By: Neil J. Mason
ELC 1: Who is Wall Street kidding? By the way brokerages present data, one would figure that the market is on fire. However, if you look at the S&P 500 since 1994, you will see that the market has done nothing since 1999 – going on 14 years of sideways market conditions. Why has the market performed so poorly all of these years? Is it because of the Tech-Wreck of the late 90′s? Is it because of the mortgage crisis of 2008? Or, is it because of the new “financial boogey-man” : the Fiscal Cliff? I am sure there is some corporate-sponsored university professor that will give an elaborate reason why the economy is acting the way it is, and that “explosive growth” is just around the corner. However, I feel that if you analyze the economy properly, you will see that things may be changing in a way that might not be “corporate friendly” in the near future. The economy appears to be going from an environment that was dominated by a few large players, to an environment that consists of mostly small players. In a previous blog: The Project Management Generation, I stated that the economy is in transition, from a large corporate-centric business environment, to one of small business owners. It would appear that the age of industrialization is behind us. Since industrialization is shrinking, what about conventional business practices, should they not wither and die as well?
ELC 2: In no other area will the forth-coming seminal change in business practices be felt than on Wall Street. Historically, for the last 200 years anyways, Wall Street was the engine of industrialized society. Wall Street is the place that took the guy who built an amazing product in his garage, and turned him into a corporate powerhouse. The way Wall street worked was very complimentary to an industrialized society. However society is changing and industrialization does not seem to be in the spotlight any longer. We are moving to the information age, the age of intangibles. No longer are the new entrepreneurs going to need financing for assembly lines or any other expensive pieces of equipment. With the widespread use of cloud-sourcing, the average person has unlimited memory storage and could build an incredible e-commerce business on a $500 computer while sipping a latte in Starbucks. Who needs Wall Street’s financing anymore? The recent UBS layoffs in their Investment Banking division is not going to be a one-off occurrence – it is a sign of what is to come. The days of the billion dollar equity issue may be behind us, and many people are feeling the negative aspects of the changing face of business in America and in Western Europe.
ELC 3: It is truly ironic that the Occupy Wall Street Movement is blaming the I-Bankers for the falling economy. There is nobody on this planet who would rather see a spike in business activity, than a Wall Street I-Banker. While the people who wear name-tags to work sing chants about how greed has destroyed America, Wall Street is trembling in fear of knowing what awaits them. What “the movement” fails to realize, is that Wall Street-Types get paid when business’ grow – they want a strong economy. The more transactions that are done, the bigger an I-bankers bonus. The recent economic decline has resulted in less Wall Street activity, not more. So, does that mean the world of business will not need financing in the future? Well, I am sure that there will be capital needed, it just might not be in as large of chunks, or administered in the same manner.
ELC 4: Firstly, as mentioned earlier, the trend in business is all about small business development. Now, Wall Street may have to do a similar set-up that they used for packaging mortgages. Only, this time it will have to be conducted with more responsibility. There is no way that Wall Street could make money from handing out $10,000 loans at a time to small business owners. However, if they use their securitization technique, where they put several business loans into one Collateralized Business Obligation (CBOs), it may work. The challenge is, the public is going to be very skeptical about any offering that resembles the same structure that caused mortgage fiasco. So, how can it be done? If you look at the situation from a purely objective nature you can draw some conclusions. Firstly, the major downfall of the mortgage crisis was, by and large, due to a lack of transparency. CMOs (Collaterized Mortgage Obligations), were structured in such a way that an investor really didn’t know what they were getting. In an attempt to make jack-up yields, so investors would buy Mortgage Backed Securities (MBS), Wall Street placed different grades of mortgages into one MBS – each different grade of mortgage was called a tranche. The best mortgages had the lowest yield and the worst ones (called “equity tranches”) had the highest yields. Wall Street figured that the good mortgages would add security to the MBS, while high-risk mortgages gave the investment the desired yield. Furthermore, the way the individual mortgages were set-up, where mortgage holders could re-finance at lower rates in the future, provided some sort of assurance that mortgage payments would keep on being paid. That is, until rates almost went to zero and people could no longer refinance – you know the rest of the story. So, how can Wall Street modify structure of the failed mortgage backed security system to the new small business loan niche? The answer, transparency.
ELC 5: If you look at the advancements in Social Media, Multimedia and popular culture. You can see where the investor might feel comfortable investing money. For one thing, people have been very receptive to reality T.V. shows. There seems to be more interest these days in seeing “real things”. People also like to watch shows that have a voting element attached to it. Survivor and Dances with the Stars are very popular. Viewers of these programs like the competition element, as it adds excitement. Then there is the fairly recent interest in start-up companies. In the U.S. they have the show: Shark Tank, where start-up business owners pitch their business idea to a groups of potential investors in the hope that they obtain some much needed venture capital. The same type of show has been developed in Canada called: Dragon’s den. Now, you combine the fact that the public has a genuine interest in start-ups with multimedia and social media, what do you get? You could have a web-based business that shows several start-up companies. The companies that make the most sense will go viral by being tweeted or passed around on Facebook. Wall Street could take all of the most popular business ideas and package them in such a way, where the ones that focus in on IT may be one BBS (Business Backed Security) and maybe another one could be a BBS that just focuses in on real estate. Again, there would have to be transparency. There could be web-based videos on each company so potential investors can get information on each company before they invest.
ELC 6: Now, don’t think that this new way of providing capital to start-ups is a lesser form of finance. If done properly, this could be one of the best things to happen to Wall Street in years. For one thing it could be a huge step forward in Risk management. When a country relies too heavily on a few giants, the entire economy gets shaken-up when one of the giants falls. By having several small companies drive the economy, there will be less turbulence if some fail. Furthermore, there will be greater innovation. According to a recent article from Gartner, The Nexus Forces, it stated that corporations can not move fast enough to keep up with consumer technology. It used to be that a person would have inferior equipment at home, and would only use high tech equipment when they went to work. Now, the opposite is true. People walk into their workplaces with technology better in their hand than what a major company is using to run its business. By having small start-ups as the central focus of the economy, new companies can bring the latest products and services to market instantly. Innovation will grow at a pace never before seen. It takes too long for stuffy boards of directors to get anything done in today’s environment. Wall Street needs to embrace small business in a way it has never done before.
