Tuesday, September 28, 2010

Article du Jour: Scientists, Secrets and Wall Street's Lost $4 Trillion

By Pam Martens, counterpunch.org

Thanks to an ever growing influx of Ph.D.s from the Ivies and an insatiable demand for an algorithmic trading edge by secretive hedge funds and proprietary trading desks at the largest firms, Wall Street has become part physics lab, part casino, part black hole.

What Wall Street bears no relationship to any longer is its primary mission in the U.S. economy: to be a fair and efficient allocator of capital to worthy businesses and innovators to propel job growth while also providing a medium for allowing investors to buy or sell stocks and bonds of those businesses at a fair price.

Stock brokers who previously scoured over annual reports and price to earnings multiples and bond prospectuses to build individualized portfolios for clients based on the client’s investment time horizon and comfort level with risk are so yesterday. The big firms lean on their brokers to turn their clients’ money over to impersonal “money managers” who use incomprehensible computerized risk modeling to manage the life savings of people they’ve never met. The business motivation for this was that the earnings of the big firms would not be dependent on the brokers’ inconsistent commission streams from trading by replacing them with a steady annual stream of money management fees. These huge pools of consolidated money have now joined the huge pools of hedge fund and proprietary trading monies, leaving small investors at the mercy of giant “pools,” the exact same word that dominated investigations after the 1929 crash. (Those intensive Senate investigations of the early 30s that turned up corruption at the highest echelons of Wall Street are also so yesterday.)

Taking the human relationship, and human brain, out of investing for others and turning it over to computer formulas has produced stark results: a lost decade of retirement savings for most Americans; a multi-trillion dollar collapse of the financial system; a taxpayer bailout of the most incompetent and negligent firms in finance; the greatest wealth transfer to the top 1 percent in the history of the country -- which has contributed to 43.6 million people in America, including one in every five children, living below the poverty level. (Read more)

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