What do Wall Street Banks do for society?

November 22, 2010 | By | 4 Replies More

What do Wall Street Banks do for society? According to a New Yorker article called “What Good is Wall Street?,” not much. Many people assume that most of the money made by Wall Street banks is associated with raising capital for fledgling businesses. Not true:

Wall Street’s role in financing new businesses is a small portion of what it does. The market for initial public offerings (I.P.O.s) of stock by U.S. companies never fully recovered from the tech bust. During the third quarter of 2010, just thirty-three U.S. companies went public, and they raised a paltry five billion dollars. Most people on Wall Street aren’t finding the next Apple or promoting a green rival to Exxon. They are buying and selling securities that are tied to existing firms and capital projects, or to something less concrete, such as the price of a stock or the level of an exchange rate. During the past two decades, trading volumes have risen exponentially across many markets: stocks, bonds, currencies, commodities, and all manner of derivative securities. In the first nine months of this year, sales and trading accounted for thirty-six per cent of Morgan Stanley’s revenues and a much higher proportion of profits. Traditional investment banking—the business of raising money for companies and advising them on deals—contributed less than fifteen per cent of the firm’s revenue. Goldman Sachs is even more reliant on trading. Between July and September of this year, trading accounted for sixty-three per cent of its revenue, and corporate finance just thirteen per cent.

In effect, many of the big banks have turned themselves from businesses whose profits rose and fell with the capital-raising needs of their clients into immense trading houses whose fortunes depend on their ability to exploit day-to-day movements in the markets . . . Other regulators have gone further. Lord Adair Turner, the chairman of Britain’s top financial watchdog, the Financial Services Authority, has described much of what happens on Wall Street and in other financial centers as “socially useless activity”—a comment that suggests it could be eliminated without doing any damage to the economy. . . “Why on earth should finance be the biggest and most highly paid industry when it’s just a utility, like sewage or gas?” Woolley said to me when I met with him in London. “It is like a cancer that is growing to infinite size, until it takes over the entire body.”

Yet Wall Street is where great amounts of money exist, and that is why many of America’s best and brightest are flocking there to engage in careers of . . . well . . . making money.

A starting point for this article is that financial markets are grossly inefficient, and that instead of directing money into productive projects, Wall Street financiers follow trends and “surf bubbles.”

These activities shift capital into projects that have little or no long-term value, such as speculative real-estate developments in the swamps of Florida. Rather than acting in their customers’ best interests, financial institutions may peddle opaque investment products, like collateralized debt obligations. Privy to superior information, banks can charge hefty fees and drive up their own profits at the expense of clients who are induced to take on risks they don’t fully understand—a form of rent seeking.

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Category: Economy, Good and Evil

About the Author ()

Erich Vieth is an attorney focusing on consumer law litigation and appellate practice. He is also a working musician and a writer, having founded Dangerous Intersection in 2006. Erich lives in the Shaw Neighborhood of St. Louis, Missouri, where he lives half-time with his two extraordinary daughters.

Comments (4)

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  1. Tony Coyle says:

    Shorter: Investment banks… don't.

  2. Erich Vieth says:

    "The recent meltdown laid bare the sharp divergence between the interests of Wall Street and those of everyone else. Ordinary people need a stable, transparent banking system that allows businesses to borrow and households to finance the purchase of homes, cars and education. But the chiefs running banks can cash in spectacularly as individuals even as they lead the rest of us off a cliff."

    http://www.huffingtonpost.com/2010/12/05/jamie-di

  3. Erich Vieth says:

    "Our megabanks are getting bigger — as we demonstrated in 13 Bankers and as Thomas Hoenig argued in the Times last week — not because of any kind of legitimate market process, but because they benefit from an unfair and non-transparent government subsidy. And these big banks have recklessly dangerous levels of debt relative to equity."

    http://www.nytimes.com/roomfordebate/2010/12/07/s

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