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.

Rule Or Ruin?

Many technical advances present two faces. For instance, we have an unrealistic view of life in the “Horse & Buggy” age. In the motor vehicle age we see death and injury rates and imagine that things were better in earlier times. They were not by any measure; horses are difficult to control at best and the drivers then were no more responsible than they are now. The key to reducing the downside of motor vehicles has been to make cars, trucks and big boy’s toys safer through technical improvements. The rules of the road -among other things- have to improve as well.

A new book, Automate This: How Algorithms Came to Rule Our World, came out last week. Former tech journalist Christopher Steiner delves into the rise in the use of this digital tool as well as its impact on our society. In a Fast Company interview, he says he initially planned to just cover the use of algorithms on Wall Street. But from that starting point his research took him out further and further into our lives like the concentric waves when a rock splashes in a lake. Algorithms make Google search work. They drive customer service programs, they are everywhere.

Many of us know that algorithms underlie the high-speed traders who dominate our stock markets these days. They carry out most of the billions of trades the markets see every day. The upside is that the cost of trading has been going down with this volume. One downside is that some high-volume traders use this tool to shadow trades being exercised by pension funds and other wealth management entities. They can race ahead of these traders scooping up their target stocks and selling them to the funds at a higher price seconds later. The effect is to drive up the cost of the securities in your 401(k) or Grandma’s pension plan.  

Worse, they have contributed to the market’s abandonment of its only benefit to society, as a source of capital for business. In fact the markets have veered from the view of arguably the most talented investor in the world, Warren Buffett, who famously said, "The best time to sell a stock is never." Businesses are obsessed with daily prices and struggle to meet the quarterly expectations of the market instead of the long-term goals that could make them hugely more profitable.

There is a simple solution for this problem. Tax capital gains based on the length of time an investment is held. Just for fun let’s say if you hold an investment for twenty years or more, there would be no tax liability. Ten to twenty years, 5%, five to ten years 10%, two to five years 15%, one to two years 25%, one month to a year 50%, one week to a month 75%, less than a week 95%. Better than pirating value from Grandma’s pension, better for investors, better for business and their employees, better for America. Ethically there is no basis for the gambling hall culture on Wall Street; high speed trading is one gaming table we don’t need.

Banking 101

The “K” Street Banker Boys are pouring millions into the political arena in a desperate effort to hold on to the massive Las Vegas style gambling enterprise that characterizes too much of our banking sector today. Banking differs from Vegas in two important ways, however.

1)  When the bets the Wall Street Bankers place against the suckers (AKA “us”)  go against them, they just run to the taxpayers (us) who cover their losses. So they can’t lose. That’s too-big-to-fail banking.

2) The banks managed to get themselves immunized from the state lottery laws, so they can bet on anything. For instance, they could legally bet whether you will make your mortgage payment on time when they have no connection to you or your mortgage.

This set some of our biggest financial institutions onto a path focused on profit and the outrageous bonus structure that this gambling hall culture has spawned. A culture defended haughtily by JPMorgan Chase “Whiner-in-Chief” Jamie Dimon, who chose newspapers to justify the banker’s insane paychecks.

Duded out in his trademark 1950’s “Ducktail” do, Jamie is quoted, “Obviously our businesses have high capital and high human capital,” implying that nobody in newsprint land could compare. What nonsense. And, their capital –cash, that is– is not theirs, it’s ours, the billions we gave the banks to stabilize our economy. So what are they doing with our money? They are rolling the dice again, confident that we will bail them out again, when the dice come up snake-eyes again.

 “Proprietary Trading,” as the bankers like to call it, was a principle cause of the recession. This practice is a recipe for disaster. Here and there the milk-toast mild Dodd Frank Act does have a tooth left. The one dealing with proprietary trading, called the Volcker Rule, is facing a firestorm from the banking lobby. It would pretty much take gambling out of the banking business, push the bankers back into the real world where they can fail, and when they do, fail without taking the country down with them.

When Bill Clinton signed “The Commodity Futures Modernization Act” opening up Wall Street to gambling, Washington unleashed a chain of events that resulted in the collapse of the world economy eight years later. Wall Street began leaping one ethical barrier after another and today everyone but the bankers is suffering.

The folks who actually toil day in and day out for a living, like those struggling to find a workable journalism model, shouldn’t have to put up with sneers from a second-rate punk like Jamie Dimon. Banking at every level has but one reason to exist, to provide the capital that sustains our economic life. Dimon and his lot are clueless when it comes to that kind of banking.