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What Is Wall Street? 01 Wall Street 2003 4/11/07 4:43 PM Page i WALL STREET 01 Wall Street 2003 4/11/07 4:43 PM Page ii OTHER TITLES FROM THE ECONOMIST BOOKS The Guide to Economic Indicators The Guide to the European Union The Numbers Guide The Style Guide The Guide to Analysing Companies The Guide to Business Modelling The Guide to Financial Markets The Guide to Management Ideas The Dictionary of Business The Dictionary of Economics The International Dictionary of Finance Business Ethics China’s Stockmarket E-Commerce E-trends Globalisation Successful Innovation Successful Mergers Essential Director Essential Finance Essential Internet Essential Investor Pocket Asia Pocket Europe in Figures Pocket World in Figures 01 Wall Street 2003 4/11/07 4:43 PM Page iii WALL STREET Richard Roberts 01 Wall Street 2003 4/12/07 5:15 PM Page iv THE ECONOMIST IN ASSOCIATION WITH PROFILE BOOKS LTD Published by Profile Books Ltd 3a Exmouth House, Pine Street, London ec1r 0jh Copyright © The Economist Newspaper Ltd 2002, 2003 Text copyright © Richard Roberts 2002, 2003 All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the publisher of this book. The greatest care has been taken in compiling this book. However, no responsibility can be accepted by the publishers or compilers for the accuracy of the information presented. Where opinion is expressed it is that of the author and does not necessarily coincide with the editorial views of The Economist Newspaper. Typeset in EcoType by MacGuru Ltd [email protected] Printed in Great Britain by Clays, Bungay, Suffolk A CIP catalogue record for this book is available from the British Library ISBN 978 1 86197 464 8 The paper this book is printed on is certified by the © 1996 Forest Stewardship Council A.C. (FSC). It is ancient-forest friendly. The printer holds FSC chain of custody SGS-COC-2061 SGS-COC-2061 01 Wall Street 2003 4/11/07 4:43 PM Page v Contents 1 What is Wall Street? 1 2 How we got here 17 3 Wall Street scandals 54 4 Markets, markets, markets 85 5 The securities industry 118 6 Banking 131 7 Insurance companies and pension funds 138 8 Mutual funds 150 9 Stock exchanges 162 10 Futures and options exchanges 188 11 Payments system, clearing houses and depositories 200 12 Regulation and regulators 209 13 Global money centre 215 14 Wall Street in crisis 223 Appendix 1: Financial-services industry institutions and organisations 231 Appendix 2: Principal players 241 Appendix 3: Key events 1792–2003 256 Further reading 260 This page intentionally left blank 01 Wall Street 2003 4/11/07 4:43 PM Page vii To Sarah This page intentionally left blank 01 Wall Street 2003 4/11/07 4:43 PM Page 1 1 What is Wall Street? ike the dollar bills on which its business is based, Wall Street has two L faces. On one side, it is a place – a street in lower Manhattan. On the other, the term is shorthand for an industry – the US wholesale finan- cial-services industry. Since Wall Street, the place, is the hub of this industry, much of the time the two meanings overlap. But lower Man- hattan is by no means the totality of the US wholesale financial-services industry, and so sometimes the term embraces other locations and insti- tutions. The US financial-services industry has two distinct parts: Main Street financial services and Money-centre financial services. Main Street financial services are retail services, that is, they meet the needs of indi- viduals and small businesses for cheque and savings accounts, loans and mortgages, investment and insurance. Money centre activities com- prise a range of wholesale financial activities, meaning that they serve the requirements of corporations, the government and other public bodies (such as states and municipalities), public agencies and the finan- cial-services industry itself. Wall Street, the place, is the leading US money centre and the fore- most US location for the conduct of wholesale financial services. How- ever, it is not the only money centre in North America: Boston, Chicago, Cincinnati, Los Angeles, Philadelphia, San Francisco and Toronto are also significant. But New York is without doubt the leading US money centre for international financial activities, an arena in which its peer group consists of the world’s other leading international financial cen- tres: London, Tokyo, Hong Kong, Singapore, Frankfurt and Zurich. The Wall Street money centre Wall Street, like other important money centres, comprises a matrix of wholesale financial sectors, financial markets, financial institutions and financial services industry firms. The principal financial sectors are: securities industry commercial banking asset management insurance. 1 01 Wall Street 2003 4/11/07 4:43 PM Page 2 WALL STREET The securities industry is the most prominent and populous Wall Street sector. Traditionally some of the activities of the securities indus- try were conducted by investment banks while others were undertaken by broker-dealer firms, but today the large securities industry firms con- duct the full range of securities activities. Investment banking activities include the underwriting of new issues of securities (stocks and bonds) and the provision of corporate advisory services, especially regarding mergers and acquisitions. Broker-dealer activities focus on the trading of securities. Securities industry firms also undertake asset management and the development of new financial instruments. Commercial banks receive deposits from depositors, both individu- als and businesses, and use these funds, sometimes with other monies, to provide loans. Some lending is at a retail level, to individuals and small businesses, and other lending is a wholesale activity, with clients such as corporations, governments and the financial-services industry. Commercial bank employment in New York City represents close to 6% of the US total, about twice the number of jobs that might be expected in a city of its size. This suggests that at least half of the city’s bankers undertake wholesale commercial-banking services, while the other half provide retail services. Asset management is the activity of managing the funds held by institutional investors. The principal institutional investors are insur- ance companies, pension funds and mutual funds. These institutions receive flows of money from individuals and businesses insuring their lives and property, and from individuals saving for retirement or invest- ing to build capital. Sometimes these funds are managed in-house by appropriately skilled investment managers, and sometimes the manage- ment is subcontracted to the asset management units of investment banks, banks, insurance companies or specialist asset-management firms. In either case, the investment managers are set performance targets. Their remuneration is usually based on the volume of assets managed. Many US insurance companies have their headquarters in New York City or have a significant presence there, from which they service corporate clients and deal with the national and international insurance markets. As in the case of the commercial-banking sector, perhaps half of New York City’s insurance industry workforce operates at the whole- sale level and half serves a retail clientele. 2 01 Wall Street 2003 4/11/07 4:43 PM Page 3 WHAT IS WALL STREET? Wall Street markets Financial transactions are conducted in two types of financial markets: formally constituted exchanges and over-the-counter (otc) markets. Wall Street is host to some of the world’s leading financial and com- modities exchanges, which employ more than 20,000 people in New York City. They are: New York Stock Exchange American Stock Exchange New York Board of Trade (coffee, sugar, cocoa and cotton) New York Mercantile Exchange (metals and energy) Chicago is host to three exchanges that form a vital part of the US wholesale financial-services industry, specialising in trading futures and options contracts relating to a range of commodities and financial derivatives. They are: Chicago Board of Trade Chicago Mercantile Exchange Chicago Board Options Exchange The Kansas City Board of Trade is an important market for trading grain futures and options and also trades stock index derivatives. The five US regional securities exchanges also form part of the national securities industry matrix. They are: Boston Stock Exchange Chicago Stock Exchange Cincinnati Stock Exchange Pacific Stock Exchange (in San Francisco) Philadelphia Stock Exchange. In the otc financial markets, trading takes place by negotiation between the parties to the transaction. These markets have no physi- cal market places – transactions are carried out by telephone and computer. The massive foreign-exchange market, the short-term money market and the US government debt market are otc markets in which currencies, deposits and securities are traded between people working in the industry. To the public, the best-known otc market is the nasdaq (National Association of Securities Dealers 3 01 Wall Street 2003 4/11/07 4:43 PM Page 4 WALL STREET Automated Quotation System), on which stocks are traded electroni- cally. Wall Street institutions A number of important money-centre financial institutions are located in New York. The city is home to several clearing houses and securities depositories that are crucial to the operation of the securities and bank- ing sectors. The New York Clearing House is the oldest and largest US bank payments clearing corporation, which processes $1.4 trillion pay- ments per day for more than 1,000 US and foreign financial firms and institutions. The Clearing House Interbank Payments System (chips) is an electronic payments system that handles 95% of all dollar payments among countries, including foreign-trade payments and currency exchanges.
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