Wall Street: Masters of the Universe

In the words of a Forbes Magazine blog, Where is the Occupy Movement, on November 12, 12: “But this is a protest movement of techno-competent, administratively well-informed, thinkers, do-ers and creators who know the system well and have levers in it. The changes that we need to see happen will come about because of them and what they are capable of, not because of what they object to.”

The Occupy Wall Street protest movement began on September 17,2011 in Zuccotti Park located in New York City’s Wall Street financial district. The Canadian anti-consumerist pro-environmental group and magazine, Adbusters initiated the call to action with the help of Manhattan based public relations firm Workhouse. A serious of events led to media awareness inspiring Occupy protests and movements around the world. Occupy Wall Street helped to highlight the social and economic inequality, greed, corruption and the perceived undue influence of corporations on government particularly from the financial services sector. The slogan, We are the 99%, refers to the income inequality and wealth distribution in the U.S. between the wealthiest 1% and the rest of the population. To achieve their goals, protesters acted on consensus-based decisions made in general assemblies which emphasized direct action over petitioning authorities for redress. Unfortunately, protesters were removed from Zuccotti Park on November15, 2011 with several unsuccessful attempts to re-occupy the area, however protesters turned their attention to occupying banks, corporate headquarters, board meetings, college and university campuses.

“I wish I could afford my own politician.” (from an Occupy DC event near K Street, lobbyist central)
“Free enterprise is not a hunting license.” (Quoting Ronald Reagan)
“Second time I’ve fought for my country. First time I’ve known my enemy.” (Sign held by a soldier in fatigues)
“Due to recent budget cuts, the light at the end of the tunnel has been turned off.”

Several media outlets and politicians have had their fair share to say about the movement. On December 29, 2012 Naomi Wolf of the Guardian newspaper provided government documentation revealing that the FBI and DHS monitored the movement through joint terrorism task force despite labeling the movement peaceful. According to the Village Voice and RT news sits, during an October 6 news conference, President Obama said, “I think it expresses the frustrations the American people feel, that we had the biggest financial crisis since the Great Depression, huge collateral damage all throughout the country … and yet you’re still seeing some of the same folks who acted irresponsibly trying to fight efforts to crack down on the abusive practices that got us into this in the first place.” According to the Los Angeles Times, former Republican presidential candidate Mitt Romney expressed his sympathy saying, “I look at what’s happening on Wall Street and my view is, boy, I understand how those people feel.” Support flooded in for the movement from House Democratic Leader Rep. Nancy Pelosi, Los Angeles City Council, the Executive Director of Financial Stability at the Bank of England and various labor unions, including the Transport Workers Union of America Local 100 and the New York Metro 32BJ Service Employees International Union. Five days into the protest, political commentator formerly of Current TV, Keith Olbermann criticized mainstream media for lack of coverage of the protests and demonstrations. Public opinion did not fair so well as, according to Public Policy Polling, in November of 2011 found 33% of voters supported OWS and 45% opposed it, with 22% not sure. 43% of those polled had a higher opinion of the Tea Party movement than the Occupy movement. In January 2012, a survey by Rasmussen Reports found that 51% of likely voters found protesters to be a public nuisance, while 39% saw it as a valid protest movement representing the people.

However, the Occupy movement has grown internationally with the same concerns and goals worldwide to rid the world of social and economic inequality in order to create an economic and political relationship in all societies less hierarchical and more distributed. The general claim among the movement is that large corporations and global financial systems control the world in a way that benefits the wealthy, undermines democracy and creates an unstable society. The movement found some inspiration from the Arab Spring, the Spanish Indignants and the Tea Party movement. According to the Washington Post, the movement described as a “democratic awakening” by Cornel West, is difficult to distill to a few demands. Financial Times journalist Shannon Bond interviewed one of the informal leaders of the movement to find that the movement takes issue with “the unemployment rate, household debt, student debt, the lack of prospects for people graduating from college and foreclosures.” The global movement is more a global collection of group working toward the same goals under the Occupy name e.g. in the U.S. Occupy Homes dealing with occupying foreclosed homes, disrupting bank auctions, and blocking evictions; Occupy Sandy provided needed relief to New York Area since Hurricane Sandy; Occupy London’s Occupy Economic group hosted and was praised by the Bank of England’s Executive Director for Financial Stability; and Occupy the SEC which monitors US financial regulatory matters and Strike Debt which is raising money to retire defaulted debt. There are numerous non-listed groups and actions.

The movement’s due diligence has led to the social dialogue shifting from deficit to economic problem ordinary citizens face such as unemployment, student and personal debt burdening the working and middle class, income inequality, lack of fairness and undeserved wealth and other major social inequality such as homelessness. While some of the movement has died down over the past year or so, the movement has had some political impact by altering the terms of the debate leading to some reform and political discussion about such issues and their impact e.g. the Spanish government setting new limits on banks (The Economist), shaping the global policy response to the Late-2000s financial crisis,  the House Judiciary Committee introducing the “Outlawing Corporate Cash Undermining the Public Interest in our Elections and Democracy (OCCUPIED) Constitutional Amendment,” which would overturn the Citizens United Supreme Court decision recognizing corporate constitutionally protected free speech rights and would ban corporate money from the electoral process, former U.S. Vice President Al Gore calling on activists to “occupy democracy”, explaining that “Our democracy has been hacked. It no longer works to serve the best interests of the people of this country” and even influencing the President’s January 2012 State of the Union address.

“On Wall Street he and a few others – how many? three hundred, four hundred, five hundred? had become precisely that… Masters of the Universe.” – Tom Wolfe

One of the greatest scenes in film history and a speech that still resonates with today’s financial world, Wall Street released in 1987, directed by Oliver Stone and written by Oliver Stone and Stanley Wieser tells the story of Bud Fox (Charlie Sheen), a young stockbroker, desperate to succeed becomes involved with his hero, Gordon Gekko (Michael Douglas), a wealthy, unscrupulous corporate raider. Stone was inspired by his father, Lou Stone, a stockbroker during the Great Depression. The character of Gekko is said to be a composite of several people e.g. Owen Morrisey, Dennis Levine, Ivan Boesky, Carl Icahn, Asher Edelman, Michael Ovitz, Michael Milken, and Stone himself, while the character of Sir Lawrence Wildman was modeled after prominent British financier and corporate raider Sir James Goldsmith. The film over the last 26 years or so has come to be seen as the archetypal portrayal of 1980s excess with Gekko declaring that “greed, for lack of a better word, is good”. The film has also inspired people to work on Wall Street with Sheen, Douglas and Stone commenting that over the year people still approach them and say that their characters have inspired them to become stockbrokers. While the first film was inspired by insider trading scandals involving real life arbitrageur Ivan Boesky, the second film, Money Never Sleeps, borrows from contemporary events where Gekko, emerging from jail and looking to get back on top, finds that the glamor and prestige of Wall Street has all but gone in the eyes of the public that has lost jobs and homes in the most devastating financial crisis since the 1930s. Wall Street brings to light the morality conflict with wealth and power contending with simplicity and honesty. As the great moral conflict plays out in the movie, some great one liners emerge from none other than the father of all evil, Gordon Gekko:

“It’s not a question of enough, pal. It’s a zero sum game, somebody wins, somebody loses. Money itself isn’t lost or made, it’s simply transferred from one perception to another.”
“What’s worth doing is worth doing for money.”
“There’s no nobility in poverty.”
“We’re all just one trade away from humility.”
“It’s not about the money – It’s about the game.”
“Idealism kills every deal.”
“Money is a bitch that never sleeps!”

Warren Buffett known as the “Wizard of Omaha,” “Oracle of Omaha,” and the “Sage of Omaha” born August 30,1930 is known as the most successful investor of the 20th century adhering to the value investing philosophy and living a frugal life despite his immense wealth. Buffet is the primary shareholder, chairman and CEO of Berkshire Hathaway consistently ranking among the wealthiest in the world and named the one of the most influential people in the world by Time Magazine. In addition, to being a business magnate and investor, he is also a notable philanthropist pledging to give 99% of his fortune to philanthropic causes primarily through the Gates Foundation. On April 11,2012 he was diagnosed with prostate cancer and completed the treatments in September 2012. According to Forbes and the New York Times, Buffett states that he only paid 19% of his income for 2006 ($48.1 million) in total federal taxes, while his employees paid 33% of theirs despite making much less money. He questioned how this was fair or right even adding, “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.” The Buffett Rule, proposed by President Obama in 2011, is named after Warren Buffett, who publicly states in early 2011 that he believe it was wrong the rich like himself pay less in federal taxes than the middle class in proportion to income and voiced support for an increased income tax on the wealthy. The rule would have implemented a higher minimum tax rate (30%) for taxpayers in the highest bracket (about 0.3%), those making a million dollars a year, to ensure they do not pay a lower percentage of income in taxes than less affluent Americans. The rule was not part of the President’s 2013 budget proposal, however the rule was submitted for deliberation as US Senate Bill S. 2059, Paying a Fair Share Act of 2012. Unfortunately on April 16, 2012, the bill received 51 affirmative votes, but was stopped by a Republican filibuster that required 60 votes to proceed to debate and a vote on final passage.

Unlike the Gordon Gekko archetype which represents the wealth and power aspect of the morality conflict, Warren Buffet represents a glimmer of the simplicity and honesty buried deep in Wall Street providing us with the following tidbits of wisdom:

“A public-opinion poll is no substitute for thought.”
“Chains of habit are too light to be felt until they are too heavy to be broken.”
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
“Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.”
“Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
“When you combine ignorance and leverage, you get some pretty interesting results.”
“You only have to do a very few things right in your life so long as you don’t do too many things wrong.”

The Wall Street financial district of New York City named after and centered on the eight block long 0.7 mile long street runs from Broadway to South Street on the East River in Lower Manhattan. Over the years, the term now symbolizes the financial markets of the United States, the American financial sector or signifying New York based financial interests. Wall Street is home to the New York Stock Exchange which is the world’s largest stock exchange by market capitalization of its listed companies with several other exchanges having their headquarters in the area including NASDAQ, the New York Mercantile Exchange, the New York Board of Trade, and the former American Stock Exchange make New York City one of the world’s principal financial sectors. The origins of Wall Street can be traced to the brushwood barricade erected by Peter Stuyvesant along the northern boundary of the New Amsterdam community of Dutch settlers in Lower Manhattan in 1653. The wall was meant to protect the early settlers against attack from Lenape Indians, New England colonists, and the British (who dismantled it in 1699). The subsequent growth and lore of local merchants and financiers imbued this simple geographic setting with its modern significance — the story of the formation of a world financial center, the powerful headquarters of U.S. financial capital according to the International Encyclopedia of the Social Sciences. The purpose of the wall was to protect against attacks from the Lenape Indians, New England colonists and the British who dismantled it in 1699.

The resulting growth and appeal of local merchants and financiers gave this simple setting its modern significance making it the world financial center and a powerful financial capital. Wall Street’s early years were rooted in the gatherings of securities and commodities traders during the Revolutionary War. These meeting led to the development of financial techniques for loans and shares out of the need of mercantile trade similar to the Dutch exchange of the 1600s. The consolidation of the New York exchange accelerated with the government demand for new sources of capital to bail out securities issued ti finance the Revolutionary War. The Continental Congress in New York issued $80 million in government bonds under Alexander Hamilton to redeem war debts at face value leading to speculators profiting from leaked news of the bailout plan with insider trading of the government paper. The eighteenth century saw trade focused on government debt and state licensed monopolies. During the nineteenth century, railroad shares and bonds fueled the market and its proliferation of trading instruments such as the monopoly on trade activity due to exclusion of informal curb participants and preventing the growth of rival exchanges. The Buttonwood Agreement of 1792 and the creation, due to the financial crisis of the War of 1812, of the New York Stock Exchange and Board in 1817 restricted membership to the exchange, enforced full commissions and secrecy and moved rented brokers into office spaces. The board turned a handsome profit financing the Erie Canal. The 1840s to the 1860s see growth in the securities issues associated with the railroad stock. A major speculative boom due to Civil War finances spawned demand for new manufacture and mining resulting in a swelling trade in government debt thus fueling attempts to establish rival exchanges such as the Open Regular Board in 1864. Unable to remove them from the trade arena, the two merged in 1869 into what is now the New York Stock Exchange with 1,060 founding members.

The twentieth century saw its fair share of growth and turmoil culminating in one of the blackest days in financial history that led to the Great Depression. In 1907, due to financial trouble and the growing concentration of wealth on Wall Street, Congress reacted with the Pujo hearings of 1907 resulting in Wall Street being implicated in the monopolistic practices of the money trusts that facilitated industrial concentration under the control of a few corporations. During the 1920s, Wall Street flourished as a financial center promoting large corporations with distributed ownership and professional management with a large amount of capital. The fragile foundation crumbled with the Black Thursday stock market crash of October 24, 1929 and the subsequent Black Tuesday sell off panic that began on October 29. The collapse prompted a wave of regulatory legislation from the  1933 Bank Act to the creation of the Securities and Exchange Commission in 1934. In the world of finance, Wall Street’s business activity produced a speculative financial frenzy with capital gains before enterprise setting the state for a debt deflation crisis bringing down more than nine thousand banks triggering the onset of the Great Depression of the 1930s. Throughout the 1930s Wall Street exchanges shrunk from losses and trading in post World War II was lackluster until the 1950s, though the shares traded in 1950 were 525 million for the year which is only two hours of an average day of trading in 2005. Wall Street was able to emerge from the crisis due to its geographic and financial monopoly on U.S. finances due to the dense area of real estate on Wall and Broad Streets that came to include the New York and American stock exchanges, member firms, over-the-counter firms, government securities dealers, major banks and trust companies, the New York Federal Reserve Bank, and countless insurance, utility, mercantile, and commodity exchanges. The retrading not new capital is what came to define Wall’s Street’s development role.

In the political economy, Wall Street became the financial epicenter for the world where the power to create or undermine nations, with the U.S. national interest in mind, is prevalent. One notable speculator, J.P. Morgan, helped in the secession of Panama from Colombia and its birth as a nation in 1903 which ensured huge profits for the U.S. in the building of the Panama Canal and U.S. controlling interest in the Canal Zone, according to Ovidio Diaz Espinoza’s 2001 book, How Wall Street Created a Nation. When Colombia refused to ratify the Hay-Herran Treaty threatening the rights to build the canal, Wall Street financiers funded an uprising by Panamanian nationalists resulting in President Theodore Roosevelt deploying U.S. troops to the region. Nineteenth center political critics blamed Wall Street for advancing the monopoly powers of national capital and imperialist extension. The global reach of Wall Street’s agenda and contributions to financial instability can be summed in the Wall StreetTreasuryIMF complex” where large brokerage firms want to have access to global capital through enforcement of complete capital convertibility, while the International Monetary Fund asserts its role as a global lender of last resort in the wake of impending crises.

The destruction of Manhattan’s World Trade Towers on September 11, 2001, solidified to the world that Wall Street was the symbolic center of financial power thus vulnerable to attack. A previous incident occurred on September 6, 1920 when a bomb exploded outside the NYSE building killing 32 people, while the post 9/11 landscape has led to a scattering of the financial industry outside of Lower Manhattan by displacing fifty thousand financial service employees to new office spaces in Midtown Manhattan and nineteen thousand across the river to New Jersey. Over thirteen million square feet of class A office space were completely destroyed, and insurance industry claims from property and life topped $40 billion. Despite all the loss and turmoil, Wall Street continues to dominate the financial landscape even with new electronic technologies. In 2006 the NYSE acquired Archipelago Holding, a rival exchange with only electronic traded funds, and took on the all electronic NASDAQ to consolidate control over Internet trading. The now NYSE Group merged then with Euronext to make the first transatlantic exchange.

As in the Great Depression, the Great Recession or Lesser Depression led to similar results as people became unemployed with soup kitchens, bread lines, mass foreclosures and falling prices. The Regan years saw a renewed push for capitalism and business with deregulation of some industries such as telecommunication and aviation leading to an upward growth in the economy. A New York Times report described that due to the overwhelming growth and flow of money during these years led to a drug culture with cocaine use rampant. In 1987, the stock market drop dramatically resulting in a brief recession as some 100,000 jobs were lost in Lower Manhattan. The day of the drop, October 20, was marked by shocked and disbelief with stock exchange employees trying to maintain orderly trading. During the recession of 1990-1991, many buildings were left vacant downtown with some completely empty, however in 1995 city authorities created the Lower Manhattan Revitalization Plan  offering incentives to convert commercial properties to residential use. When the World Trade Center was destroyed on September 11, 2001 it left an architectural void as many building since the 1970s took inspiration from it. Some reports estimated that Wall Street lost 45% of its best office space and crippled the communications network. The attack prevented many financial firms from moving to midtown causing a loss of business for Wall Street due to relocation and decentralization of establishments. After September 11, the financial services industry saw a downturn with sizable drops in year-end bonuses of $6.5 billion according to the state comptroller’s office. The Guardian reporter Andrew Clark describe 2006 to 2010 as “tumultuous” due to the heartland of America dealing with high unemployment around 9.6%, the average housing price falling from $230,000 in 2006 to $183,000 and the national debt increasing to $13.4 trillion foreshadowing what was to come, however the economy was starting to make a come back. Beginning in September 2011, demonstrators upset with the financial sector protested in parks and plazas around Wall Street. Wall Street has invaded popular culture for many years making appearances in everything from movies to television to video games to literature to transportation.

In May of 2012, The Atlantic and its senior-editor Richard Florida selected their list of the most economically powerful cities in the world based on a surveys on global metro powerhouses. The ranking is as follows:

  1. United States, New York City
  2. United Kingdom, London
  3. Japan, Tokyo
  4. Hong Kong, Hong Kong
  5. France Paris,
  6. United States, Chicago
  7. Singapore, Singapore
  8. China, Shanghai
  9. United States, Los Angeles
  10. Switzerland, Zurich

New York Times analyst Daniel Gross (The Capital of Capital No More? published October 14, 2007) wrote:

“ In today’s burgeoning and increasingly integrated global financial markets — a vast, neural spaghetti of wires, Web sites and trading platforms — the N.Y.S.E. is clearly no longer the epicenter. Nor is New York. The largest mutual-fund complexes are in Valley Forge, Pa., Los Angeles and Boston, while trading and money management are spreading globally. Since the end of the cold war, vast pools of capital have been forming overseas, in the Swiss bank accounts of Russian oligarchs, in the Shanghai vaults of Chinese manufacturing magnates and in the coffers of funds controlled by governments in Singapore, Russia, Dubai, Qatar and Saudi Arabia that may amount to some $2.5 trillion. –Daniel Gross in 2007

Kevin Zeese and Margaret Flowers’ article, The Plague of Wall Street Banking (March 2013), highlights the consequences of inaction by the government in response to the root cause of the financial collapse which as many know was due to risky speculation and securities fraud of the big banks. The government instead punished the people with cuts in benefits, taxing their savings and demanding people to work harder for less. In the United States, no criminal prosecution for securities fraud has come to pass as ,according to the Justice Department, the big banks are too big to jail because it would jeopardize the stability of the banking system, while, according to financial fraud investigator Bill Black, the SEC cannot institute fines due to the same problem. As the article explains:

“‘The art is to make the number sound large to fool the rubes, but to ensure that the fine poses only a modest inconvenience to our ‘most reputable’ fraudulent banks.’ So, the SEC trumpets ‘more than 150 firms and individuals, with sanctions totaling $2.7 billion.’ Black points out that this number sounds big, but it isn’t compared to the losses caused by the fraud epidemic in the US which are well in excess of $15 trillion.  A trillion is a thousand billion. Are we, ‘the rubes’ or do we know that our government is in cahoots with big finance?”

As most people can attest to the knowledge that big banks have conducted nefarious activities for a long time including but not limited to fraud. According to the article, J.P. during the end of March had its financial fraud and utter defiance of regulation and policy center stage when the Senate Banking Committee used a 300 page indictment document the $6.2 billion London Whale scandal tracing it all the way to the top, CEO Jamie Dimon, and showing how the bank lied to bank examiners and investors. The big bank will probably suffer some sort of investigation, fines and have to pay out a large monetary settlement but prosecution by the Department of Justice is slim states experts. Goldman Sachs lost in court the same week, when the United States Supreme Court refused to overturn a Court of Appeals decision forcing the bank to defend a civil suit by investors claiming securities fraud. The second largest bank in Germany escape prosecution after offering a job to an IRS agent who cut its tax burden. The public was told that Commerzbank paid $210 million in tax liability which is only 62% of what it owed due to an IRS officer making an agreement with the bank for a job. The agent pled guilty to charges.

Europe is a prime example of what happens when government fails to confront the problem as the people will pay and the economy will collapse into depression making many wonder if something similar will happen in the U.S. The country of Cyprus was built up as a big banking area when it all went sour and they went to the European Union for a bailout. The E.U. skirted the issue but agreed to the bailout with very strict stipulations requiring a one-off 10 percent tax on savings over 100,000 euros and a 6.75% tax on small depositors, while senior bank bondholders and investors in Cyprus’ sovereign debt will be untouched. As a result, people tried frantically to take their money out of the banks in Cyprus. The wider effect could be people taking their money out of the bank and keeping it under the mattress if the banks are viewed as unsafe with a greater widespread potential across the European Union. Another run on banks in Cyprus or across the European Union could cause even more problems for an already weakened system. Some good news though, on Tuesday March 19, 2013 the Parliament in Cyprus rejected the tax on bank accounts after mass protest by the people leaving Cyprus with no bailout and no money to contribute to a bailout. Lots of questions are left unanswered to what Cyprus will do, but what is certain for now is the banks in the country will remain closed until a solution is reached. To add fuel to the fire, the leaders of the European Union, the International Monetary Fund and Germany will stay with the current demand for more austerity and greater productivity with lower wages and greater output, while urging the bailout of the banking system which remains weak. The same leadership knows that such a request will incite a social upheaval as Standard and Poor’s warns the same. To summarize, Southern Europe is already in a depression yet Germany, EU and IMF want to squeeze more money out of the impoverished people.

Back in Washington, the two parties continue to talk about further budget cuts or austerity measure that will hurt the old, the poor, the young and the working class, while completely disregarding what the problem in fact is.  While austerity seems to be the only solution coming out of Washington, they remain silent about big business interests with another year of big tax avoidance. According to Zeese and Flowers:

“…Paul Buchheit summarizes ‘For over 20 years, from 1987 to 2008, corporations paid an average of 22.5 percent in federal taxes. Since the recession, this has dropped to 10 percent – even though their profits have doubled in less than ten years.’ He highlights the worst of the worst. On top was Obama’s jobs czar, General Electric.

There is some sanity, but not much, among the US financial elite. Dallas Fed Chairman Richard Fisher told the Conservative Political Action Conference that it was time to break up the big banks and end the crony capitalism that protects them.  Liberal Democrat Sherrod Brown has introduced a bill to do just that. Of course it is opposed by the administration so it will probably not go anywhere.

Instead, President Obama is pushing the anti-democratic Trans Pacific Partnership which is a gift to the big banks and other transnational corporate interests. For the big banks it will require countries to let capital flow in and out without restriction, not allow the banning or regulation of risky investments like derivatives and credit-default swaps and will prevent the formation of much-needed public banks. Our Wall Street government continues to serve Wall Street first at the expense of the people’s necessities.”

This all adds up to one inevitable truth: the banking system needs a makeover to include but not limited to hold security fraud violators responsible, break up the big banks, support community banks and credit unions, create public banks at state and local level and make the Federal Reserve responsible to the American people and democracy. As a result, democracy would serve the interest of the people and not the interest of a few. If the government continues to allow Wall Street centered banking to infect not just the U.S. but the global economy, then the consequences will continue to be dire with the future looking less bright and more like Cyprus.

On August 8, 2011, Tejvan Pettinger publishes an article, How does the stock market affect the economy?, explaining the correlation between a falling stock market and a subsequent weaker and struggling economy as follows:
1. Wealth Effect

“The first impact is that people with shares will see a fall in their wealth. If the fall is significant it will affect their financial outlook. If they are losing money on shares they will be more hesitant to spend money; this can contribute to a fall in consumer spending. However, the effect should not be given too much importance. Often people who buy shares are prepared to lose money; their spending patterns are usually independent of share prices, especially for short-term losses.”

2. Effect on Pensions

“Anybody with a private pension or investment trust will be affected by the stock market, at least indirectly. Pension funds invest a significant part of their funds on the stock market. Therefore, if there is a serious fall in share prices, it reduces the value of pension funds. This means that future pension payouts will be lower. If share prices fall too much, pension funds can struggle to meet their promises. The important thing is the long-term movements in the share prices. If share prices fall for a long time then it will definitely affect pension funds and future payouts.”

3. Confidence

“Often share price movements are reflections of what is happening in the economy. E.g. recent falls are based on fears of an U.S. recession and global slowdown. However, the stock market itself can affect consumer confidence. Bad headlines of falling share prices are another factor which discourage people from spending. On its own it may not have much effect, but combined with falling house prices, share prices can be a discouraging factor.”

4. Investment

“Falling share prices can hamper firms ability to raise finance on the stock market. Firms who are expanding and wish to borrow often do so by issuing more shares – it provides a low-cost way of borrowing more money. However, with falling share prices it becomes much more difficult.”

5. Bond Market

“A fall in the stock market makes other investments more attractive. People may move out of shares and into government bonds or gold. These investments offer a better return in times of uncertainty. Though sometimes the stock market could be falling over concerns in government bond markets (e.g. Euro fiscal crisis).”

Pettinger explains the real cause of the Great Depression was widespread banking failure throughout the country in 1930 due to the collapse in confidence and a decline in money supply resulting in a decline in overall National Output e.g. massive unemployment resulting in a decrease in production and GDP. Today, the falling stock market shares many similarities due to the weakness of the financial markers thus the greater economy, while the global downturn is expected to be much worse reducing the profitability to firms therefore dividends and the uncertain future of the banking system despite attempts to bail them out has caused people to move their money to somewhere safer.

Looking at the stock market as recently as March of 2013 one would find almost a miraculous recovery from a few years ago, yet the economy is still plagued with massive unemployment, people earning the same as five years ago and foreclosures. According to Neal Irwin, The stock market is back, but the economy isn’t. Blame Congress., there exists a trillion-dollar gap in what the U.S. economy could be making and what it is actually producing. As Irwin explains, the efforts initially in response to the recession of late 2008 was shared by everyone as:

“Congress and the new Obama administration enacted an $800 billion stimulus act. The Federal Reserve unveiled zero interest rate policies and pledged to pump more than $1 trillion into credit markets. The Treasury used its emergency bailout dollars to pump money directly into banks. It was a strategy of throwing everything the government had at the problem and hoping that it would work—and indeed, hoping that the different prongs of the crisis-response would complement each other and be greater than the sum of their parts. (For example, that efforts to repair the banking system would make monetary policy more effective, and vice verse).”

Unfortunately after all the initial hoopla died down the United States is still left with the same problems as before except the banks are stronger and the everything but the kitchen sink plan has led to Congress sitting on their hands leaving the Federal Reserve to take unconventional steps. Irwin believe this is where the disconnect between financial markets and how the economy feels as the Federal Reserve operates with exceptional blunt tools using its great power to control the flow of money into the economy yet has little control over where it goes. The Federal Reserve to date under quantitative easing policies is pushing an extra $85 billion per month into the financial system e.g. treasury bonds and mortgage back securities in addition to the $2 trillion already invested. The result of the Fed buying these securities forces investors to buy something else like corporate debt or invest in the stock market propping up private asset prices making it cheaper and more appealing for companies to invest. Higher prices for stocks and other assets lead to the wealth effect where people who own those securities feel richer and more willing to spend. Unfortunately, the effects primarily benefit the wealthy as, the Fed’s Survey of Consumer Finances reports, the gap is more dramatic when one examines the value of their holdings e.g. stocks and retirement accounts with the top 10% of income earners having a median value of $277,000 in their retirement accounts compared to only $22,800 in middle-income retirement accounts.The Fed can only do so much to bring down unemployment and it just happened to benefit those with financial assets, while Congress has the power to do something to endure the policies of the Fed benefit everyone. One example of Congress in action was the payroll tax holiday where the government due to ultra low borrowing costs enacted by the Fed increased Americans’ after tax paycheck by 2% according to Irwin. Unfortunately, in order to finance Social Security the program has to be sacrificed, however during the fiscal cliff negotiation no other policy to put money into the hands of ordinary citizens was even considered. The Fed can only decide whether to make money cheaper or more expensive, it is up to the government entities in Washington to decide what to do with it in order to strengthen growth.

An important aspect of the stock market and subsequent effects on the economy comes in the form of stock market crashes and bubbles. A stock market crash occurs when a sudden dramatic decrease in stock prices, e.g. steep double-digit percentage losses in the stock market index over a period of several days, across a significant cross-section of a stock market results in loss of paper wealth. Crashes are different from bear markets due to the panic selling and abrupt dramatic price declines that occur rather than periods of decline measured over months or years. Crashes often follow speculative stock market bubbles, a type of economic bubble, taking place in a stock market when market participants drive the prices of stocks above their value in relation to the system of stock valuation. Stock market bubbles frequently produce hot markets in Initial Public Offerings due to investment bankers and clients seeing opportunities to float new stock issues at inflated prices. As a result, IPO markets misallocating investment funds to areas of speculative trends rather than to enterprises generating longstanding economic value. The two most famous bubbles of the twentieth century, the bubble in American stocks in the 1920s just before the Great Depression and the Dot com bubble of the late 1990s were based on speculative activity surrounding the development of new technologies. The 1920s saw the introduction of a variety of technological innovations including radio, <span automobiles, aviation and the deployment of electrical power grids, while the 1990s was the decade when Internet and e-commerce technologies emerged. Stock market crashed are social phenomena where external economic events combined with crowd behavior and psychology causes market participants to sell therefore drive more to sell as well.

As of recent, the cumulative events of  the global financial crisis and Black Monday, 8 August 2011, have led to global economic downturn. Many economist consider the financial crisis of 2007 and 2008 the worst financial crisis since the Great Depression of the 1930s calling it the Lesser Depression or the Great Recession as the consequences have been and still are dire. It resulted in a threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world, while the housing market also suffered, resulting in evictions, foreclosures and prolonged unemployment. The crisis led to failure in key businesses, declines in consumer wealth estimated in trillions of US dollars, and a downturn in economic activity leading to the 2008–2012 global recession and contributing to the European sovereign-debt crisis. The active phase of the crisis according to Wikipedia manifested in the liquidity crises dating back to August 7,2007 when BNP Paribas terminated withdrawals from three hedge funds citing “a complete evaporation of liquidity”. The bursting of the housing bubble which peak in 2006 caused the values of securities tied to the U.S. real estate pricing to drop damaging the financial institutions globally. Question regarding bank solvency, declines in credit availability and damaged investor confidence impacted global markets, where securities suffered large losses during 2008 and early 2009. Economies has slowed worldwide as credit tightened and international trade declined as governments and the central banks responded with fiscal stimulus which has unfortunately done nothing to pull many countries including the U.S. out of recession and forcing many to resort to austerity measure as a last resort when stimulus flopped. Critics argues that the credit rating agencies and investors failed to accurately price the risk of mortgage financial products and governments did not adjust regulatory practice to address the market. In the aftermath, workable fiscal and monetary policies were adopted to lessen the shock yet did not prevent Black Monday where U.S. and global markets crashed following the Friday night credit rating downgrade by Standard and Poor’s of the United States sovereign debt from AAA, or “risk free”, to AA+. By market close, “the Dow Jones Industrial Average lost 634.76 points (-5.55%) to close at 10,809.85, the NASDAQ Composite Index fall 174.72 points (-6.90%) closing at 2,357.69, the S&P 500 Index shed 79.92 points (-6.66%), and the New York Stock Exchange lost an astounding 523.02 points (-7.05%), finishing the day at 6,896.05. Both the Dow Jones Industrial Average and the NASDAQ Composite Index ended the day at their session lows”, Wikipedia reports.

Michael Snyder said it best in his April 14, 201o article, 11 Examples Of How Insanely Corrupt The U.S. Financial System Has Become, which was published in the Business Insider giving 11 examples of corruption and the chaos they have brought:

Price manipulation of gold and silver: “An industry insider “whistle-blower” has come forward with “smoking gun” evidence that major financial institutions have been openly and blatantly manipulating the price of gold and silver. But so far those who are supposed to be regulating these firms have been sitting back and doing nothing about it.”

“Gold deposits” with no relation to actual gold: “It has also now come out that most “gold” that is traded on the markets is not backed by the actual metal itself. For years, most people have assumed that the London Bullion Market Association, the world’s largest gold market, had actual gold to back up the massive “gold deposits” at the major LBMA banks. But that is not the truth at all. Industry insiders are now revealing that LBMA banks actually have approximately a hundred times more gold deposits than actual gold bullion. When most people think they are buying gold what they are actually buying is pieces of paper that say that they own gold. Meanwhile they are being charged huge storage fees to store the gold.”

No punishment for AIG-destroyer Joe Cassano: “The guy who helped bring down AIG is going to get off scott-free and will be able to keep the millions in profits that he made in the process. It must be nice to be him.”

Back stab hedging at Goldman Sachs: “Goldman Sachs is denying that it “bet against its clients” when it changed its position in the housing market in 2007. But the reality is that is exactly when they did and a lot of things that are even worse than that. The corruption at Goldman Sachs is very deep and very entrenched, but they will never be fully investigated because they have such close ties to the U.S. government.”

Predatory deals against American cities: “LA’s desperate mayor Antonio Villaraigosa-It is being alleged that the biggest banks in the United States are ripping off American cities with the same predatory deals that brought down the financial system of Greece. Of course the big banks will rip off just about anyone these days if they think they can get away with it.”

“Repo 105”: “Several major Wall Street banks are being accused of using accounting techniques similar to those utilized by Lehman Brothers in its final days to mask the size of their balance sheets at the end of reporting periods.”

The Federal Reserve Ponzi scheme: “The Federal Reserve bought up the vast majority of U.S. government debt in 2009. Many analysts claim that this is the same as “printing money out of thin air”, while others are openly calling it a Ponzi scheme.”

Even the Fed bets on state defaults: “It turns out that the Federal Reserve holds credit-default swaps on the debt of Florida schools, and on debt owed by the states of California and Nevada. So the Federal Reserve would profit if one of those states defaulted on its debt. Talk about a conflict of interest.”

Record bonuses during and after the financial crisis: “Executives at many of the firms that received large amounts of money during the Wall Street bailouts are being lavished with record bonuses as millions of other average Americans are suffering intensely. Even the CEOs of bailed-out regional banks are getting big raises.”

Invasive data mining by credit card companies: “We may not know much about what is going on inside some of these banks, but they sure do know a lot about us. For example, it has been revealed that the data mining operations of the major credit card companies are becoming so sophisticated that they can actually predict how likely you are to get a divorce.”

A national debt that dooms our children: “But the biggest financial fraud of all is being committed against the American people. The exploding U.S. national debt threatens to destroy the financial future of literally generations of Americans. It is obscenely immoral to saddle our children and our grandchildren with the biggest mountain of debt in the history of the world. If they get the chance, future generations of Americans will look back and curse this generation for what we have done to them.”

As for the Masters of the Universe, due to some successful benchmark reform, public vilification and politicians turning against them, the all too familiar turn of phrase no longer applies. According to Gabriel Sherman’s The End of Wall Street As They Knew It published in February 2012 explains how the landscape of Wall Street has drastically changed in the past decade. For the better? Who knows.  Among the many problems plaguing Wall Street since 2008, none is more destabilizing than the new of January 17 where the Bloomberg terminals leaked that Morgan Stanley would cap its cash bonuses to $125,000 with Bank of America following suit a week later cutting cash bonuses 75% and making  it up with stock. All across Wall Street, compensation is crashing even Goldman Sachs slashed its compensation by 21 percent. Granted banks have had bad years, but according to Sherman’s conversations with more than two dozens senior Wall Street executives, traders, bankers, hedge-fund managers, and private-equity investors, the industry crisis itself is existential due to structural problems. To comply with the Dodd-Frank financial reform act, banks have had to strip themselves of their profit machine, leverage and proprietary trading. With the banks unable to wager their own funds, many believe that the money seen during the Bush boom won’t return. Banking analyst Dick Bove during his interview with Sherman said,”The government has strangled the financial system. We’ve basically castrated these companies. They can’t borrow as much as they used to borrow.”

By reducing the risk in the system at a cost of a certain amount of banks’ profits, the government has accomplished some of its goal. Before the crash, when compensation slide, the bank might have seen its top talent go to a rival firm or hedge fund, but now due to the industry wide belt-tightening, bank chiefs care calling their bluff e.g. Morgan Stanely CEO James Gorman told Bloomberg TV after announcing its meager bonus numbers, “If you’re really unhappy, just leave.” A hedge fund executive even said, “If you’re a smart Ph.D. from MIT, you’d never go to Wall Street now. You’d go to Silicon Valley. There’s at least a prospect for a huge gain. You’d have the potential to be the next Mark Zuckerberg. It looks like he has a lot more fun.” Since the crash and the occupation of Zuccotti Park, many in Wall Street have come to realize that the million dollar bonuses were built on an unstable foundation with many going back to basics by assessing their value in the economy and take their part in rebuilding it. As Sherman tells it:

“No one on Wall Street liked to be scapegoated either by the Obama administration or by the Occupiers. But many acknowledge that the bubble­-bust-bubble seesaw of the past decades isn’t the natural order of capitalism—and that the compensation arrangements just may have been a bit out of whack. ‘There’s no other industry where you could get paid so much for doing so little,’ a former Lehman trader said. Paul Volcker, whose eponymous rule is at the core of the changes, echoes an idea that more bankers than you’d think would agree with. ‘Finance became a self-justification,’ he told me recently. ‘They made a lot of money trading with each other with doubtful public benefit.'”

By no means does Dodd-Frank perfectly accomplished its aims, but critics who called for bank executive to go to jail and argued for laws that would crack down on the banking system, the legislation does pack a punch resulting in a severe blow to Wall Street. As a senior banker told Sherman, “Since 2008, what the financial community has done is kick the can down the road. ‘Let’s just buy us one more quarter and hope it gets better.’ Well, we’re now seeing cracks in that ability to continue operating with the structures that had been built up.” Wall Street has changed from the quaint old years of earning profits by loaning money, advising mergers, and supervising bond issues and IPOs. The leveraging of the American economy and the super charging of the financial industry began in the early eighties, while banks profited from a series of financial bubbles each bigger and more violent than the one before. “Wall Street did a really good job convincing people it was really complicated and they were the only ones who could do it and it justified paying them millions of dollars,” a former Lehman trader explained. “If you look at the past 25 years, the world economy was going through a process of leveraging,” a senior Citigroup executive said. “Debt has grown faster than economic growth. The banking industry was at the epicenter of facilitating the growth of credit creation. It drove every business.”

Now that Wall Street may be in a losing position, it seems they are onboard with some of the tax changes Obama has been proposing. As Jamie Dimon, current chairman, president and chief executive officer of J.P. Morgan Chase, told Sherman, “I would tax dividends and interest income higher and capital gains. Have a higher tax rate. If you said there’d be a certain percent rate for people making over a million dollars and a higher percent rate for people making over $10 million, no problem with me. I don’t think people should be able to pass unlimited amounts on to their kids.” Even Home Depot founder and financier Ken Langone (“You bet I’m a fat cat,” he told Sherman proudly) shared the same sentiment saying, “I would enthusiastically embrace a tax increase. I’m more than willing to pay taxes. I’m saying, take the money and use it to lower the debt.” However, Dimon argues, “Banking is very global now. If rules are written in a way where American banks can’t compete and are disadvantaged versus non-U.S. banks, that’ll be a problem for banks and for American competitiveness. Banking cannot be made into a utility.” It should be noted that Wall Street when faced with new regulatory obstacles has always found a way around them.

For now, the banks are being held at bay by the new rules and regulations on the books much like in the thirties. Those laws have kept banking relatively risk free and dull until the deregulation mania of the eighties and nineties unleashed finance. The system now is being designed to keep Wall Street growing only as fast as Main Street to prevent another such bubble from happening again. A final thought before we revisit our old friend Gordon Gekko from one of the industry giants of the 20th century, Jack Bogle who is the founder and now retired CEO of Vanguard Group (according to Sherman):

 “’The bubble can’t happen again. The underlying reason is, corporations make money. We do things that make society better. But they grow, and this won’t surprise anyone, at rate of GDP.’ On Wall Street, recent history was the exception. ‘Reversion to the mean is the rule of the financial market.’”

Back to our old friend the father of all evil, Gordon Gekko, who has seen the error of his ways or at least the guy who played him, Michael Douglas. According to Ryan Gorman, Michael Douglas PSA to Fight Corrupt Wall Street: Greed is Not Good, the FBI has recruited Michael Douglas for a special public service announcement where Douglas lashes out against the “greed is good” mentality consuming the financial sector. Why Douglas? Well Gordon Gekko has become a sort of cult hero inspiring many people to flock to Wall Street even though Oliver Stone has stated that the character of Gordon Gekko was supposed to be a satire on the excess of 1980s Wall Street (Unfortunately, the movie made Wall Street more appealing). Wall Street in the eyes of many is seen as the epicenter of greed with the movie only helping to re-enforce the notion. According to an interview with Fox Movie Channel, Michael Douglas was surprised that people “involved on Wall Street, who were students in business school” were working in finance because of Gordon Gekko despite being a villain. According to an ABC News report, securities and fraud cases have risen 52% since 2008 with the FBI tallying 1,800 pending cases and Douglas convinced that he had something to do with it, Gorman reports. Douglas explains, “A lot of those business school students are the leaders of these investment banks, hedge funds now where we’re seeing all this incredible corruption.”

To fight corruption on Wall Street, Douglas’ PSA has caused a stir in both the financial and enforcement communities. Douglas in the PSA states, “The movie was fiction, but the problem is real …. Our economy is increasingly dependent on the success and integrity of the financial markets. If a deal looks too good to be true, it probably is.” Gorman argues:

“While it’s good that Douglas has gone as far as he has in this PSA to clarify that Gekko was indeed the villain, it will do little to address the issue of fraud in the financial industry. While greed can be bad motivation, it can also be good. Gekko also said ‘greed for life, for money, for love, knowledge has marked the upward surge of mankind.’ Greed motivates, inspires and carries people through the day. It also leads to many other things like crime and war. When harnessed by the right person, ‘Greed, for lack of a better word, is good;’ just not when that person is supposedly inspired by Gordon Gekko.”

3 thoughts on “Wall Street: Masters of the Universe

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