By Pam Martens: November 26, 2012
America doesn’t have a jobs problem; it has an IPO problem. The lack of jobs can be directly correlated to the misallocation of capital by Wall Street to financial wagers instead of directing the flow of capital into job producing growth industries.
A review of the 201 initial public offerings (IPOs) at the New York Stock Exchange so far this year, shows that 99 were financial wagers on old debt and/or equity instead of new listings of real companies making real products to create real jobs. The 99 IPOs were closed end mutual funds or ETFs (Exchange Traded Funds). Another 11 listings were banks or financial firms.
One of the financial firms is KKR Financial Holdings LLC. This is how it describes itself on its web site: “KFN, is a New York Stock Exchange-listed specialty finance company with expertise in a range of asset classes. KFN’s core business strategy is to leverage the proprietary resources of its manager with the objective of generating both current income and capital appreciation. KFN is externally managed by KKR Financial Advisors LLC, a wholly-owned subsidiary of KKR Asset Management LLC, which is a wholly owned subsidiary of Kohlberg Kravis Roberts & Co. L.P.” Does that sound like a growth industry with a breakthrough innovation that will jumpstart jobs in America?
Of the remaining listings, I randomly selected a company I’d never heard of to see if there might be any prospect for new jobs with good wages. The company is called Rexnord Corporation and went public on March 29 of this year. At first, I was hopeful – the company makes real things – gears, couplings, industrial bearings, flush valves and faucet products. But as it turns out, the bulk of the money from the IPO was not going into expansion where there might be some hope for job creation, it was going to be used to pay off debt the company owed to Wall Street firms.
On December 14 of last year, Kate Mitchell testified before the Senate Banking Committee’s Subcommittee on Securities, Insurance and Investment. Mitchell is a Managing Director at Scale Venture Partners, a venture capital firm based in Silicon Valley and a former Chairman of the National Venture Capital Association. Mitchell testified that “Companies that were founded with venture capital accounted for 12 million private sector jobs and $3.1 trillion in revenue in the U.S. in 2010, according to a 2011 study by IHS Global Insight. That equals approximately 22 percent of the nation’s GDP. Almost all of these companies, which include Apple, Cisco, Genentech and Starbucks, began small but remained on a disciplined growth trajectory and ultimately went public on a U.S. stock exchange.”
Let’s pause for a moment to examine the inclusion of a Starbucks with an Apple, Cisco and Genentech. A coffee and food retailer, like all those financial wagers currently dominating the IPO listings at the New York Stock Exchange, is not the way America will woo investors back to Wall Street to invest what’s left of their depleted life savings. More importantly, retailing cannot produce the breakthrough innovations desperately needed to reignite job growth and good wages. But Mitchell is right about the role of venture capital startups needing access to the U.S. capital markets to ramp up their job prospects.
The Senate hearings held in December were cursory and perfunctory and perpetuate the meaningless Wall Street reforms by a Congress too lazy or too compromised to get to the bottom of how corruption on Wall Street is strangling job creation in our country. When faced with the same set of circumstances in 1932, the U.S. Senate Banking and Currency Committee passed Resolution 84 on March 2, 1932 and commenced full scale hearings covering every aspect of “Stock Exchange Practices.” The investigation became even more expansive with Senate Resolution 56 on April 4, 1933 and Senate Resolution 97 on June 8, 1933. Altogether, the hearings included more than 12,000 pages and over 1,000 exhibits submitted into evidence.
The work of this one Senate committee and its exposure of systemic corruption of every appendage of Wall Street delivered the securities regulations that protected this nation for half a century, until they were whittled away from the 1980s onward, culminating in the devastating repeal of the Glass-Steagall Act in 1999.
Today, we urgently need the same intensive series of hearings on “Stock Exchange Practices.” We need in-depth investigations of so-called internalization (where big Wall Street firms match their customers buy and sell orders, effectively becoming their own stock exchanges); high frequency trading; how much insider trading is occurring as proprietary trading; has stock research really changed for the better at the large firms; are compensation incentives at the root of the corruption; why is so much dreck being served up as IPOs; have the big firms corrupted their regulator at the New York Fed; do the large firms have too much control over market pricing functions for structured products; what is the true economic damage from bank deposit concentration at the four largest Wall Street firms.
The 1932 to 1934 hearings revealed layers upon layers of corruption. Only by peeling away each artifice was the next layer of market rigging exposed. Until Congress gets serious about this task, job growth and innovation will languish along with the future prospects of our Nation.