For close to fifty years I have participated in the financial community as a worker and/or investor; in the U.S. markets and as an investor overseas. I see our financial world undergoing massive changes, both as a unit and through its interactions with organizations and individuals. Amidst these changes, I have been formulating a course of action for the money I have been, or will be, entrusted to invest. Some of my ideas are starting to congeal into view. These thoughts were reinforced by Jason Zweig, the always thoughtful and well-researched author of “The Intelligent Investor” column in the weekend edition of The Wall Street Journal. A friend for many years, this weekend Jason points out the hopelessness of trying to control the level of bonuses on Wall Street. He recognizes that the large firms inflicted by the TARP will out-source most of their high compensation work to firms in which they have some ownership.
My thought pattern is more encompassing, and to some extent a throw-back to a Nineteenth or early Twentieth Century model. My basic concept might be called the “Single Capacity Approach.” First, an entrepreneur or group of entrepreneurs would find a banker (most likely a merchant banker or venture capitalist) to provide the next level of capital and to offset risk from its own resources. Once additional capital was needed, then an investment banker would be sought. In the old days, this firm would be called a buying firm, somewhat analogous to the role often played by the old First Boston. Up to this point, as all of the participants would be using their own, relatively small amounts of private capital, one would think they would exert a reasonably high level of prudence in their risk aversion. There would not be much systemic risk if any participants failed.
In this model, the buying firm would have no direct customers and would turn to a selling firm who has commissioned brokers to sell the new merchandise. As the selling firm would only have investors as clients, they would research the prospects of their underwritings very carefully. Because of the need to underwrite these issues, some public ownership would be desirable. If the selling firm would go bust, it would not create a major failure. The ownership of selling organizations has always been problematic for the marketplace because of the over-zealousness of commissioned sales people, or the risks of the selling organization pushing its own proprietary products. (The latter event can create a major risk). Recently, there have been press reports that Bank of America turned to its newly-owned Merrill Lynch to sell Bank of America’s own capital-raising issue. Similar lapses in judgment are ill-advised and may quickly bring the reversal of the repeal of the two sections of the Glass-Steagall Act that prohibit commercial and investment banking from cohabitating. When properly supervised, the selling firms, as well as commercial banks could provide custodian services, including margin lending and securities lending to their clients.
To protect the public investor in these underwritten and publicly traded securities, there should be a bunch of intermediaries/fiduciaries independent of the commercial bankers, investment bankers, venture capital firms and most important of all, the selling organization firms; they could be independent advisers, mutual funds and hedge funds with enhanced disclosure. While the need for substantial capital for these intermediaries is not enormous, they could be publicly traded to facilitate internal transfers of ownership and the settlement of estates.
The structure that I outline is far from perfect, but it has the advantage of keeping the required capital relatively small and reduces the need for TARP-like intervention in the capital base and compensation tables.
I look forward to hearing your views, please comment.