Mark Gimein writes an interesting piece titled The Reason Wall Street Got So Rich in Two Charts:
The New York City data, though, are compelling. University of Chicago economists Steven N. Kaplan and Joshua Rauh have theorized that the main reason for the rise in Wall Street pay is that “asset managers, investment bankers, lawyers, and top executives now apply their talent to much larger pools of assets.” The bonus charts support that explanation.
You can argue about whether there’s something special about those folks, or whether they’ve just gotten lucky. You can’t argue with the math, which shows unequivocally that income at the top is growing because essentially the same number of people are splitting greater profits.
Next week I expect I’ll take a more careful look at this, moving beyond New York City. There are other factors to consider, like the drop in the city’s share of industry employment from about 30 percent in 1992 to 21 percent now. Nonetheless, I suspect the general principle that the jobs at the top of the economic ladder are becoming ever more lucrative as their industries scale up without adding staff will hold up. If so, that reveals some truths uncomfortable for both sides in the debate over incomes at the top. For the harshest critics of Wall Street. the fewer employees/more profits explanation isn’t exactly the cloak-and-dagger conspiracy they might wish for.
On the other hand, for those who think that all is just hunky-dory on the inequality front, this isn’t exactly a pleasing result either. Fewer people sharing more profits means Wall Street employees may be more “productive” — but not in any way that non-economists understand that word. It’s not that they work harder or have somehow gotten vastly smarter. It’s just that it doesn’t take many more people to do a $300 million deal than a $50 million. That basic fact does a lot to explain why incomes on Wall Street have grown. It doesn’t do anything to make it seem fair.
Fitch is gloomy on Canadian housing prices:
Canadian home prices are overvalued by about 20 per cent, Fitch Ratings says.
The rating agency’s estimate of how inflated prices are was included Monday in details of a new financial model that it is proposing to use to estimate the potential losses on pools of residential mortgages, which form the backbone of a number of securities that Fitch rates.
Naturally, every sleazebag politician in town is blaming the banks:
>Finance Minister Jim Flaherty is issuing a warning to the country’s banks, as stiff competition for mortgage customers is prompting lenders to cut rates heading into the key spring home-buying season.
“My expectation is that banks will engage in prudent lending – not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States,” Mr. Flaherty said in a statement to the Globe on Sunday, after Bank of Montreal reduced its price on five-year fixed-rate mortgages to 2.99 per cent from 3.09 per cent.
Of course the lending will be prudent, chum – given that you are providing virtually unlimited mortgage insurance.
A new fund has started marketting …. North American Preferred Share Advantage Fund:
The Portfolio will be managed by Fiera Capital Corporation (“Fiera” or the “Portfolio Manager”).
In order to seek to achieve the Fund’s objectives, the Fund will invest the net proceeds of the Offering as follows: (i) at least 20% and up to 100% of the Fund’s assets, together with borrowings under the Fund’s loan facility or prime brokerage facility, will be invested in an actively managed, diversified portfolio consisting principally of Canadian preferred shares (the “Canadian Preferred Share Portfolio”); and (ii) the remainder of the Fund’s assets will be invested to provide leveraged, tax-advantaged exposure to the U.S. Preferred Share Portfolio.
…
Fiera is one of the largest independent money managers in Canada with over $58 billion in assets under management as of December 31, 2012, including over $36 billion in fixed income assets. Fiera is also one of the largest preferred share managers in Canada with approximately $1.75 billion in preferred securities.
“Independent” is a bit of a stretch:
Fiera Capital Corporation (TSX: FSZ) (“Fiera” or the “Firm”) ) and National Bank of Canada (“National Bank” or the “Bank”) (TSX: NA) announced today the closing of the transaction under which Fiera will acquire substantially all of the assets of Natcan Investment Management Inc. (“Natcan”) from the Bank for $309.5 million subject to reduction (“the Acquisition”). In return, the Bank, through Natcan, will receive 19,732,299 Class A subordinate voting shares of the share capital of Fiera (the “Class A shares”) as well as a cash payment of $85,553,219.
…
The 19,732,299 Class A Shares (the “Consideration Shares”) over which the Bank exercises control and direction represent approximately 56.11% of the issued and outstanding Class A Shares and 35% of the total number of Class A Shares and Class B special voting shares in the capital of Fiera issued and outstanding. The Bank also received an option to acquire additional Class A Shares of Fiera at a market price determined on the day of exercise, equal to 2.5% of total shares outstanding at the end of September in each of 2013 and 2014. If the options are fully exercised, the Bank will own 40% of the outstanding shares of Fiera. The Bank will also be entitled to protect its ownership in Fiera pursuant to anti-dilution rights
It was a good solid day for the Canadian preferred share market, with PerpetualPremiums gaining 2bp, FixedResets up 8bp and DeemedRetractibles winning 10bp. Volatility was average, skewed to the upside; volume was below average but dominated by FixedResets, presumably due to the TRP.PR.D new issue.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.5339 % | 2,594.6 |
| FixedFloater | 4.04 % | 3.30 % | 23,155 | 18.48 | 1 | 1.9489 % | 4,029.9 |
| Floater | 2.56 % | 2.86 % | 77,745 | 20.01 | 5 | -0.5339 % | 2,801.4 |
| OpRet | 4.81 % | 2.90 % | 45,027 | 0.32 | 5 | -0.1777 % | 2,592.7 |
| SplitShare | 4.60 % | 4.54 % | 45,614 | 4.24 | 2 | 0.0400 % | 2,928.1 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1777 % | 2,370.8 |
| Perpetual-Premium | 5.21 % | 1.45 % | 84,823 | 0.16 | 31 | 0.0175 % | 2,355.7 |
| Perpetual-Discount | 4.83 % | 4.88 % | 133,474 | 15.61 | 4 | 0.1421 % | 2,652.5 |
| FixedReset | 4.91 % | 2.74 % | 281,604 | 3.54 | 80 | 0.0796 % | 2,498.7 |
| Deemed-Retractible | 4.87 % | 2.53 % | 141,848 | 0.32 | 44 | 0.0970 % | 2,445.0 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| TRI.PR.B | Floater | -3.63 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-03-04 Maturity Price : 23.07 Evaluated at bid price : 23.33 Bid-YTW : 2.24 % |
| PWF.PR.A | Floater | 1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-03-04 Maturity Price : 23.49 Evaluated at bid price : 23.76 Bid-YTW : 2.19 % |
| MFC.PR.H | FixedReset | 1.15 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-03-19 Maturity Price : 25.00 Evaluated at bid price : 26.50 Bid-YTW : 2.98 % |
| BAM.PR.G | FixedFloater | 1.95 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-03-04 Maturity Price : 22.76 Evaluated at bid price : 23.54 Bid-YTW : 3.30 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TRP.PR.D | FixedReset | 1,497,865 | New issue settled today. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-03-04 Maturity Price : 23.23 Evaluated at bid price : 25.40 Bid-YTW : 3.50 % |
| BNS.PR.X | FixedReset | 204,450 | CIBC sold three blocks to Scotia of 24,900 shares, 49,000 and 18,000, all at 26.33. CIBC sold another four blocks to TD, of 19,000 shares, 30,000 shares, 10,000 and 25,000, all at 26.34; and finally sold another 15,000 to TD at 26.33. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-04-25 Maturity Price : 25.00 Evaluated at bid price : 26.32 Bid-YTW : 2.04 % |
| PWF.PR.S | Perpetual-Discount | 118,482 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-03-04 Maturity Price : 24.58 Evaluated at bid price : 24.97 Bid-YTW : 4.81 % |
| ENB.PR.T | FixedReset | 55,241 | Scotia crossed 40,000 at 25.50. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-03-04 Maturity Price : 23.28 Evaluated at bid price : 25.60 Bid-YTW : 3.55 % |
| BNS.PR.P | FixedReset | 45,076 | TD crossed 40,000 at 25.15. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.14 Bid-YTW : 3.27 % |
| BAM.PF.A | FixedReset | 35,604 | National crossed 25,000 at 26.32. YTW SCENARIO Maturity Type : Call Maturity Date : 2018-09-30 Maturity Price : 25.00 Evaluated at bid price : 26.37 Bid-YTW : 3.58 % |
| There were 26 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| TRI.PR.B | Floater | Quote: 23.33 – 24.40 Spot Rate : 1.0700 Average : 0.6220 YTW SCENARIO |
| BAM.PR.C | Floater | Quote: 18.49 – 19.00 Spot Rate : 0.5100 Average : 0.3222 YTW SCENARIO |
| FTS.PR.G | FixedReset | Quote: 25.01 – 25.25 Spot Rate : 0.2400 Average : 0.1758 YTW SCENARIO |
| CM.PR.K | FixedReset | Quote: 26.06 – 26.30 Spot Rate : 0.2400 Average : 0.1859 YTW SCENARIO |
| RY.PR.L | FixedReset | Quote: 25.77 – 25.99 Spot Rate : 0.2200 Average : 0.1686 YTW SCENARIO |
| RY.PR.E | Deemed-Retractible | Quote: 25.75 – 25.93 Spot Rate : 0.1800 Average : 0.1322 YTW SCENARIO |
“It’s just that it doesn’t take many more people to do a $300 million deal than a $50 million. That basic fact does a lot to explain why incomes on Wall Street have grown. It doesn’t do anything to make it seem fair.”
How about, “It’s just that it doesn’t take many more people to make $300 million of [name your product] than it used to take to make $50 million of [name your product].” That’s the textbook definition of increased productivity. If he means that the same number of people can do essentially any size deal, then he’s implying large fixed costs with near zero variable costs, which is an increasing returns to scale industry where we would also expect large profits.
By the way, “increased productivity” rarely means that you “work harder”. Farmers don’t “work harder” when they buy a tractor. They become more productive. Construction workers don’t “work harder” when they they get a backhoe. Capital substitutes for labor, meaning that we need less of it.
Information technology has made knowledge workers vastly more productive. I remember what a spreadsheet is. (The one that you write on.) Wall Street training programs used to involve 6-12 months of updating the files in the libraries that were used in deal-making. All of this information is now available at your fingertips and for little money. Are the Google millionaires and billionaires “fair”? We can debate that but there’s no denying that they are productive.
The nice thing about financial services is that they scale so well! Once you have a basic infrastructure in place, you can quintuple assets under management – or deal sizes – without breaking a sweat.
One of the side effects of the information revolution is that it has made many things scale more readily and this is most apparent in financial services (and in the occasional Google / Microsoft / Apple / etc. billionaire). There is no doubt but that income inequality is growing substantially and there is going to be considerable anger about this – it doesn’t matter if it makes sense or not.
Another side effect is that it’s harder to break into the business – you mentioned updating the libraries used in deal-making; my first job in the industry was finding $500 Canada Savings Bonds in the vault (every piece of paper individually registered), tearing them in half and sending the bottom half to the bank for redemption. It may be good for productivity to eliminate these jobs – but it does mean that there are fewer opportunities at the entry level for bright and ambitious nobodies.