By Any Name, New Trend on Wall Street Is the Same Old Game
ARROYO GRANDE, Calif. – "Don't get caught up in mass hysteria," says money manager Jack Schwager is his classic, "The New Market Wizards." "By the time a story is making the covers of the national periodicals, the trend is probably near the end."
What about the new "private-equity/hedge-fund/mega-merger/buyout" trend (or whatever it's being called lately)? It's getting more ink than TomKat's wedding, Britney's divorce and Madonna's baby combined.
Ergo, it must be over, right? Wrong. It's got a long way to go, folks.
So help us find the right label. Seriously, the media's going bonkers with the name game. The "billionaire-maker trend" is the most descriptive term to me. Why? Because nothing's really new. This trend is just a sequel to the late 1990s, with a twist. Back then it was initial public offerings. The little guy got a chance to buy stock, although founders, venture capitalists and investment bankers became the billionaires.
This new trend also has deep historical roots: Like the Medici's power financing global trade during the Renaissance, Caesar's power in ancient Rome and Morgan's power from financing railroad and steel industries.
Throughout history 90 percent of the economic power of most nations has been controlled by 10 percent, the capitalist elite. Same today. The rich rule the poor (and middle class). Today their lobbyists have all the money needed to control Congress.
So here's an overview of the news media's discombobulated inability to describe and label the current incarnation of this massive historic trend:
Newsweek: 'Bursting another sort of bubble'
"So is it Bubble Alert Time? Yep." A bubble of 9,000 hedge funds playing with $1.2 trillion in equity, leveraging huge debt. But like most of the media, the magazine struggles with the new bubble's name, inventing the clumsy "Alternative Assets," a vague term whose very vagueness is a cover-up for the underlying goal: We are experiencing a massive historic effort to deregulate the securities industry, moving it back into the shadowy pre-1934 underworld where billions and billionaires were created in virtual secrecy.
Fortune: 'The expanding universe'
Today there are fewer IPOs for the little guys to participate. Wall Street loves it that way. Now the smart money can get rich and become billionaires without sharing with the unwashed masses, by cutting out America's pesky 95 million individual investors. More money's been raised in 2006 by Blackstone, Carlyle, KKR, Bain and other private-equity buy-out firms than in the heyday of 2000 mania. They now control over $1.2 trillion and leverage $26 trillion in derivatives.
But their roster of "human capital" is their key to success, including many former political, financial and business power-players: George H. W. Bush, IBM (IBM) CEO Lou Gerstner, Nixon's Commerce Secretary Peter Peterson, British Prime Minister John Major, Ford (F) CEO Jacques Nassar, Secretary of State James Baker, SEC chairman Arthur Levitt, Treasury Secretary Paul O'Neill, to name some. Heavy hitters who can open doors worldwide, earning huge rewards in "retirement."
Investment News: 'Blaming SOX for the slump in IPOs is a bum rap'
Lobbyists point out that five years ago 90 percent of the dollars raised by foreign companies were raised in the U.S. Today only 10 percent. Now Treasury Secretary Henry Paulson and SEC Chairman Christopher Cox are siding with Wall Street and Corporate America insiders in an aggressive push to kill section 404 disclosure provisions of the Sarbanes-Oxley Act (SOX).
A separate report by the Committee of Capital Markets Regulation (a group of special-interest insiders which critics call a "wolf in sheep's clothing") offers a novel argument: America overreacted to the Enron-WorldCom scandals. We're now overregulating; too much accountability makes Wall Street less competitive!
Investor advocates say SOX is not the problem. If Wall Street is less competitive, the real culprit is Corporate America's own rush to globalization and outsourcing: "You could repeal SOX [and big foreign firms would] still list overseas," says Barbara Roper, a director at the Consumer Federation of America.
CNNMoney/Fortune: 'The private-equity boom is breathtaking'
"It's not just making investors rich, the wave is changing the mindset of corporate managers everywhere," with results: "PE firms returned 22.5 percent vs. 6.6 percent for the S&P 500, says Thompson Financial." Here's how: They attract the best managers with huge incentives, set short-term goals and specific performance measurements and, with minimum disclosure demands, the team focuses on goals without distractions (that often take 40 percent of a manager's time) from the SEC, media, politicians, pesky gadflies and investor advocacy groups.
Trouble is: Billions are siphoned off for insiders, not Main Street investors.
BusinessWeek: 'Gluttons at the Gate'
Here's the other side, a cover story about the negatives. These unregulated dealmakers take advantage of buy-out companies using "slick new tricks" in four ways: Siphoning off huge one-time fees and dividends, ongoing withdrawals, quickly flipping companies like the proverbial "condo flips" in the recent housing boom. And worse, many load up "companies with so much debt that their credit ratings are suffering; some of them even ending up in bankruptcy."
Time: 'Below-the-radar investments for the rich'
Buried in Time's article is this disturbing fact: "Hedge-fund manager James Chanos of Kynikos Associates started a Washington-based trade group this year." Rest assured, folks, all 9,000 funds are one massive, well-financed special-interest lobby that can buy whatever Congressional votes are needed to assure they'll not only continue operating in the shadows, making billions, but get even more protection by watering down SOX.
Economist: 'Revolution in finance, the dark side of debt'
Corporate America hates the regulatory spotlight. It hates issuing new securities that trade on exchanges. It prefers private-equity financing arranged outside the regulated banking system, plus leveraged credit derivatives traded off the exchanges, now totaling $26 trillion. Consequently, in this era of cheap money, private-equity firms soak up so much capital little is left on the table for normal channels.
The Economist calls this historic shift a "revolution in finance." But it's much bigger than even the Economist imagines. This revolution is part of a larger trend of the last decade slowly reversing the early 20th century investor protections that created the SEC, Investment Company Act, antitrust Laws, Glass-Steagall Act, and other laws requiring disclosure and oversight.
The truth is, Corporate America, Wall Street, banks and fund companies are in a de facto conspiracy to dismantle all these protections, and operate in the shadows.
In the past couple months it's been hard not to miss the relentless hoopla about this new "private-equity/hedge-fund/mega-merger/buyout" trend. But that term's too darn clumsy. We need a better label, a buzzword, a catchy name. What do you think us poor journalists should use till then?
The "New Billionaire-Makers Trend" works for me. You got a better one?
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