An article in the latest New Yorker talks about the effect the big investment banks going public has had on the Wall Street collapse. By putting themselves at the mercy of the stock market, they surrendered a lot of freedom and autonomy. They were pushed to keep leveraging their bets by shareholder demand for profits. And when the profits fell, so did the companies. Gone are the days when JP Morgan could assemble a few bankers and save the economy. Aside from the irony of the titans of Wall Street not understanding the market, what does this say about modern capitalism?
In a related vein, I heard an interesting interview recently about the rash of IPO’s in the dot-com heyday. The speaker said that the old purpose of going public was to raise capital for expansion, but the new purpose became for founders to cash out. As a result, capital formation didn’t go into new production but private fortunes. The result didn’t add value to the economy.
Google, perhaps the most successful company of the new millennium, held off on going public during the dot-com years and instead depended on private investors. As a result, the owners were able to plow profits back into growth and keep the company’s income and assets out of the public eye. By the time Google did go public it was much bigger than anyone thought – too big for Yahoo to catch up, too big for Microsoft to squash.
So, I’ll throw this out to the economists among us. Has the way the stock market handles new offerings outlived its purpose? Are companies going public too soon, or perhaps totally unnecessarily? Are there problems that are deeper than simple regulation can solve? And what would a better model look like?