[Infowarrior] - A Las Vegas Illusion

[Richard Forno]

A Las Vegas Illusion

Roger Martin is Dean of the Rotman School of Management at the  
University of Toronto and author of the forthcoming book, The Design  
of Business: Why Design Thinking Is the Next Competitive Advantage.

http://views.washingtonpost.com/leadership/panelists/2009/09/a-las-vegas-illusion.html?hpid=smartliving

In response to the question: What does Wall Street have to change to  
produce better leaders, a different culture and a more long-term focus?

Forget about it. Don't even waste time thinking about it. The purpose  
of Wall Street firms is to trade value for their own benefit not to  
build value for the economy either short-term or long-term. While at  
one point in its history, a non-trivial part of Wall Street's activity  
involved financing the growth of American companies, that is now a  
minor piece of its business. Wall Street is primarily engaged in  
encouraging individuals and companies to trade value between one  
another and tolling the parties for the service, and trading against  
the outside economy for its own account.

On the retail side, one Wall Street brokerage firm convinces a buyer  
to buy a stock that its high-paid analysts declare to be "under- 
valued" while another Wall Street brokerage firm convinces a seller to  
unload the self-same stock that its high-paid analysts declare to be  
"over-valued." Randomly, one adviser is right and the other is wrong,  
but both take a commission on the transaction. Zero value is created -  
the buyer makes X and the seller loses X, or vice versa. But as with  
Las Vegas, a casino cut is shaved off the top.

On the corporate side, one Wall Street M&A department convinces a  
buyer that it can make a value-creating acquisition while another Wall  
Street M&A department convinces the seller that selling is "in the  
best interests of shareholders." Again, someone is right (typically  
the seller) and someone is wrong (typically the buyer) and the Wall  
Street firms each earn huge deal fees.

Neither creates value for the economy, nor is it intended in either  
case. Buyers and sellers for some reason, beyond any data or logic,  
believe that Wall Street has special insights that will work in their  
favor - even though there is another Wall Street firm working the  
other side of the transaction.

Wall Street has only one prerogative and that is to maintain the  
illusion that it adds value so that it can charge spectacular sums for  
its services. It is tough to be an awesome leader when your primary  
job is to maintain a set of self-serving illusions.

And increasingly, Wall Street has recognized that the above businesses  
earn chump-change in comparison to the consistently super-normal  
returns of their best business of all: proprietary trading, in which  
Wall Street makes supernormal returns trading for its own account.  
Given that Wall Street can't demonstrate that it provides valuable  
trading insight for outside clients, it begs the question: how can it  
earn super-normal returns trading on its own account? The answer is  
not a very reassuring one: proprietary trading based on proprietary  
information. And the very best proprietary information is information  
that comes closest to being illegal. This is not a zero-sum game. Wall  
Street wins and everybody else loses.

So I think it is foolish to think about Wall Street producing leaders  
that help build the economy. That isn't in the DNA. Wall Street  
exists, first and foremost, to benefit Wall Street and that isn't  
going to change anytime soon.