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Wall Street Isn’t Capitalism!!

Posted by Larry Doyle on March 22, 2010 1:53 PM |

Is our nation trending away from the principles of capitalism which built the foundation upon which we rest? Another healthcare whine? Nope. I am talking about the once proud pillars of capitalism centered on lower Manhattan, otherwise known as Wall Street.

Let me simplify the debate. What is capitalism? Are you willing to accept the definitions provided by my Investing primer, Investopedia?

What Does Capitalism Mean?
An economic system based on a free market, open competition, profit motive and private ownership of the means of production. Capitalism encourages private investment and business, compared to a government-controlled economy. Investors in these private companies (i.e. shareholders) also own the firms and are known as capitalists.

What does the Financial Times have to say about our financial system this morning?  The FT writes, Fat Fees, Few Banks:

When the number of participants in a market declines and fees rise, there is clearly a prima facie case for a competition investigation. Just such a situation obtains in the post-crisis investment banking market, and the Office of Fair Trading in the UK is right to think about examining it.

As with the wider banking market, the investment banking field has contracted thanks to the crisis. Two large players – Lehman and Bear Stearns – have disappeared, while others have been forced to contract. Fee levels are rising in some areas. The UK insurer Prudential is paying $1bn to underwrite its $20bn rights issue. A few years ago, underwriting fees were closer to 2 per cent than 5 per cent.

Any investigation must be broad in scope. It should examine how the sector maintains such high profitability – and hence rewards its employees so lavishly. The bankers argue that this is attributable to the excellence of their product. But since the meltdown, this claim is hard to sustain.

There is little price competition in investment banking. The large global firms charge similar amounts for underwriting and M&A services. Such discipline is only possible if the barriers to entry are high. Circumstantially, this seems to be the case. There have been few new entrants, and those there are have done so through acquisition.

The continuing concentration of business into ever fewer hands opens the door to substantial conflicts of interest. The “financial supermarket” model allows banks to advise companies, sell them financial products and also trade on their own account in those products also. It is not clear that the companies that buy investment banking services are sufficiently alive to the pitfalls of this. Chief executives of businesses appear more concerned about successful execution than price, and equate this with brand names. No one, they say, ever got fired for hiring Goldman Sachs.

Investment banking services are like a tax on stock market returns. During the boom it is estimated that they cut returns by about half a percentage point a year. This could actually increase because of the additional capital and liquidity burdens that are likely to be placed on the industry. Regulators acknowledge that these costs will be passed on to clients.

A competition review must therefore go hand in hand with regulatory reform. An OFT probe would at least be a start. If the time is not ripe now, when will it ever be?

Thus, if we accept the premise that capitalism is based upon free market, open competition, profit motive, and private ownership of the means of the production, then what did the FT just describe? Capitalism? I don’t think so.

The FT just laid out that our global financial system is now effectively an oligopoly which, in the spirit of equanimity, Investopedia defines as:

What Does Oligopoly Mean?
A situation in which a particular market is controlled by a small group of firms.

An oligopoly is much like a monopoly, in which only one company exerts control over most of a market. In an oligopoly, there are at least two firms controlling the market.

You can resign yourself and say, “It is what it is.” I will grant you that, and respond in kind that on Wall Street, “It isn’t what it isn’t,” and right now it isn’t capitalism.

What do you think?


  • Mike

    It seems to me that in an industry such as this one, it is nearly impossible for new big investment banks to ‘spring up.’ Weren’t Bear and Lehman around since the 1800’s? Goldman and J.P. too?

    Not only that, but all the know-how’s of the industry are likely already employed by GS or JP and payed quite well.

    They know they’re running an oligopoly, but they can pretty much say “To hell with you, DO something about it then.” We’ve got all the money, all the reputation, all the expertise and it isn’t leaving anytime soon.

    Companies that use the services of these firms need to figure out ways to do it themselves, if possible. Otherwise there is no slowing down their momentum.

  • LD

    You are right on one hand but this is extremely dangerous as we go along because the financial industry’s pricing power will only get more firmly entrenched.

    The need for real regulation and oversight has NEVER been greater, but our regulators have NEVER been more poorly equipped.

    The implications of this oligopoly if it continues to run amok are longstanding and, in my opinion, not healthy for our country….but “it is what it is, right?”

  • JC

    could you please tell me why all the Americans are fearing non-capitalism? What’s wrong with the socialism?

    • Leo T


      Oligopoly isnt socialism… of the two options, I’d pick Socialism. Either afore mentioned ‘ism’s requires a strong / socially responsive government based on reasoned discourse and civil debate. The current political environment is neither reasoned nor socially aware (much less civil). A more appropriate analogy for Oligopoly is OPEC. Very few owning/controling the source of production/revenue and no civil responsibility…

  • LD

    A lessened chance for opportunity to pursue a better quality of life by taking appropriate risks.

    You may respond by asking what happened to create the current mess. Capitalism needs strong regulation. Our regulators and our government failed us. Capitalism did not fail us.

    Great question. Thanks for asking.

  • Aaron Kramer

    This is the ULTIMATE Issue we face. I have been discussing with colleagues how American Capitalism has been destroy by government intervention and legislative preference. Our highly specialized occupations has enabled participants to capture market share based on highly favorable, politically based legislation that has been disguised as regulation. This process began long ago and is far reaching throughout our economy. I could easily argue that the Federal Reserve is the quintessential example of this market capture.

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