Wall Street

“Extractive Economic and Political Institutions”

by Ross Kaplan on March 31, 2012

That’s One Way to Put It

According to “Why Nations Fail,” a book cited by Tom Friedman in his New York Times column today, egalitarian institutions are the key to successful nations, “extractive economic and political institutions” lead to failed ones.

I have no issue with the authors’ observations and conclusions – after all, they’re Tenured Ivy League Professors! — just their rather antiseptic (not to say amoral) language.

So, instead of “extract,” I might have said “steal”; instead of “concentrate power” I would have said ”bribe and corrupt.”

And instead of “extractive economic institution?”

Try, “modern-day Wall Street.”

Just a small difference in semantics . . .

P.S.:  And I always thought an “extractive economic institution” was a gold mining company.

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Coming: the Golden Age of Venture Capital?

by Ross Kaplan on February 17, 2012

Wall Street Allocating Capital  . . . to Itself

Once upon a time, Wall Street’s reason for being (“raison d’etre,” if you want a fancy term) was to efficiently allocate capital from suppliers of capital (aka “savers”) to those who could most productively use it — typically young, promising companies.

At least, that’s how I explained it to my 12 year-old son the other night.

Going on four years after The Crash of ’08, it seems obvious — at least to me — that what modern-day Wall Street really excels at is  . . . allocating capital to itself.

Witness the still-ginormous salaries and stock options handed out to the head honchos at top investment banks (as best I can tell, any cutbacks are being absorbed by these firms’ rank-and-file), juxtaposed with anemic corporate lending and still-high unemployment.

Revolt of the Savers

Against a backdrop of zero percent interest rates (“ZIRP”), public skepticism towards the stock market (and the High Frequency Trading-types who clearly control it), anemic bond yields, and still-accelerating gains in communication and technology (Moore’s Law lives!), where might retail investors more profitably put their money to work?

Institutional money is apparently flooding into private equity, but that’s not an option for Mom-and-Pop types.

Gold and other precious metals (still) feel a little too “fringy” to old-timers like me.

What does that leave (beside mattresses, that is)?

Instead of accepting “return-free risk” from bonds, I’m guessing that at least a slice of the gargantuan liquidity sitting out there migrates toward investments which actually promise a return for assuming risk.

A pretty good return, in fact.

What meets that description?

Venture capital.

Here’s hoping that more of that money gets raised and invested in the Twin Cities instead of traditional hotbeds like Silicon Valley and Boston.

P.S.:  want a quick primer on venture capital?

Watch “Something Ventured,” a terrific documentary on Silicon Valley’s history.

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The Cruise Ship Called “Wall Street”

by Ross Kaplan on January 17, 2012

If the Federal Reserve and U.S. Treasury were coordinating the response to the cruise ship disaster off the coast of Italy, here’s what they would be doing:

–the Captain and senior officers would all be given multi-million dollar bonuses (actually, their regular, annual multi-million dollar bonuses).

–Carnival Cruises, the ship’s owner, would transfer title to the damaged ship to The Federal Reserve, and be given a no-strings-attached bailout by Treasury to build a new one (or not, as they wished).

–The passengers would all be given harnesses, and the government would build ramps, handrails, etc. to help them manuever around the capsized vessel.

Sorry (and sorry to say), but the foregoing analogy isn’t so far off . . .

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The Investor Case for Following the Crowd

by Ross Kaplan on January 9, 2012

Safety in Numbers?

If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.

–John Paul Getty

If a small investor gets ripped off by Wall Street, they’re SOL.  But if a whole lot of investors get ripped off by Wall Street, there’s at least the possibility of some recourse.

–Corollary, Ross Kaplan

One of my New Year’s tasks (OK, by Spring, no later) is to review my investments for current conditions, then to tweak — or re-shuffle — as necessary.

So, I have been researching which ETF (“exchange-traded fund”) to invest in once a CD earning literally nothing matures soon.

A Primer on ETF’s

If you’re not aware, ETF’s are basically the successor to mutual funds, based on their superior liquidity and tax efficiency.

The first thing that jumps out surveying the ETF landscape is how many there are today – something like 3,000 to 4,000.

The second is the range in size, from a few million (or less) to tens of billions (“SPY” and ”GLD,” the funds that track the S&P 500 and gold bullion, respectively).

The last realization is ETF’s tremendous scope, from funds that mirror broad swaths of the global equity and bond markets, to ones that focus on niches and sub-niches (“small-cap Canadian gold miners,” anyone?).

Strength in Numbers?

Normally, my instincts are to figure out what the herd is doing — then run the other way.

But in today’s investing environment, where Wall Street sharks (still) have a license to steal, and the SEC is Wall Street’s friend and small investors’ enemy (instead of the other way around), there’s a case to be made for allying with other investors.

The rationale? 

If you should somehow get screwed, so will a lot of other people.

In which case you’ll have a better shot at marshalling the necessary resources to sue the bastards.

So, I’m limiting my ETF search to the largest funds, or ones with at least a few billion under management.

That’s a big enough pool of investors to actually have some legal and political clout if something goes wrong.

A helluva way to think, I know, but ask the folks at MF Global if they disagree . . . 

P.S.:  The one exception to the above, at least so far?

All the people screwed by predatory lenders.

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Moview Review: Margin Call

December 20, 2011

Adding Fuel to the Fire — Then Buying Fire Insurance According to Margin Call — the most recent movie to tackle the Wall Street-authored financial bust — the honchos running the nation’s biggest investment banks realized too late that the market for mortgage-backed securities was going to collapse. So, literally overnight, they did a 180, dumping their [...]

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MF Global “Whodunit”

December 1, 2011

Wall Street Journal:  ‘Blame the Regulators’ Chutz-pah′:  killing your parents, then throwing yourself on the mercy of the court because you’re an orphan. So, according to The Wall Street Journal, who’s to blame for the still-missing $1 billion of client funds at now-bankrupt MF Global? Not the company’s senior management, led by CEO Jon Corzine, [...]

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“Welcome Aboard, Tom!”

October 30, 2011

No Longer AWOL on Financial Reform Notwithstanding a very long public record of Wall Street self-dealing, treachery, and greed on a scale never before witnessed in American (world?) history, New York Times columnist (and St. Louis Park native) Tom Friedman has been silent on the need for systemic financial and political reform. Until today.   Our Congress [...]

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Firing Wall Street

October 8, 2011

The “RoboCop Solution” to the Financial Crisis When it comes to holding the citizenry hostage, owners of pro baseball and football franchises have nothing on Wall Street. The former, of course, have refined to an art form the practice of extorting tax dollars from cities and counties to build ever more expensive (and grandiose) sports palaces. The pitch? [...]

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