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Monday, August 18, 2014
Occupy Wall Street - Forget Carried Interest - Here is How to Really Stick it to the Hedge Funds
Originally Published on forbes.com on October 4th,2011
I have done a couple of “Occupy Wall Street” posts and I think I will have some more coming. It is moving very fast though and this is a busy time at the day job – the final push of second tax season. When I was looking at it last week though, I was able to find only one specific tax proposal. It was not a proposal of the group, but rather something that somebody told them would be a good thing to push for. Surprisingly it wasn’t about“carried interests”. The suggestion was for a tax on stock market trades. The particular proposal was $0.50 per share. Forget about whether that is the right number. More likely it should be based on value of the trade – maybe 50 basis points. Regardless just think about the principle. I kind of like it. I’m going to call it Stock Trading Excise (STE).
Here is the really interesting thing about that proposal. My day jobenvironment is not populated with a bunch of people like my radical friendTom Cahill. Many of them are victims of the corporate media blackout and are only vaguely aware of Occupy Wall Street. When I explained OWS to them they were underwhelmed. When I told them about STE though they loved it. In some cases, we are talking here about border line Tea Party types. I am proposing a new tax, which they will have to pay and they love it. Andy Tieman was director of treasury for a major corporation. Like many of those who retired early, he finds himself back at work in a less exalted role. I find his position really ironic. He is one of the nicest guys I know and our best clients – those who pay their bills timely – never get to talk to him. He told me I absolutely had to put the idea on forbes.com. I told him I had and he told me I needed to do it again.
I really don’t know what the cut-off is for being in the 1%, but I asked somebody I know who is likely in it and he likes the idea. Then I tracked down the biggest curmedgeon in the office. Whenever I mention anything vaguely liberal, he will launch into a tirade about the lazy hordes wanting something for nothing. He like the idea too. He stopped by my office on the way out and started gushing with enthusiasm about it.
The positive sentiment is based on the idea that there is way too much speculative trading. As the curmudgeon put it, the hedge funds with their computerized trading have turned the investment world into a gambling casino. Andy and I, the 1 per center and the curmudgeon all are invested in the stock market which is like having a piece of the real American economy that gives us some security against the ravages of inflation (which you have to be kind of old to remember). We don’t think the wild fluctuations are based on underlying economic reality.
It used to be much more expensive to trade securities. I actually have some intimate acquaintance with why it was so much more expensive. I’m actually a second generation Wall Street guy. I retired early though. At 16. My father was a lifer though. It was a paternalistic environment back then. His company Estabrook & Co. (long ago swallowed up by a bigger fish that was swallowed up by an even bigger one) had its main office on State Street in Boston, but there was a fairly extensive New York operation. There were times when they kept him on when there wasn’t a lot of work to do and there were times he could have done better going someplace else and he stayed. My brief tenure on Wall Street, two summers, was probably the result of the paternalism.
My dad was a senior order clerk. He sat in an interior room with a few other guys like himself. There was a table between them with little tracks with different colors. One of the tracks had a stopper in front of him. He sat there wearing a phone head set. Registered reps who sat at desks and could see daylight wrote orders on slips of paper which went on the tracks. My father would pick up the slips and relay the information to somebody who was trading on the floor. At the end of the day a bunch of p&s clerks would labor long into the night trying to get the days business to balance. I used to listen to them while I sat in the runner’s room carrying out my over time assignment which was sitting around for several hours. The assignment did have a point. The office where the reps and the order clerks were was at 80 Pine Street. The p&s clerks and the runners worked out of a more raffish building whose address I don’t recall. Also there was a keypunch machine there, which was a key part of the high tech operation. The lady who ran the key punch machine was a highly qualified technician. You could not have her carry a box of 80 column cards a couple of blocks at 10:00 PM to 80 Pine where the card reader attached to an ATT dedicated line transmitted the days business to State Street. You needed to keep a runner on for that. A runner who got paid overtime and qualified for “supper money”. I loved it.
That was not the main job of a runner. When a trade was between customers of different firms it had to be settled by a physical transfer of paper securities. So our main job was to spend the morning delivering paper securities to other firms and the afternoon going around picking up checks. There were other tasks. First thing in the morning a runner would bring a huge black case with wheels on it to the bank. As I understand it the case held the securities of all customers with margin loans. That runner would pick up a seven figure check, the day loan. At the end of the day a slightly larger seven figure check would ransom the big black case back. The summer of 1968 was an exciting time in the country. The Democratic National Convention in Chicago resulted in what was called a police riot and the violence outside the hall was debated on the convention floor. Things were exciting on Wall Street too. Trading volume was rising. That summer the volume record set in 1929 was broken. 16,000,000 shares. The back offices were buried. Wages for the army of clerks who made the thing work were not very high and I think tended to be stable. The market adjusted by bonuses denominated in weeks pay. At that point they were being advertised as high as 26 weeks. Sadly my father did not live to see those glory days. He died in 1965.
What paid for that elaborate human infrastructure was fixed commissions. Organizations that traded a lot paid the same high commissions as small timers. The commissions were called soft dollars and firms earned them by doing research. The fixed commissions went away because, I think, of the FTC. The firms could no longer make money from helping people who were buying. Technology drove the transaction costs down. I don’t know how much bigger the old Wall Street would have had to have gotten to accomodate today’s level of trading which is 100 times greater than the late sixities. It would probably be encroaching on Greenwich Village anyway.
The function of Wall Street is to allocate capital for the economy. Some level of trading is necessary for that since the market liquidity makes people willing to invest knowing that they will be able to get their value out if they need it. Somehow in 1968 the economy was able to pay for a very expensive Cold War, a very expensive hot war and a fairly prosperous consumer econonmy with trading at a miniscule fraction of todays level. Maybe a fairly stiff transaction tax would cripple the capital markets. I tend to doubt it. Maybe it would get them back to doing what they are supposed to be doing. At least it will raise some revenue, unlike the Administration’s soft ball carried interest proposal.