Via Stephen Bornstein’ Hedge Fund Law Blog

///Via Stephen Bornstein’ Hedge Fund Law Blog

Via Stephen Bornstein’ Hedge Fund Law Blog

Zingers from Buffett, Welch and Weill – By Stephen Bornstein

Bold ideas to fix Wall Street from three unexpected sources

Three of the biggest names on Wall Street have sent shock waves through the financial system with bold and ironic antidotes for curing its ills:

Hedge Fund Lawyer Stephen Bornstein, hedge fund, hedge fund lawyer

Warren Buffett calling for raising taxes on the rich;
Jack Welch denouncing management strategies focused on quarterly results; and
Sandy Weill backing the breakup of the big banks.

The third richest person in the world, Warren Buffett shocked us all early last year when he declared that anyone making more than $1 million a year should pay at least 30% in income taxes.  The so-called “Buffet Rule” reflects his embarrassment at paying a lower effective tax rate than his secretary.   He undoubtedly earns tens of millions of dollars a year on his Berkshire Hathaway investments and gets a huge benefit from the preferential tax rate on capital gains.

Buffett came to realize that the fiscal imbalance between rich and poor in America today is no longer defensible, even if there were good reasons at one time to promote capital investment through the tax system.   Since US income inequality – as measured by how much the top 1% earn — has more than tripled in the last 40 years, Buffett must sense that our society is at a tipping point, and the presidential election this fall will most likely determine whether his prescription eventually wins the day.

Denouncing management strategies aimed at maximizing short-term stock prices at first seemed facetious coming from Jack Welch.  When he became CEO of GE in the late 1970s, Welch said his goal was to sell underperforming businesses and cut costs so as to increase profits faster than global economic growth.   That remark was interpreted to mean maximizing short-term shareholder value.

In discussing the future of capitalism in a recent interview, however, Welch explained that he never meant to glorify short-term corporate profit-seeking, but rather to indicate that it should figure into a long-term growth program.  To Welch, “maximizing shareholder value is an outcome, not a strategy.”  While this may be prescient advice for American managers, one wonders how to persuade them to lengthen their focus when the eyes of the research analysts who follow their companies and the shareholders who invest in their stock are trained squarely on quarterly results.

Sandy Weill’s recent call for the dismantling of the universal banks is even more surprising to the financial industry than Buffett’s tax epiphany or Welch’s reconsideration of corporate short-termism.  After all, it was Weill who, in 1998, built Citigroup into the first financial supermarket in the world.

Weill has apparently seen enough greed, corruption and mismanagement in the banking industry of late to realize that the animal spirits inherent in proprietary trading and investment banking have no place in a government-guaranteed institution.  US taxpayers should not be back-stopping private risk-taking, especially where the public gets none of the upside.   Since the Volcker Rule has already taken us a step in that direction, the next step — repealing Glass-Steagall — may not be that far-fetched.  The question then would be whether we could actually separate investment from commercial banking without disrupting the global financial system any more than it already is.

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