Chapter 1.5 - WALL STREET & THE GREAT INVESTMENT MYTH

CHANGING AMERICA'S MIND  Chapter 1 Part 5

What Other Wall Street Critics are Saying

One of Wall Street’s most compelling critics has unusual credentials to back up his critiques.  John C. Bogle is founder and former CEO of Vanguard Group Inc, the second largest mutual fund company in the United States.   Bogle is also a lifelong conservative and Republican.

Here is a selection of some of his critiques of Wall Street:

• In September of 2007 during a Bill Moyer’s Journal interview, he said that “the financial sector of our economy has overwhelmed the productive parts – it takes $560 billion value out of the society annually.”   He went on to point out that in relatively few years, the financial sector had grown from 8% to 74% ownership of the country’s assets.

• In an October 2008 column by conservative talk radio personality, Michael Smerconish, Bogle raised that estimate to $650 billion per year.  He was further quoted as saying that, “there was too much speculation and not enough investment.”

•  In his 2005 book, The Battle for the Soul of Capitalism, Bogle, in critiquing the Internet bull market bubble of 2000 and the following crash, that it was a “massive $ 2 trillion-plus transfer of wealth from public investors to corporate insiders and financial intermediaries …” He went on to say that “transfers of this nature and relative dimension happen over and over again whenever speculation takes precedence over investment.”

•  In his commencement address, “Enough,” to Georgetown University MBA graduates in 2007 he made the following remarks.  “We’re moving, or so it seems, to a world where we’re no longer making anything in this country; we’re merely trading pieces of paper, swapping stocks and bonds back and forth with one another, and paying our financial croupiers a veritable fortune.  We’re also adding even more costs by creating ever more complex financial derivatives in which huge and unfathomable risks are being built into our financial system.” 

Note, this was barely a year before the derivative funded real estate bubble burst resulting in the Great Recession.

Roger Lowenstein, Author of a new 2010 book, “The End of Wall Street,” and also an outside director of the Sequoia Fund, in the March 15, 2010 New York Times wrote an article entitled, “Who Needs Wall Street?”  In it he offered the following critiques:

•  After pointing out Wall Street’s historical role of aggregating the savings of disparate individuals through the sale of stocks and bonds, thereby giving industry access to capital, he went on to write, “Wall Street’s emphasis began to change “in the ‘90s, as financiers devised new securities” …. that “did not involve selling bonds so that a Dupont could build new factories; they were rearrangements – new permutations, new alignments of risk – on flows of cash that already existed.  Most famous was the trading that stemmed from complex derivatives (like mortgages) with only a remote connection to the underlying product.  For all the trading in mortgage-backed securities, homeownership increased only a trivial amount.”

•  He goes on to write, “For much of Wall Street, capital-raising is now a sideshow.  At Goldman, trading and investing for the firm’s (own) account produced 76 percent of revenue last year.  Investment banking, which raises capital for productive enterprise, accounted for a mere 11 percent.  Other than that, it could have been a hedge fund.”

•   “Modern markets are more likely afflicted with too much trading.”  “As the volume from speculators and momentum traders dwarfs that of long-term investors, prices gyrate further from fundamental value.  Raising capital thus becomes, to paraphrase John Maynard Keynes, the byproduct of a casino.”

• In referring to the mechanism called credit default swaps that required a bailout for AIG, he writes, “The social utility of credit-default swaps is ostensibly the insurance function.”  But he goes on to point out that “Thanks to swaps, banks write more suspect loans and, over all, society is more exposed.  At least in an actual casino, the damage is contained to gamblers.  The street’s undertow is more serious.  Following the debacle, the economy lost eight million jobs.”

Another seemingly unlikely Wall Street critic is David Stockman, a director of the Office of Management and Budget under President Ronald Reagan, as well as a past hedge fund manager.  In a January 20, 2010 article entitled, “Taxing Wall Street Down to Size,” he offered the following critiques:

•  “The economy desperately needs less of our bloated, unproductive and increasingly parasitic banking system.”  In the next sentence, he appears to applaud the White House (Obama), for scoring “populist points against the banksters ..”   “Make no mistake,” he continues, “The banking system has become an agent of destruction for the gross domestic product and of impoverishment for the middle class.”

• And, “The baleful reality is that the big banks, the freakish offspring of the Fed’s easy money, are dangerous institutions, deeply embedded in a bull market culture of entitlement and greed.”

•  And finally, in referring to the record profits of the Wall Street banks, he wrote, “But these profits were not evidence of Mr. Market doing God’s work, greasing the wheels of commerce and trade by facilitating productive financial transactions.  In fact, they represented the fruits of hyperactive gambling in the Fed’s monetary casino – a place where the inside players obtain their chips at no cost from the Fed-controlled money markets (low to zero interest rates).”

Next section:
Games Boys Play

Larry
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