Public Ownership Is A Fraud

Michale Lewis' epic piece "The End" makes a great read, even if you don't agree with all of his points or accounts. To me, the central theme is that the beginning of the end of Wall Street was Salomon going public. By going public, the wealth of investment banks is transferred from the public to the previous private partners, while the risk goes the opposite way. This is indeed the single most critical, systemic discourse between risk and reward in our financial system.

I'll take that one step further and say the very notion of "public ownership" has become a farce in modern economy.

1. First of all, few shareholders nowadays intend to "own" it for a long time to begin with -- holding a stock for over a few years is considered an indication of old age, I guess.

2. Secondly, for the few old-fashioned shareholders with the real ownership mentality, they have very limited visibility to what's going on in "their" company. Quarterly report is a mockery of transparency for all modern companies large enough to cross the IPO threshold. This is especially true for financial companies, considering the notion of "off balance sheet", the myriad of derivatives, and the increasingly nonsensical accounting rules (I'm surprised few have criticized FASB in this mess yet).

3. Thirdly, even if transparency becomes real and meaningful via some drastic change in law and regulation, shareholders have little use of it. You can vote once a year in shareholders' meeting and hope the board would exercise oversight for you, just like what you do with politicians. Well, you know how well that's been working out. If you think I'm being cynical, just look at the trend in executive compensation over the last few decades.

4. Even if shareholders care, can get visibility, and have an effective board, the obscenely high executive compensation, and especially the most insane, illogical, anti-owner notion of golden parachute, still provide enough cushion for irresponsible and incompetent behavior for at least some executives. Heads you win, tails you don't lose. Risk-reward breakage. Disaster is guaranteed.

We've seen this farcical notion of public ownership blowing up on our collective face in steel, air carrier, banking, telecom, insurance, auto, technology, air carrier, banking, insurance, auto... Now even GE is in trouble. Every time we find a few culprits, scapegoats to satisfy our frustration, then carry on the same fraud, only to see it blowing up somewhere else a few years down the road.

Time to take a step back and survey the history, folks. Do we want to continue this fraudulous public ownership or go straight to state ownership? Most of our mortgages and banks, some insurance, and autos it looks like, are already state-owned. Or worse yet, tax payers just pay and don't own anything.

Public ownership was once a great idea. And it worked when life was simple and scale was manageable. But today's world is different. We need to either drastically rethink corporate governance model in public ownership or revert back to private ownership. The other alternatives are state ownership or even worse, like what we're heading into now, fantom public ownership with tax payers taking on the ultimate risk without any reward.

I don't think Wall Street is dead. There'll be smart and hardworking people setting up private-ownership investment banks soon, because the future state-owned banks cannot possibly compete and be financially viable without constant stimulus, bailout, and suffocating regulation.

Out of the ash, an Old Wall Street will re-emerge.