December 9, 2005

Excerpts: The Battle For The Soul of Capitalism - Part IX

By: 800-CEO-READ @ 10:50 PM – Filed under: Management & Workplace Culture

The Winners

Consider first the winners. A large proportion ofthe shares that were sold as the bubble soared to its peak were those held by corporate executives who had acquired vast holdings of their companies’ stocks through options, and those of entrepreneurs whose companies had gone newly public as Wall Street investment banking firms underwrote huge volumes of initial stock offerings, many now worthless. Examining a group of executives in a mere twenty-five corporations in those categories, Fortune magazine placed sales of stock at $23 billion—nearly a billion dollars for the executives of each company.

While hard data for all stock sales by executives in publicly traded companies are not available, it seems reasonable to estimate that total sales could have reached $200 billion or more. Initial public offerings (IPOs)— largely of “new economy” companies, most of which were bereft of earnings—totaled more than $800 billion from 1995 through 2001. (An unknown, but doubtless enormous, portion of the proceeds of these sales was reinvested in stocks.) Thus, the wealth transfer to insiders and entrepreneurs who sold their stocks may well have totaled $1 trillion or more.

The other—and even bigger—recipients of the massive transfer of wealth were the financial intermediaries themselves—investment bankers and brokers who sold those high-flying stocks to their clients, and mutual fund managers who sold those speculative “new economy” funds to the public. Why were they winners? Because the investment banking, brokerage, and management fees paid by investors for their services reached staggering levels. More than a few individual investment bankers saw their annual compensation reach well into the tens ofmillions, and at least a half dozen owners of fund management companies accumulated personal wealth in the billion-dollar range, including one family whose wealth is said to be at the $20 billion level. During 1997–2002 alone, the total revenues paid by investors to investment banking and brokerage firms exceeded $1 trillion, and payments to mutual funds exceeded $275 billion.

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