Wednesday, March 16, 2011

BGO: This Tunas's Not for Eating,
It's for Buying and Selling

  I took my only academic course in corporate finance in the fall of 1969 during my transitory stopover at the Yale Law School.   My teacher was Marvin Chirelstein and I cherish the memory: it was one of those courses where you wind up saying "I really have no idea what I am learning in this class but  am so glad I'm here."  In my own teaching career it has never been at the center of my skill set but it works its way sideways into a lot of things and every ten years ago, I teach the course itself.  I'm back to it now in what I trust will be my valedictory decennial venture.

And I think I am just now figuring out what the course is, or was, or has become.  Blinding glimpse of the obvious, perhaps, but put it this way: 40  years ago the course was (or I though it was) a course about, well, corporations, who need, well, finance.   The Ace Widget Works needs to retool, or expand into a new territory  It can issue new equity or borrow from the bank, or if it is  big enough, it can submit itself to the public bond market, under the exquisite mysteries of the Trust Indenture Act of 1939 (I'm sure I had never heard of any Trust Indenture Act until I took the course).    We also got a bracing taste of the then-new elixir of finance theory--efficient markets,  beta, Modigliani-Miller, that sort of thing (Black-Scholes was still a gleam in the creator's eye).

I may have been offbase even then, but this year I've been fighting the syllabus all semester up to this week when it finally sank  into me: "Corporate Finance" isn't about widgets any moreIt's about money--the aggregation, disaggregation and processing thereof.    You talk about hedge funds, about securitization, about monetizing the income stream, yadda yadda.  It's all fun stuff to learn and teach but the widget seems at times to function as no more than the Macguffin-- the device that drives the plot while harboring no independent significance.

I realize I am stepping onto contentious turf here, making assertions about the supposed financialization of the marketplace, and the alleged decline of intrinsic craft.  I know there is a lot of disagreement about whether and to what extent the marketplace has truly become swamped by finance. I concede that it's an empirical issue on which the answer is unlikely to be a simple yes or no.  I recognize also that it's nothing new, this war of the talent and the suits: it's an issue that goes back at least as far as Veblen (okay, a lot further).

I'm necessarily driven to speculate on why the world has changed (if it has changed) so much in forty years.  Seeking for the reasons, for the moment I can come up with two:
  • Cheap money.  Since the Volcker inflection which led to the Reagan boom,  we've been awash--some would say aslosh--in capital.  Arab oil zillionaires, Wisconsin schoolteachers, everybody throwing money at anybody who looked like they could make it grow, all seeking alpha before alpha enjoyed the dignity of a name.
  • Testosterone- driven dealmakers. They say there is nothing so inimical to the stability and good order of any society than a bunch of underemployed young males with more energy than good sense. As General Sherman said with perhaps a soupçon of hyperbole, "These men must all be killed or employed by us before we can hope for peace."  For our purposes is that these deal makers gotta have a deal.  Fish swim, birds fly, men drink and hotblooded young bankers cannot sit quietly in a little room.
These are my candidates.  Are there others?


Anonymous said...

(3) Misguided efforts by Congress and institutional investors to control executive compensation by capping salaries, which led to the extensive use of stock options during the greatest bull market in American history. This perversely INCREASED executive compensation, thereby redefining normal compensation levels in boardrooms and on Wall Street.

Anonymous said...

(4) Like throwing chum at a school of sharks, the sharply increased compensation attracted increasingly greedier people to Wall Street.

Anonymous said...

(5) The slow acceptance of Modern Portfolio Theory and its brethren, e.g., the Efficient Market Hypothesis.

Anonymous said...

(6) With the EMH and MPT came a growing demand for eggheads (rocket scientists, if you please) to apply quantitative methods to Wall Street products. Fisher Black co-authored the seminal work on stock options in 1973 (that fits nicely into your 40-year period). He left academia and joined Goldman Sachs in 1983.

Anonymous said...

(7) Increased leverage at the individual, governmental, and probably corporate level.

Anonymous said...

(8) Point four means we've attracted the sharks. Points five and six mean corporate finance became more complex. Point seven means leverage increased. Guess where these lead.......