Nine years have gone by since the financial crisis of 2008 but its spectre still looms large over the world. The US government’s half-baked approach to plug the systemic loopholes didn’t make post-crisis era any better. The Dodd-Frank reforms did raise a few barriers, but they were not high enough to hold the financial wizards for long. As a result, the financial chicanery goes on unabated. A wedge of ‘financialization’ now separates the main street from the Wall Street.
Rana Foroohar, the FT columnist and CNN economic analyst, shows in her new book ‘Makers and Takers’ how financial greed came to disengage the economy of the vast majority of the population from the Wall Street economy – the economy that belongs to the top 1%.
‘Financialization’ at its core is a disbelief on the part of investors. Instead of making money by investing in the real economy, investors see making money from financial economy an easier and more profitable endeavour. The financialization is, gradually, gobbling up the real economy.
Foroohar tracks the whole nine yards of the financial greed. She dives into spheres such as education, housing, retirement, etc., where financialization is spreading its poisonous tentacles and bringing chaos to the doorsteps of American households. She deserves applause for turning the spotlight on the financial shenanigans since ordinary folks remain mostly oblivious to such wrongdoings.
“Today’s companies, like banks, are keeping their wealth in a closed feedback loop where it enriches only a few at the expense of the many.” – Rana Foroohar
The United States boasts of the biggest financial system in the world. Yes, over $80 trillion worth of financial assets. Yet the rewards fail to cascade down to the real economy. Foroohar emphasises that the problem is Wall Street’s obsession with the holy grail of Economics 101 – shareholder value maximisation. It’s as if only the shareholders have the divine right to riches.
Over the years this approach has turned into a sinister plan concocted to benefit a privileged few. This short-sighted, be-quick-or-be-dead Wall Street style stymies innovation and coerces the management into opting for quick fixes to goose the share prices. After all, shareholders want to make a quick buck. Tell them you wish to invest in R&D and new plants, and they will disappear on you like a bubble. It’s a sad fact but actions of public corporations reflect the rallying cry of the Wall Street traders: short-term earnings.
Until the powers-that-be gear up to re-regulate the whole financial system, long-term opportunities will continue to be sacrificed at the altar of the short-term bumps. In most places, the rot starts at the top. It’s not uncommon for CEOs to draw 30-80% of their income in stock options and performance-based pay.
The income from stock options is generally taxed at much lower rates than regular salary. Hence, there is every incentive for these top dogs to bump up stock prices quarter after quarter, whichever way possible. The gravy train doesn’t stop there, however. When share prices take the beating, companies often let the CXOs swap their old shares with new lower-priced shares. Not a bad incentive for spearheading quarter-to-quarter machinations.
“How did finance, a sector that makes up 7% of the economy and creates only 4% of jobs, come to generate almost 25% of all corporate profits in America?” – Rana Foroohar
The enactment of Glass-Steagall act post the great depression managed to keep the inherent greed of financial markets in check. It separated the commercial banking from the murky world of proprietary trading and as a result, things remained calm for decades. But then, equilibrium and calm are not the words you often associate with the financial world.
Financiers felled the last picket of Glass-Steagall resistance in 1998, when Travelers group merged with Citicorp to form Citibank as we know it today, the first too-big-to-fail entity. Foroohar alleges the 2008 crisis had its seeds sown in that merger. She holds Clinton administration responsible for unleashing this monstrosity on the world.
In 2015, American firms have paid a record of $1 trillion back to investors in the shape of buybacks and dividends. – Rana Foroohar
Nothing debilitates an economy more than the wealth getting stuck in a closed loop of financial markets, with access to a privileged few. This is a grim reality, and taxpayers increasingly get manipulated at the hands of more resourceful investors. Foroohar cites the example of the revered iPhone-maker ‘Apple’.
For the record, Apple is a cash-rich company with over $250 billion in cash and equivalents sitting on its book. Yet when it comes to buying its shares back and handing out dividends, Apple chooses to raise debt than dip into its cash. Foroohar alleges that since Apple has stashed most of its wealth away in tax havens, it prefers to take advantage of low-interest rates at home and skip paying hefty taxes.
You don’t expect someone like Carl Icahn, the 7th largest investor in Apple, to build new factories and invest in R&D. And hence, it’s no wonder that the post-Jobs Apple has failed to come out with a single revolutionary product.
Tax evasion is but one trick up the sleeves of corporate ruffians. Tax inversion is another. US companies buy smaller firms based out of low-tax or no-tax havens such as Cayman Islands, Monaco, Ireland, etc. Subsequently, they relocate their domicile to these countries which reduces tax burden.
Chapter after chapter outlines the extent of corporate malfeasance. The shocking part is that more often than not, the wrongdoings are totally legit. It seems, too-big-to-fail entities, in addition to their financial con artistry, also know a thing or two about skirting the regulations. Foroohar’s remark in this context sounds completely apt, “You mainly need a few very clever people and a lot of superfast computers.”
In 2013, the aluminium prices started to go up. Coke reacted to the conditions and passed on the increased costs for its cans to consumers. To a neutral, this might sound like a market-forces-led orchestration. It turns out, however, that the mighty Goldman Sachs was behind the manoeuvring. The bank not only hoarded away tons of aluminium in its warehouses, but it also netted billions of dollars as it controlled the supply of the metal.
You might ask what in the God’s name a bank has got to do with owning and stockpiling a natural resource? Well, nothing, but make a darn good profit. Goldman Sachs, in this case, merely exploited the fine print between what was legal and not. A great vampire squid indeed!
If the markets are an ocean, private equity firms like Blackstone are the great white sharks that have perfected the use of debt, leverage, tax avoidance and legal machinations to maximize their own profits. – Rana Foroohar
The tentacles of financialization are starting to spread beyond financial markets. Foroohar reports that the biggest private equity firm, Blackstone, have become an indisputable overlord of the real estate in the US. It owns more homes on the US soil than any one else. And, you can’t expect such entities to be upright homeowners, their endgame is to make profit. Genuine home-buyers rarely get a look-in as PE players mostly sell to each other or pool in money to create REITs to avoid taxes. Here’s the author on PE firms, “If the markets are an ocean, private equity firms like Blackstone are the great white sharks that have perfected the use of debt, leverage, tax avoidance and legal machinations to maximize their own profits.”
Retirement savings is another area which the financialization is beating the hell out of. Fund houses such as BlackRock, Fidelity, Vanguard and a few others own almost 65% of the US stocks, it’s their perspective which most of the times drives what those companies whose stocks these funds own do. If BlackRock and Fidelity turn their focus to long-term, then, the ripple effects would improve the system. Lesser portfolio turnover, lesser management expenses, more benefits to the retail investors. However, that seems to be a pipe-dream. The game right now is rigged strongly in favor of the big investors and they continue to get richer.
In the penultimate chapter titled ‘The Revolving door’, Foroohar uncovers the intimate, tight-knit romance between the Wall Street and Washington D.C. She makes it amply clear that bankers couldn’t game the system without the policymakers’ collusion. If bankers got rich, so did the lobbyists, policymakers, and politicians.
The Dodd-Frank reform bill and the Volcker rule have made it difficult for the likes of Goldman Sachs and Morgan Stanley to conduct highly profitable proprietary trading. But then, no rules are too tight to slip through for these expert charlatans. While post-crisis reforms stopped short of tightening the snare, the Wall Street is waging its own war against regulations. Foroohar reports that top financial institutions have spent over $1.3 billion in their war against regulations.
With Donald Trump at the helm, and ex-Goldman alum like the Treasury Secretary Steve Mnuchin in his tow, it should not come as a surprise if there is a let up in regulations for the Wall Street traders to go back to their old ways.
In her suggestions to fix this finance problem, Rana Foroohar wants an overhaul of the tax code and a general increase in the real economy investments. She also hopes for the inclusion of a broader group of stakeholders on the companies’ boards (she cites examples from Germany where labour also has an important say in higher matters). These sound like welcome steps, but are there any buyers out there? As of now, sadly, financialization looks set to usurp the US economy.