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Break Wall Street’s Money Monopoly

As the next Congress creates a new regulatory structure for our crippled financial system, job one is breaking Wall Street's grip on capital and credit.

Nicholas von Hoffman

October 2, 2008

Once again, the small group of financial organizations and the few thousand people who constitute what we call Wall Street have brought the country to the verge of ruin. It’s been barely ten years since they visited the dot-com boom and bust on the nation and twenty years since they took us to the edge of ruin in the savings and loan scandals.

Leading the first response team trying to save Wall Street is Henry Paulson, secretary of the treasury and the former CEO of Goldman Sachs. While at Goldman Sachs, Paulson is estimated to have enriched himself by a one-half billion to three-quarters of a billion dollars.

That kind of money makes people call Paulson and his pals the new robber barons, but they are nothing like the old robber barons of the late nineteenth and early twentieth centuries. Andrew Carnegie and John D. Rockefeller, the two most famous barons of early-robber nobility, enriched the country while enriching themselves, just as Bill Gates has done in our time.

However swinish you may think Rockefeller was, by making cheap kerosene available he made it possible for the first time since man and woman left Eden to stay up after the sun went down. Rockefeller lit up the night. What did Paulson do for all his millions? He pushed paper around, he manipulated capital and credit–not because he is a creative financial genius à la the original J.P. Morgan, but because he made his way up the career ladder in a company that, in association with other Wall Street firms, has enjoyed monopoly control of the distribution of money and credit.

Wall Street’s monopoly power has enabled it to price its often dubious services at extortionate rates. The price of its “products” is what has made it possible for Paulson and his like to amass fortunes rivaling those earned by true entrepreneurs such as Henry Ford in the old days or Gordon Moore, who in our time co-founded Intel.

The job of capital markets is to distribute money where it will be most productively used. Wall Street failed to do its job even as it assessed stupendous fees in return for its disastrous failures.

A shocked and injured public is demanding more and better regulation. Revamping the regulatory structure is needed, but if the past predicts future conduct, Wall Street will find ways to wiggle out from under the regulatory eye.

Regulation does not deal with Wall Street’s monopolistic grip on capital and credit. It will still be able to makes lots of money on financial transactions, whether it’s a big initial stock offering for a young company, floating bond issues or charging interest on our monthly credit card bills.

In the past denunciations of what a hundred years ago was called “the money trust” have come from the left side of the political spectrum. But the struggle against Wall Street has also been carried on by some of the most notable figures in business history.

In 1938 Cyrus Eaton got into a knife fight with Wall Street when he issued Baltimore & Ohio Railroad bonds without having them underwritten by two of the Street’s most imposing names, thereby cutting the Morgan and Kuhn Loeb investment banking houses out of their fees.

One of the epic battles between a non-Wall Streeter and the eEastern money monopoly involved A.P. Giannini, the founder of the Bank of America. Giannini, who invented branch banking and brought banking and financial services for the first time to farmers, factory and white-collar office workers, was scorned for his independence and his Italian heritage, which is odd, considering that Italians invented banking. When Giannini issued stock in the Bank of America and sold it directly to the public without Wall Street brokerage houses getting a cut, another vicious fight ensued which Giannini, the California auslander, won.

It is a rare businessperson, however, who has the energy, resources and the courage to take on Wall Street. The path of least resistance is to give Wall Street the business, suffer the monopoly costs it imposes and hope to pass them on to the customers.

A couple of small fixes in the tax law would go a long way toward breaking the money trust’s hold on American finance. Congress could lower the tax on income or capital gains from stocks and bonds purchased directly from the issuing company, as opposed to those bought through a brokerage house. A similar tax break could be offered to the corporation issuing the stock.

Even now, many companies sell shares directly without going through a brokerage, but they do not put much emphasis on their direct purchase programs because the incentives are not there. Congress could supply them.

The money monopoly could also be tamed by changes in the anti-trust and securities laws, but that approach is complicated, slow and sure to bring on generations of litigation. Imposition of taxes or fees would bring swift results.

The new, lower-cost competition will give the nation a less bubble-prone, more efficient distribution of investment capital. Wall Street will not go out of business, but we may have fewer overly rich, underperforming types like Henry Paulson.

Nicholas von HoffmanNicholas von Hoffman, a veteran newspaper, radio and TV reporter and columnist, is the author, most recently, of Radical: A Portrait of Saul Alinsky, due out this month from Nation Books.


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