Goldman Sachs, Morgan Stanley, JP Morgan Chase. Just a few of the fat cats President Obama has referred to in the past. With the word “occupy” being the trendiest word in the Twitterverse and other social media, no doubt Mr. Obama will pander to the Occupy Wall Street movement during the 2012 election cycle. It’s unfortunate that the president may take this route, but it’s expected given that he has for the most part abdicated his position as national Explainer-in-Chief.
If Mr. Obama has bothered to explain the terms “investment bank” and “speculation” beyond the phrase “fat cat”, he must have buried the definition in footnote 4 of an old speech. Since we will hear these terms time and again next year, especially if Willard Romney, a former turnaround specialist who once served as governor of Massachusetts becomes the GOP nominee for president, we may as well get familiar with a few of them.
First, let’s start with the aforementioned investment banks. When companies and municipalities want to raise capital to finance the marketing of new products and services, or as in the case of municipalities, streets, bridges, and airports, they call on their investment banker. An investment banker is a broker-dealer that specializes in underwriting the sale of securities. Working on behalf of a company or municipality, the underwriter’s main goal is to get municipal bonds or company shares into the hands of the investing public.
The investment banker doesn’t do this for free of course. The banker gets paid from the spread between the price he sells the securities at to the public – and the money passes up to the municipality or the company.
Contrary to the image of a bunch of pot-bellied White guys sitting around a table smoking cigars, investment bankers aren’t throwing darts at a board hoping for a bulls-eye. Investment bankers act as the eyes and ears for companies like Facebook and Linkedin whose investors would like to take the company to the next level and need the additional capital to do it.
Investment bankers provide advisory services, helping the municipality or company determine the best method for raising capital; determine the right price for the bonds and stocks being sold; and navigate the municipality or company through the regulatory maze that comes along with raising capital from the public.
Second, the investment banker helps with the distribution of the securities to the public. The investment banker may use its broker-dealer staff to sell the securities or purchase the offering from the issuer before selling the securities to the public.
In short, investment bankers fulfill an intermediary function between investors and companies seeking capital. They help circulate capital throughout our economic system and yes, extract a portion of the value generated for the company as part of their fees.
Wow. Sounds pretty antiseptic given the talk from the likes of Massachusetts U.S. Senate candidate Elizabeth Warren (D) and her merry bunch at the Consumer Financial Protection Bureau or the worshipers of Dodd Frank. Speculation has become a dirty word for the anti-Wall Street bunch, but in reality, given the investor class’ overall wariness of uncertainty, speculation is not quite as volatile you think.
Speculation, which is defined as assuming a higher risk in anticipation of gaining a higher return, is only entered into after thorough analysis of the environment surrounding a trade. Contrary to popular belief, it does not involve the throwing of darts; it is not gambling with a random outcome.
Is there a chance that a trade will go the opposite way of expectations? Of course. Just ask the fine people over at MF Global. Okay, I’m not being fair to MF Global given the derivatives trader got back the money from their sovereign debt trades, but investors did run for the hills in part due to the perceived overexposure to Europe’s financial problems.
The point here is that speculation, properly defined, is not the bogey man too many politicians, including Obama, would like to make it out to be. Unfortunately for Willard Romney, he’ll have to run the gauntlet of the incomplete description of Wall Street that will be presented during the campaign.
In addition to Romneycare, the Obama campaign will likely argue that Mr. Romney is not only a member of the one percent, but also a member of the industry that caused the foreclosure fiasco, the credit crisis, and the recession. In fairness to Mr. Romney, his old firm, Bain Capital, doesn’t come up on the radar screen for exposure to poorly performing mortgages or European sovereign debt. Bain Capital’s activities are as vanilla as Pat Boone; comprised primarily of absolute return, venture capital, leveraged buyout, and private equity investments in small businesses and start ups.
If anything, trying to highlight and cast as negative the activities of a capitalist who actually raised funds for startups that grew and hired people may not be the best approach from an administration perceived as overly regulatory and dead set on rejecting job creating initiatives. You know: like AT&T’s proposal to bring 5,000 call center jobs to the U.S., or creating 25,000 jobs via the Keystone pipeline project. Those would be the last topics the Explainer-in-Chief would want to educate the public on.