Wall Street is necessary

By DAVID MOON, Moon Capital Management, LLC
March 15, 2009

A recent Wall Street Journal article discussing the planned increased regulation of the financial markets posed this question: “Is Wall Street still needed?”

The author posed this as a serious question.

I don’t know whether I’m more shocked or frightened that a serious journalist would ask that question. Anyone who entertains the idea that Wall Street’s destructiveness outweighs its usefulness is naïve and doesn’t understand the basics of capital allocation and how businesses raise the money they need to build factories, expand distribution facilities and create jobs.

The term “Wall Street” often gets tossed around as a catch-all phrase to refer to any out-of-town business executive who makes significantly more money than the person using the phrase.

A better broad definition of “Wall Street” is the industry in which people with excess funds evaluate and decide which companies that need funds are most likely to have profitable business uses. That activity used to mostly take place under a buttonwood tree along the Hudson and East Rivers, where traders first started gathering in 1792. It now takes place all over the U.S. and the world, increasingly away from the series of interconnected buildings near the corner of Wall and Broad streets in Lower Manhattan.

Without the process of matching businesses and individuals with various types of capital needs – both excesses and deficiencies – the only surviving companies would be those that could generate enough capital to self-finance their operations year-round. Without access to debt or equity capital, there would be no retail stores or research intensive businesses. There would likely be no new drug developments.

Even hugely profitable outfits like Walmart use external capital to increase their ability to expand their markets.

If private industry didn’t make the decisions about which companies deserved access to more or less investor money, that function would be left to whom? The federal government?

I don’t like Timothy Geitner deciding which banks are too big to fail. I didn’t like the previous Treasury Secretary, Hank Paulson, deciding when to wipe out the shareholders of a company and in which situations he would take out the bondholders too.

I sure don’t want Senate banking committee members Christopher Dodd (D-Conn.) and Bob Corker (R-Tenn.) holding hearings to make those decisions.

There have been incredible mistakes made by individuals who work for banks, investment houses, brokerages, underwriters and mortgage firms. Some of these acts, well publicized, are egregious.

Private industry, however, doesn’t have a monopoly on self-serving, manipulative, deceptive and egregious acts. They are found as often in Washington as they are on Wall Street.

We are just as likely to find opportunistic charlatans in the City-County Building as we are a corporate board room.

Sadly, it is human nature.

Humans have been giving in to temptation since Adam and Eve. Even then, with a simple set of rules, a young couple managed to violate the authority of a pretty powerful regulator.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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