Subject: [big campaign] New Huff Post from Creamer-Another Reasons to Break Up the Big Wall Street Banks
From: [email-masked]
To: [email-masked], [email-masked]
Date: Fri, 3 Sep 2010 10:46:38 EDT
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Another Reason to Break Up Big Wall Street  Banks 

Ever wonder how Wall Street bankers manage to make tens – and sometimes  
hundreds -- of millions of dollars?   How do people who really don’t produce 
anything manage to siphon such  gigantic sums from the pockets of the people 
who produce goods and services –  who actually create the wealth? 
The answer is  that they have managed to gain almost monopolistic control 
of the keys to world  financial markets, to sources of capital that are 
necessary to finance equity  investments and bonds for everyone from the largest 
international corporations  to new start-ups.  
But, you may ask, how can this be?  In the kind of competitive financial 
markets envisioned by Adam Smith,  competition should create multiple gateways 
to these capital markets.  What’s more, price competition should  prevent 
massive overcharges by the underwriters of big financial  deals. 
On Friday, August 20, Washington  Post financial columnist Steven 
Pearlstein published an insightful article  examining the reasons why there is so 
little price competition on underwriting  deals between Wall Street’s big 
banks.   
He points out that the big investment banks would normally stand to make  
almost $450 million in fees on the $15 billion stock offering by General  
Motors.  In this case, though, the  Federal Government owns most of the stock.  
Goldman Sachs – convinced that it would never be named lead underwriter  
because of its legal and PR issues decided to do something that is never done 
on  Wall Street: undercut the fee structure.  It shocked its rivals by 
violating an unwritten law of the investment  banking world – it engaged in price 
competition. 
It turned out that Goldman’s competitors Morgan Stanley and J.P. Morgan  
got the opportunity to underwrite the offering.   But the Treasury Department  
insisted that they do so at Goldman’s price -- .75 percent of the stock 
sale --  which is one quarter of the normal fee.  
Now even three-quarters of a percent is a huge haul of $112 million – but  
it’s not $450 million. 
The normal fees charged by investment banks are 6 to 7 percent for deals  
of less than $200 million, 4 to 5 percent for middle range deals, and 3 to 4  
percent for those over a billion. Pearlstein explains that the fee 
structure is  divided into three pots:  
Twenty percent is an underwriting  fee for the banks’ guarantee that they 
will buy the entire issue even if nobody  else will.  That was once an  
important consideration, but in today’s markets, the investment banks ensure  
that no IPO goes forward unless it is pre-sold.  As a result, the underwriting 
fee is now  a pure windfall. 
Sixty percent of the fee represents a sales commission, which also turns  
into something of a game, particularly when it involves highly desired shares 
of  well-known companies such as GM.  Since all the major relationships 
with all the major institutional  buyers, it’s hard to say which sales force 
actually makes the sale.  So once Fidelity or TIAA decide how many  shares 
they want to buy, they can divide the commission among the investment  banks 
any way they choose. … 
The final 20 percent is the management fee, which goes exclusively to  lead 
underwriters.  This is for  helping to prepare the prospectus, organizing 
the 10-day road show to market the  issue to prospective buyers, keeping the 
order book and advising the company on  the offering’s price and size.  For  
a big deal such as the GM offering, it might involve incredibly intense 
work by  as many as 30 professionals for as long as four months – let’s say 
generously,  30,000 hours of work.  On a $15  billion IPO, that works out to 
$3 million per banker, or $3,000 per hour  worked. 
Not bad pay.  These “masters  of the universe” make more money in six 
hours than a minimum wage worker makes  all year. 
But the question is, how can they demand such massive fees?  Do they have 
special skills that are so  rarefied and valuable that they can demand such 
numbers?  Are they the intellectual equivalent of  precious stones? 
Of course not.  They do it  the old fashion way.  They have  cornered the 
market.  Pearlstein  notes, “A handful of established firms control access to 
global financial  markets and use this power to extract monopoly-like 
profits and funnel them to  their executives and employees.” 
These firms  don’t engage in price competition because they have a “
gentlemen’s agreement”  between them not to kill the goose that lays the golden 
egg.  If one of them starts undercutting the  other they will drive down 
these fees and all of them will see less  money. 
The big Wall Street banks can limit the size of the investment banking  
club because it is very difficult for upstart firms to establish  themselves.  
Part of the issue is  size.  And these firms have managed  to convince 
potential clients that if they go around Wall Street’s gatekeepers –  say, 
selling IPO’s at auction as Google successfully managed to do with its IPO  – 
they will not get full price for their offerings.   
In addition, with the end of the Glass-Steagall Act that once put a  
firewall between commercial and investment banking, companies worry that if they  
cut the investment banks out of the deal, they will be charged higher prices 
for  their loans. Bundling of services is a classic means of fending off 
market entry  from lower-priced competitors.  
Pearlstein argues that one way to break through this semi-monopoly  pricing 
structure is for companies themselves to do what the Treasury did –  demand 
lower prices from their underwriters.  But they haven’t done it up to now, 
and  there is no reason to expect they will take that risk any time soon.  
Why you might ask should anyone care if a big corporation pays a huge fee  
to investment bankers?  Because the  money they pay really represents the 
control of a huge quantity of the society’s  goods and services.  For the  
corporations in question it becomes a cost of doing business that is passed  
along to the average consumer.  And,  of course, these fees represent dollars 
that the corporations might pay to their  employees who are paid maybe $25 
per hour, instead of $3,000 per hour that goes  to the Wall Street bankers.  
Remember each “Wall Street Banker hour” (at $3,000) represents 120 hours  
of an employee who makes $50,000 per year. 
In either case these are dollars siphoned out of the hands of everyday  
Americans who work for living producing the goods and services of the economy – 
 and concentrated into the pockets of a tiny elite on Wall Street.  And 
mostly they are not paid for adding  value to a product or service.  They  are 
paid a toll for having gained semi-monopoly control of the gateway to  
financial markets.  They are the  sophisticated version of a bunch of bandits who 
stop you on the road and demand  to be paid before you can pass. 
The only way to  end this oligopoly of corporate finance is government 
action. It is just one  more compelling reason why the big Wall Street banks 
should be broken up and we  should reimpose a strict firewall between 
commercial and investment banking.  
The new Wall Street Reform bill went a great distance to rein in the  power 
of the big Wall Street Banks.  Now Congress must take the next step. 
The government must to set up new rules to assure that corporate finance  
is a competitive marketplace.  It  clearly isn’t today, and will never be so 
as long as a few gigantic players are  allowed to maintain “gentlemen’s 
agreements” not to compete on the basis of  price. Congress needs to act to 
break these institutions up, and the Anti-trust  division of the Justice 
Department should take action to enforce the anti-trust  laws. 
And isn’t the only reason to break up the big Wall Street banks.  There is 
no real competition in the  credit card sector either. The top three issuers 
control 52.82% of the market  (JPMorgan Chase 21.22%, Bank of America 
19.25% and CitiBank 12.35%).  Add American Express (10.19%) and  Capital One 
(6.95%) – and it becomes clear that five firms control almost 70% of  American’
s credit card market. 
The new Wall Street reform has gone a long way to prevent the kind of  
recklessness and financial sector meltdown that collapsed the economy and cost  
eight million Americans their jobs. Democrats passed that bill passed, over  
virtually unanimous Republican opposition, on the strength of massive 
public  support. There is plenty of political support among the voters to take 
the next  step and break up the monopoly power of the big Wall Street  Banks. 
After all, the only way to completely guarantee that no financial  
institution is ever again “too big to fail” is to invoke the yardstick that if  it’
s too big to fail, it’s simply too big.   
For a long time a group of sharp guys and gals on Wall Street have run  one 
hell of a game on everyday Americans.  We’ve been played for chumps.  Isn’
t it time for us to wake up and end a system where a few Wall Street  
Bankers have a license to siphon money out of the pockets of the middle  class? 
Robert Creamer is a  long-time political organizer and strategist, and 
author of the recent  book:  Stand Up Straight: How  Progressives Can Win, 
available on _Amazon.com._ 
(http://www.amazon.com/Listen-Your-Mother-Straight-Progressives/dp/0979585295/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1213241439&sr=8-1
)  

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