Today is the four-year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Has it made our financial system fundamentally safer? Unclear. But one thing about the law is certain: It's forced the financial industry to get much more interested in individual investors.
Even today, a full four years after the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law, it remains unclear whether this massive set of financial regulations has made our banking system fundamentally more stable. But one thing about the law is certain: It’s gotten the financial industry much more interested in individual investors.
How important have mom and pop become to the titans of capital? On Thursday Morgan Stanley reported second-quarter operating profits jumped by nearly half to $1.3 billion. The biggest contributor wasn’t the bank’s investment bankers or traders, but its army of 16,000 financial advisers working with Main Street clients. That didn’t happen by chance, either: Chief executive James Gorman, a former management consultant who took over the storied bank in the wake of the financial crisis, has made a point of made a point emphasizing relatively steady activities like wealth management.
That flies in the face of Wall Street tradition. Historically, so-called Masters of the Universe have earned their status advising on giant mergers or trading bonds, which were far sexier (and more profitable) than telling well-to-do lawyers and dentists which stocks to buy. Then the financial crisis hit. Hot-shot bond traders, who once seemed able to conjure millions from thin air, no longer looked so bright. Meanwhile, blockbuster corporate deals that investment bankers specialize in dried up. The economy has finally bounced back. But relatively calm financial markets combined with new regulations like higher capital requirements and the so-called Volcker rule have made it harder for Wall Street trading machines to regain their glory.
That’s given Main Street financial advisers new prestige. It’s not just Morgan Stanley. Big banking firms like UBS and Bank of America, which acquired Merrill Lynch in 2009, have been racing to poach – and keep – top advisers, offering signing bonuses and other perks, even as they’ve sometimes thinned ranks among bankers.
Of course, for you and me, the $10,000 question is not who’s top of the pecking order but whether advisers’ new stature will mean better treatment for small investors who, to put it mildly, haven’t always been the Street’s top priority.
In some ways, being a chief profit engine could be a curse more than a blessing. The more banks rely on small investors for profits, the harder they’re going to push to wring every last cent out of their customers. There’s some evidence of this already: While big banks used to be satisfied with handling clients’ investments, they’re now leaning on advisers to pitch fee-laden products like loans and credit cards.
The attention that banks give to individual clients hasn’t been evenly distributed, either. Wealthy clients tend to be more profitable. And banks have pushed advisers to focus on these, sometimes at the expense of middle-class investors.
But there’s hope too. On Wall Street profitability eventually becomes clout. Wealth management divisions traditionally haven’t had much. One of the most painful examples: During the financial crisis many small investors got burned after buying instruments known as auction-rate securities, which were supposed to offer the safety of cash but turned out to be illiquid during the crisis. One of the industry’s biggest stars – Smith Barney’s Sallie Krawcheck, then among the highest ranking women on Wall Street – pushed Citigroup to provide restitution to her division’s clients. Instead, she was shown the door. Maybe in the future that sort of thing won’t happen.
A bar in Kalamazoo, Michigan, takes the fun of happy hour to a whole new level.
The Beer Exchange has been going viral on Reddit and Imgur in the last day because its beer list resembles a stock ticker — or a Bloomberg Terminal that dispenses alcohol. It displays the current prices for various kinds of beer, and as demand for the different types ebbs and flows, the prices rise and fall. Once in a while, there’s even a market crash that brings the beverages to their all-time low.
It’s a happy hour all the time—as long as you’re interested in the right beer. But unlike stock trading, there’s no reward for buying low and selling high. Besides getting buzzed, that is.
When finance calls the shots, we all lose
It’s widely known that more than half of all corporate mergers and acquisitions end in failure. Like many marriages, they are often fraught with irreconcilable cultural and financial differences. Yet M&A activity was up sharply in 2013 and reached pre-recession levels this year. So why do companies keep at it? Because it’s an easy way to make a quick buck and please Wall Street. Increasingly, business is serving markets rather than markets serving business, as they were originally meant to do in our capitalist system.
For a particularly stark example, consider American pharmaceutical giant Pfizer’s recent bid to buy British drugmaker AstraZeneca. The deal made little strategic sense and would probably have destroyed thousands of jobs as well as slowed research at both companies. (Public outcry to that effect eventually helped scuttle the plan.) But it would have allowed Pfizer to shift its domicile to Britain, where companies pay less tax. That, in turn, would have boosted share prices in the short term, enriching the executives paid in stock and the bankers, lawyers and other financial intermediaries who stood to gain about half a billion dollars or so in fees from the deal.
Pfizer isn’t alone. Plenty of firms engage in such tax wizardry. This kind of short-term thinking is starting to dominate executive suites. Besides tax avoidance, Wall Street’s marching orders to corporate America include dividend payments and share buybacks, which sap long-term growth plans. It also demands ever more globalized supply chains, which make balance sheets look better by cutting costs but add complexity and risk. All of this hurts longer-term, more sustainable job and value creation. As a recent article on the topic by academic Gautam Mukunda in the Harvard Business Review noted, “The financial sector’s influence on management has become so powerful that a recent survey of chief financial officers showed that 78% would give up economic value and 55% would cancel a project with a positive net present value–that is, willingly harm their companies–to meet Wall Street’s targets and fulfill its desire for ‘smooth’ earnings.”
Some of this can be blamed on the sheer size of the financial sector. Many thought that the economic crisis and Great Recession would weaken the power of markets. In fact, it only strengthened finance’s grip on the economy. The largest banks are bigger than they were before the recession, while finance as a percentage of the economy is about the same size. Overall, the industry earns 30% of all corporate profit while creating just 6% of the country’s jobs. And financial institutions are still doing plenty of tricky things with our money. Legendary investor Warren Buffett recently told me he’s steering well clear of exposure to commercial securities like the complex derivatives being sliced and diced by major banks. He expects these “weapons of mass destruction” to cause problems for our economy again at some point.
There’s a less obvious but equally important way in which Wall Street distorts the economy: by defining “shareholder value” as short-term returns. If a CEO misses quarterly earnings by even a few cents per share, activist investors will push for that CEO to be fired. Yet the kinds of challenges companies face today–how to shift to entirely new digital business models, where to put operations when political risk is on the rise, how to anticipate the future costs of health, pensions and energy–are not quarterly problems. They are issues that will take years, if not decades, to resolve. Unfortunately, in a world in which the average holding period for a stock is about seven months, down from seven years four decades ago, CEOs grasp for the lowest-hanging fruit. They label tax-avoidance schemes as “strategic” and cut research and development in favor of sending those funds to investors in the form of share buybacks.
All of this will put American firms at a distinct disadvantage against global competitors with long-term mind-sets. McKinsey Global Institute data shows that between now and 2025, 7 out of 10 of the largest global firms are likely to come from emerging markets, and most will be family-owned businesses not beholden to the markets. Of course, there’s plenty we could do policy-wise to force companies and markets to think longer term–from corporate tax reform to bans on high-speed trading to shifts in corporate compensation. But just as Wall Street has captured corporate America, so has it captured Washington. Few mainstream politicians on either side of the aisle have much interest in fixing things, since they get so much of their financial backing from the Street. Unfortunately for them, the fringes of their parties–and voters–do care.
The Crumbs cupcake shop in my neighborhood just shut down. It’s a sad day for the entire sugar industry: Crumbs, a once-growing collection of shops with visions of becoming a national bakery chain, abruptly folded its 65-store operation in 12 states, putting hundreds of people out of work. The company had been delisted from NASDAQ last week, its stock trading for pennies from a high near $14. Sales were falling, Crumbs was losing money and unlikely to become profitable anytime soon. As of its last quarterly filing, the company had just $300,000 in cash on hand, and its liabilities included $244,000 in gift cards outstanding. Hope you didn’t own any of them. Crumbs lost $5 million in its last quarter.
Was Crumbs a victim of Americans turning toward eating healthier, especially among children, as the First Lady has encouraged? Fat chance. We are as plump and pleased as ever, and our appetite for donuts, cronuts, deep-fried Oreos and Baconators will not be reposing anytime soon. Long live junk food, if maybe not us.
But you could see this one crumbing long before it happened. Crumbs made good cupcakes—one of those sweet bombs could keep an 8-year old wired for about three days—but its failure isn’t so much about the product so much as the way Wall Street works to bake new companies. The recipe almost guarantees trouble in the future for many firms. Crumbs joins the long list of once hot food franchises that couldn’t resist the smell of growth and ultimately had difficulty managing it: David’s Cookies, Krispy Kreme, Einstein Bagels, World Coffee, just to name a few. They can survive, but generally after massive restructuring. Crumbs ran out of time and money.
The pattern is similar: a good product or idea becomes increasingly popular, and investors get moon-eyed about the prospects. At the same time, other operators and investors will swear to you that there’s plenty of room for more than one brand—or that if there isn’t much room, their concept is superior.
In the mid-90s, it was the humble bagel’s turn for the national spotlight. The players included Bruegger’s Bagel Bakery, Einstein Bros. Bagels, Chesapeake Bagel Bakery, Manhattan Bagel, Noah’s New York Bagels, Big Apple Bagels and the Great American Bagel among others. Several of them went public, which funded overexpansion. They dreamed big. “What happened to the pizza in the ’40s and ’50s is happening to the bagel today,” said the ceo of Manhattan Bagel at the time. “Soon there will be bagel shops on every street corner.” Except in Manhattan, where there are no Manhattan Bagel shops. Einstein, Noah, Chesapeake and Manhattan would eventually become part of one company, as the craze subsided and the industry consolidated. Then it was doughnuts. Krispy Kreme also got creamed by massive overexpansion funded by its very popular IPO. Even in the U.S., we can only eat so many doughnuts.
Cupcakes are now repeating the pattern, with predictable results. In the cupcake game, Crumbs competitors include Magnolia Bakery, Sprinkles, and any number of hipster-preneurs in major cities not to mention the likes of Duncan Donuts and Starbucks, which flanked the cupcake shops with offerings of their own. If cupcakes were that hard to make, your mom wouldn’t have churned them out on demand.
Why isn’t there more caution? Because that’s not Wall Street’s real concern. The investment industry’s mission is to throw money at enough startups—from cupcakes to social media—and hope to land on a winner. Failure is built in, the only question being who is going to take the losses. A lot of time it’s overeager shareholders who pile in these stocks because all they see is unlimited growth. In food, the best case scenario is Starbucks, whose original store still operates on Pike Street in Seattle along with thousands of others around the world. An IPO allowed Starbucks to enjoy rapid growth and made a lot of investors rich. But part of Starbucks strategy was to be capitalized enough to blow other rivals out of the water by grabbing the best locations. That left everyone else to scramble to remain competitive—and why there’s really no No. 2 in premium coffee.
Fortunately, the U.S. is not going to run out of cupcakes anytime soon. This is basically a mom and pop business that is still best run by mom and pop. Cupcakes may have had their run for now, but investors are always going to be hungry to find the next new food style to fund. And grilled cheese is waiting in the (chicken) wings.
Jamie Dimon told employees the disease is “curable”+ READ ARTICLE
Investment banking firm JP Morgan’s CEO Jamie Dimon told staff Tuesday that he has throat cancer.
“The good news is that the prognosis from my doctors is excellent, the cancer was caught quickly, and my condition is curable,” Dimon, CEO of the bank since 2005, said in a note to staff.
Dimon said the disease will require about eight weeks of radiation and chemotherapy treatment, CNBC reports.
“I feel very good now and will let all of you know if my health situation changes,” he said.
Dimon steered JP Morgan through the financial crisis but met with controversy after the bank was involved in a scandal in 2012, leading to billions of dollars in losses and calls for Dimon’s ouster. The notoriously blunt bank chairman was criticized for calling the fiasco a “tempest in a teapot.”
NEW YORK — The stock market sank Thursday following a disappointing report on Americans’ spending last month. Bed Bath & Beyond and banks were among the biggest losers.
KEEPING SCORE: The Dow Jones industrial average fell 79 points, or 0.5 percent, at 16,787 as of 12:30 a.m. Eastern time. The Standard & Poor’s 500 index sank nine points, or 0.4 percent, to 1,951, while the Nasdaq composite index fell 18 points, or 0.4 percent, to 4,362.
ECONOMY: The government said the number of Americans seeking unemployment benefits declined last week, the latest evidence that an economic slowdown earlier this year hasn’t caused employers to shed workers. In a separate report, the government said consumer spending inched up 0.2 percent last month, half the increase that economists had predicted.
RESPONSE: “The spending data was a soft, but it’s not that big of a deal,” said Phil Orlando, chief equity strategist at Federated Investors.
Orlando said the stock market has been rising a little too fast recently, so a slight drop in the summer months wouldn’t come as a surprise. “I fully expect to see a hiccup here, but I wouldn’t get too worried about it,” he said. “It’s probably going to set us up for a nice end-of-the-year rally.”
TRADING SCRUTINY: Barclays fell after New York’s attorney general sued the British bank, claiming that it favored high-frequency traders over large institutions in its private-trading platform, known as a “dark pool.” Eric Schneiderman accused Barclays of misleading investors by saying they were safe from predatory high-frequency traders. Barclays’ U.S.-listed shares fell 97 cents, or 6 percent, to $14.74.
Other banks that operate similar private-trading platforms also dropped. Morgan Stanley sank 64 cents, or 2 percent, to $69.75. Citigroup slipped 63 cents, or 1 percent, to $47.20.
TOOK A BATH: Bed Bath & Beyond sank 9 percent, the biggest loss in the S&P 500, after the company posted quarterly earnings and sales late Wednesday that fell short of analysts’ estimates. The store’s stock dropped $5.26 to $55.85.
POPPED: GoPro jumped 32 percent in its stock-market debut. The company, whose cameras get strapped to the heads of skydivers, extreme skiers and surfers, raised $427 million in its initial public offering Thursday. GoPro soared $7.15 to $31.17 in its first day of trading on the Nasdaq stock market.
HEAVY METAL: Alcoa plans to acquire Firth Rixson, a British maker of jet-engine parts, for $2.9 billion, as the company continues to shift away from its aluminum-smelting roots. Alcoa’s stock rose 31 cents, or 2 percent, to $14.86.
EUROPE: Major European markets mostly fell. France’s CAC 40 fell 0.5 percent while Germany’s DAX lost 0.6 percent. The FTSE 100 index of leading British companies was flat.
BONDS AND COMMODITIES: In the market for government bonds, the yield on the 10-year Treasury note dropped to 2.52 percent from 2.56 percent late Wednesday. Bond yields fall when prices rise. The price of crude oil fell 43 cents to $106.07 a barrel.
NEW YORK — Wall Street is feeling adventurous.
Investors sent shares of GoPro Inc. up 30 percent in their stock market debut Thursday, following an initial public offering that valued the sports camera maker at about $3 billion.
The company makes wearable sports cameras that are used by skydivers, surfers and other extreme sports fans to film themselves or create first-person videos that capture the experience as they saw it.
The cameras, which are light and waterproof, cost between $200 and $400. It also sells accessories such as cases, battery packs and mounts that help users attach their cameras to surfboards, helmets or their wrists. And it has a free app and software that lets users edit, store and publish their videos to their social media accounts including Facebook, Instagram, Twitter and YouTube.
GoPro raised $427 million after selling 17.8 million shares at $24 each.
Its shares rose $7.75, or 32.3 percent, to $31.75 in midday trading Thursday after rising as high as $33 earlier. GoPro shares are trading on the Nasdaq stock exchange under the symbol “GPRO.”
The San Mateo, California, company plans to use the money raised to pay down debt.
According to a new study, nearly 25 percent of all public company deals involve some insider trading.
Argentina, the Obama Administration and a host of international financial and humanitarian organizations got a load of bad news Monday from the U.S. Supreme Court. But hedge funds and other investors that specialize in risky international bonds could not be more pleased.
After a 13-year international legal battle that seemed, at times, to borrow its narrative from daytime soap operas, the Court made two decisions Monday morning that will change the way countries borrow and service their national debts. The Supreme Court first declined to hear two cases, choosing instead to leave intact lower court decisions requiring Argentina to pay back all of its bondholders—even those that refused the country’s offers to restructure their debt. The lower court decisions said Argentina was obliged to treat all of its investors equally, even if doing so would force the South American nation to default or sell off military equipment or other vital assets.
The Court then handed down a decision on a new case, Republic of Argentina vs. NML Capital, Ltd, in which a hedge fund and other investors who were owed $2.5 billion in damages demanded that certain banks disclose information about Argentina’s global assets. The Court backed the hedge funds, saying it was perfectly legal for them to subpoena financial institutions, including Bank of America, for information about Argentina’s assets in an effort to help investors get repaid. Assets belonging to foreign countries that fall outside of U.S. borders are still fair game, the Court said.
While all three cases are mired in reams of wonky international finance law, the bottom line is a huge win for hedge funds and other financial firms. The Court decided that when investors buy up foreign countries’ risky (or “distressed”) bonds, they can demand repayment at the same rate as all other bondholders, and seek repayment through all national assets, no matter where those assets are located.
The Obama Administration and many international finance groups think this is a very bad idea. They argue it upsets the delicate balance of foreign countries’ borrowing, threatens international credit markets, and creates incentives for investors to resist the debt-restructuring process, which is vital for many developing countries struggling to provide basic services for their citizens. They say investors no longer have a good reason to agree to less favorable terms in a debt-restructuring deal since doing so does not increase the probability that they will be paid back.
Humanitarian and religious organizations like Jubilee USA said the decision will have the effect of forcing impoverished countries to pay hedge funds rather than use their scarce resources to rebuild domestic social programs or otherwise serve their citizens.
In the lower court cases, which the Supreme Court declined to hear, Argentina’s lawyers described the hedge funds as “vultures” seeking repayment on debt they originally bought at heavy discounts during one of the country’s many economic collapses. They warned the Court that requiring the country to repay all of its bondholders equally “could trigger a renewed economic catastrophe with severe consequences for millions of ordinary Argentine citizens.” They also argued that Argentina would have to sell some of its military equipment to finance the debt, so the court’s decision could have the effect of weakening its military defense.
Both cases attempted to define the scope and limits of Argentina’s obligation to its bondholders, which hinged on two guarantees: that all Argentinian bonds would get “equal treatment,” and that investors’ rights apply equally to everyone. Argentina argued that the “equal treatment” guarantee didn’t apply to everyone to whom it owned money, but to everyone within the same bracket, so to speak. In other words, everyone who had agreed to restructure their investments in 2005 and 2010 would be repaid at the same rate, while those who had refused to refinance would be paid back at the same rate. (In 2001, Argentina announced they would not paid back at all.)
A New York federal court, and later the U.S. Court of Appeals in the Second Circuit, didn’t buy it. Both courts decided Argentina had violated the “equal treatment” guarantee by paying back some of its debtors but not all of them. By deciding not to hear those cases, the Supreme Court allowed those lower court decisions to stand.
In Argentina v. NML Capital, Justice Antonin Scalia wrote for the majority in a 7-1 decision that the Foreign Sovereign Immunities Act (FSIA), which governs such transactions, does not protect foreign countries’ non-U.S. assets from seizure by U.S. firms, where a court has granted their right to repayment. In previous cases, Argentina argued that FSIA only applied to assets in the U.S. Justice Ruth Bader Ginsburg dissented and Justice Sotomayor recused herself.
In her dissent, Justice Ginsburg lambasted the idea that a U.S. court would allow a group of U.S. investors “unconstrained access to Argentina’s assets.”