The United States Congress exempted this form of gambling from State Laws. While that legal loophole should be closed it is not the most effective way to curb this abusive practice.

A change in our tax code would pull down the Jolly Roger. Let’s eliminate all capital gains taxes on profits from investments held for more than twelve months. Tax profits earned from investments held less than a year at 35%; those held less than six months at 50%; those held less than 90 days at 60%; those held less than 30 days at 70%; those held less than seven days at 80%; those held less than 24 hours at 90%; and those held less than an hour at 95%.

High Frequency trading generates as much as 70% of the trading on Wall Street; one of these outfits is reported to make 20% of the daily trades. When you add in the daytraders, there’s not much focused on what should be the primary role of the market, raising capital to support our economy. It’s past time to shut down the Casino and pull down the Jolly Roger. That will take the focus off quarterly returns and allow management to look to long term growth.