(By Daniel Beckerman) Occupy Wall Street had a rowdy anniversary meeting last week. The idea of Wall Street certainly has changed since I first received my securities license in 2000. Wall Street was then considered to be the most prestigious address in the world for a career in finance. It drew some of the brightest minds globally.
Since the financial crisis and bank bailouts, the term Wall Street has become synonymous with instability, greed, and high stakes gambling. It is not clear precisely what the movement Occupy Wall Street would like to accomplish, but they seem to be opposed to what Wall Street stands for.
So, what does Wall Street stand for? The history of Wall Street goes back to the Dutch colonialists in the seventeenth century. Peter Minuit purchased the island of Manhattan from the Lenape Indians for an estimated $24 in trinkets and beads. A few decades later, a wall was built from the east to west side of Manhattan. This wall was designed to keep out the Native Americans and the English colonialists and it was reinforced several times.
The street along the wall became known as Wall Street. It was a popular spot for trade and in the eighteenth century, under a buttonwood tree, a group of stock traders decided to form an exchange. This was the place that ownership shares of businesses could be swapped between two parties. This was the beginning of the New York Stock Exchange and the birth of Wall Street as we know it.
Prior to the financial crisis, there was clearly too much hubris and a lack of proper risk management on Wall Street. It is fair to point to the symbols of greed and instability. But, I think that there is much more that Wall Street stands for. It is also synonymous with the free markets.
It provides a forum where people can quickly and easily allocate capital from where it is abundant to where it is scarce. Wall Street itself is largely symbolic today as the majority of investment market trading takes place outside of the actual physical Wall Street address. Most trading today is done electronically from places like midtown Manhattan, Jersey City, Long Island, and California.
While the free markets have their pitfalls, they are a primary ingredient in making New York the financial capital of the world. You may have the next Mark Zuckerberg or Steve Jobs trying to access public or private investment markets in order to fund the next big idea. Capital markets make it possible to seed a business and create opportunities to create millions of jobs.
Free markets can certainly have an ugly side. We see this when there is too much risk-taking with other people's money, or when there is a lack of integrity and people like Bernie Madoff show up and try to game the system. However, Wall Street and the free markets are what has made New York the financial capital of the world and one of the most successful historical cities in the world.
The valuations of many banks and the Wall Street firms such as Morgan Stanley (MS) and Goldman Sachs (GS) remain well below book value. These discounted valuations reflect a variety of concerns, including future write downs, litigation, and profitability. There is a general lack of confidence and trust in these institutions. But these institutions are not just greedy bankers.
They are for the most part composed of hard working people. Some of these people help to lend money to someone who is trying to hire new workers, or building homes in a community. Some are working to ensure that our electronic data is secure. Some of these people are simply mopping the floors, or cleaning the windows.
There will always be a need for a healthily functioning financial system. Though we are not buying the stock of individual financial institutions for our fund, we do access them in some percentage through ETFs. I believe that the stock of many financial institutions represent a significant investment opportunity for those who have a strong stomach and a long time horizon.
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