A New SEC?

While I’m more and more suspicious that Half Sigma is a National Bolshevist (that is, a Strasserite), he raises an interesting point about the SEC:

Half Sigma: Post-Marxism
The capital in Marx’s day was mostly value creation capital. But the modern economy is based on value transference capital, which is a lot less obvious than value creation capital. Investment bankers are rich because they have a lot of value transference capital, and this is something we can infer by their lack of value creation capital.

Right-wing economists will throw out a lot of smokescreens in order to deny this is happening. There are few jobs that are pure value transference, so right-wing economists will correctly identify the value creation part of a job, but then wrongly insist that there’s no value transference happening. With respect to investment bankers, the right-wing economist will argue that they are reducing the costs of a capital by providing an efficient means to match investors with entities in need of money, which is true, but it doesn’t explain why they have to make so much money. It doesn’t explain why we need investment bankers at all—why can’t the SEC set up a public system where new securities are visible on the web, and anyone who wants to can bid on them?

I don’t know the answer to his question, because I do not have the experience.

Several tdaxp readers have first-hand experience on Wall Street. Can they answer the question, of why we have investment banker, and not an SEC-run eBay-type system?

Are investment bankers essentially salesman?

6 thoughts on “A New SEC?”

  1. tdaxp: i’ll try to answer your question, and not the post you quoted from (because, frankly, i think that post is a little silly – and your questions is more to the point).

    “are ibankers essentially salesmen?” well, yes, those on the sell-side aren’t “essentially” salesmen, they are, in every way, shape, and form, salesmen. that’s their job. to sell, promote, or trade (i really prefer the term trade, because that is their function more concretely) securities. if you are an industry, and you are looking to raise capital, you would have a couple of options. the two most important choices would be, equity or debt? how do you make that decision? well, of course, you call up your friendly sell side banker and talk to him, or her, or it (have you seen what passes for an investment banker in russia these days?).

    then of course, there’s the buy-side. the pension funds, mutual funds, etc. that consume these debt or equity offerings in the hopes that their value will increase,e tc.

    can these functions be replaced with one big ebay-opoly? of course. but if you are running a $1B a year operation, and you would like to expand it to a $10B year operation, and you need several hundred million of capital to do it, are you going to trust ebay-opoloy with that decision or someone on the “street” with the “know”? i guess it depends on who you are, but obviously, lots of people with lots of money beleive that investment bankers have the know they need. incidentally, back in the good ol’ dotcom days, the “ebay-opoloy” paradigm was tried a couple of times with horrible results. not saying it wouldn’t work today, just saying there might be no such market for such activity even if it would work. which is, afterall, what they should be paid for.

    and lets be clear that there are no major broker-dealers any longer. bear is gone. lehman is gone. goldman and morgan are now banks. the business model of a major broker-dealer is probably gone for good. that might be for the good, imho.

    but i think its a fundmantal misreading of the situation to blame what happened on ibankers (at least the normal, garden variety, M&A front office type). you can blame our last recession on them. you can’t blame this one on them though. this was simply a case of too much leverage for too long.

    in my view, a less scary proposition would be to forbid the next generation of broker-dealers (they will come around again, albeit in different form) from becoming publicly trading companies. much as we do for law firms. grant them a monopoly, license them, and forbid them from sharing profits with non-licensees. if you do that, some country somewhere will allow them to go public, maybe brunei, or some such place. and thats why it was never done. to keep the financial capital of the world here. but that’s fine with me. let brunei have the speculative and unrestrained bubbles along with the crashes that ensue. eventually value will track expertise and making the unit a profession, with a rigorous code of ethics, as well as limiting their ability to grow like a cancer through the public markets, will make us the mainstay of responsible financial advice.

  2. One good reason to read blogs like TDAXP: After all I have read and studied and had never come across the “National Bolshevist” dude before.

  3. One area in which Investment Bankers did great harm to the US Economy was in the area of handling IPOs.

    Investment Bankers essentially used the process as a mean of looting wealth from the entrepreneurial firms going public for the benefit of the investment bank and some its choice customers to the detriment of the Entrepreneurial Company and its founder/owners.

    While I don’t know if the process started out that way, by the time of the internet book in the mid 1990’s it was.

    Here is how the looting worked.

    ACME Systems is a growing Network Service Provider. The founder and the VCs decide to take the company public in order to raise cash for growth for company, to reward the founders and reward/payback the early investors and VCs.

    ACME Systems hires investment bank Natas, Laab & Ikol (NLI) to help with this. ACME will pay NLI to 1) Value the company and 2) Manage the Public Offering.

    NLI will get a shitload of money for this.

    Preparing for the IPO, NLI determines that the ACME public offering will be 10 million shares at $20/share valuing ACME at $200 million. The source of the shares will be from the founders (some of their shares), the early investors (some of their shares), the founders (some of their shares), but mostly the shares will be new shares with purpose of raising money for the company to further grow (and become profitable or more profitable.

    So, IPO day occurs and lo and behold the stock price jumps up to $27/share. The business journalist and shareholder are giddy at the day one bump. By the end of the week the price is $32/share. The company is now valued at $320 million and market value increase of $120million.

    This IPO day scenario happened again and again.

    So, everybody was happy right? It is a good thing that the stock price jumped up so high on day one,right?

    The answer is no. The founders, initial investors and the company just got looted NLI.

    Besides the large pile of cash paid to NLI for their “expertise” in handling IPO, they also bought shares at that opening price and let choice customers of theirs (favorite insiders) all by shares at that opening price.

    Rarely did the stock price drop after IPO day. It almost always rose. This suggests that through malice, NLI purposefully recommended an IPO price/share that undervalued the company. The $120million rise in market price – that wealth should have gone to the founders, early investors, and the cash accounts of ACME. The $120 million that should be in ACME bank accounts for growth and job creation has instead mostly ended up in the bank accounts of NLI and its favored customers.

    NLI did nothing to “earn” this extra wealth. Remember, they were paid big time to manage the IPO and value the company. This extra wealth is money they looted by manipulating the process. How many companies with good ideas and products would have survived if they had more of the they should have had in order to get their product or service offering up and running? How many jobs would that have been? How much has lost by these companies not surviving because NLI pilfered from them?

    I am glad NLI and real-world banks like them are going or gone. Fuck them. They are not needed anymore. Maybe in the old days, there was no other way to do IPOs. That is no longer true.

    The right way to do IPOs is through an Open Auction [1] after a set time period by which firms and individuals can use their individuals skills to determine an appropriate share price. Using this Wisdom-of-the-Crowds approach a good share price can be derived and the IPO can do what it is meant to do: raise cash for the company by selling a percentage of the company at a fair price.

    [1] http://www.wrhambrecht.com/ind/auctions/openipo/index.html

  4. purple: if ibankers were professionals, and had a similar code of ethics as do lawyers, then this self-dealing scenario would be prohibited.

  5. Fed X.,

    Thank you for your in-depth answer to my question. I appreciate it! 🙂

    in my view, a less scary proposition would be to forbid the next generation of broker-dealers (they will come around again, albeit in different form) from becoming publicly trading companies. much as we do for law firms

    I think this is very sensible.

    Purpleslog,

    One good reason to read blogs like TDAXP: After all I have read and studied and had never come across the “National Bolshevist” dude before.

    Heh, thanks. 🙂

    Before I became away of the NBP [1], I found it impossible to predict Half Sigma’s positions on new issues. Since thinking of him as a ‘left Nazi,’ however, my rate is much beter! 🙂

    One area in which Investment Bankers did great harm to the US Economy was in the area of handling IPOs.

    Investment Bankers essentially used the process as a mean of looting wealth from the entrepreneurial firms going public for the benefit of the investment bank and some its choice customers to the detriment of the Entrepreneurial Company and its founder/owners.

    I have no first-hand knoweldge of this.

    I remember my dad telling me that the justification for the IPO price needs to b included int he paperwork the firm sends to the federal government, under threat of perjury. So the rise in the company I used to work for, VA Linux, jumped from about $30 to about $293 on the first day [1], was a sign of bubble mania, as the company’s officers feared the risk of imprisonment if they had attempted to justify a $290 price.

    But as I said, I don’t have any other knoweldge beyond this. Perhaps s. or f. do?

    [1] http://en.wikipedia.org/wiki/VA_Software

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