How stock markets really work: free enterprise meets banana-republic-grade pillaging

For those who read financial news, it can feel intimidating and overwhelming to understand. Things happen very quickly and there’s a steady stream of commentary about every event The talking heads on the news speak as though they know what it all means. I’ve given up listening to the daily chatter long ago; to find meaning in the barrage of earnings hits or misses one has to be totally immersed every day to even be able to understand the reference points, never mind trying to weigh the value of the yakking.

The chatter is unfortunately part and parcel of modern capital markets, the playground of the vultures that help companies raise money. While not a cornered market – companies are of course free to find financing anywhere – public markets exist specifically for the purpose. In concept it’s wonderful; a marketplace where firms that need money meet with firms that have money (or more accurately, have access to other people’s money). In practice, it’s an example of the sad phenomenon that occurs wherever money gathers in large pools. Out comes the lower half. They may be impeccably groomed, but that is very misleading packaging, like superimposing the mindless beauty of beer commercial stars onto packaging for hemorrhoid cream.

It would be fine if the denizens of capital markets were simply the middlemen they should be, pairing capital raising firms with capital heavy investors. But that is boring and non-lucrative, so a massive skimming-machine has been built.

Capital market firms, otherwise known as investment bankers, place themselves between the two parties and structure the system so as to siphon off vast sums of the money flowing from investors to companies. Not large on a percentage basis, but a small percent of a very large number is still a lot of money.

The investment bankers have built a structure where they in effect control market access. Not “control” as in absolute control, the very mention of which causes their lawyers to stir from far below. More like control as in “ sure go ahead and try it without us, and see what happens.” It has become a cartel where one has to play the game to access markets. Corrupt practices have developed – kickbacks, in one form or another (fishing trips, Super Bowl junkets, boys trips to Vegas (it’s always boys…)) – in exchange for never complaining about fees, and never disturbing the system.

That’s not just opinion. Wall Street banks have paid over $200 billion in fines for their shenanigans related to the 2008 financial crisis. Hardly a week goes by that one of the big investment banks is not fined for some type of market manipulation.

It’s the reason the “Occupy Wall Street” movement was started, and it was very sad to see the movement hijacked by various social causes. If it had remained true to its original purpose maybe we’d have gotten somewhere.