Shift to publicly traded corp changes culture to short-term gain and higher risk


Casting around further, I discovered that Michael Lewis wrote about this ownership shift in The Big Short—his look at who profited amid the 2008 meltdown. In his closing pages, he observed that “you could trace the biggest financial crisis in the history of the world back to a decision” made by John Gutfreund, when, “in 1981, he’d turned Salomon Brothers from a private partnership into Wall Street’s first public corporation.” Had it remained a partnership, Lewis wrote, the firm would not have leveraged itself so dangerously, taking on $35 of debt for every $1 of assets it held, as Salomon Brothers had. No partnership, Lewis wrote, “would have sought to game the rating agencies, or leapt into bed with loan sharks,” like the firms that did predatory mortgage lending. “The short-term expected gain would not have justified the long-term expected loss.” When a partnership becomes publicly traded, somebody else takes all the risk, and you make all the money, my brother had said. Lewis said the same thing slightly differently. When Gutfreund took Salomon public, he and the other partners “not only made a quick killing, they transferred the ultimate financial risk from themselves to their shareholders,” he wrote. Risk taking accelerated. And when risky loans turned sour, more than a trillion dollars of the stuff was ultimately transferred to US taxpayers, Lewis continued, as the Federal Reserve stepped in to purchase bad subprime mortgages from banks.

Marjorie Kelly, Owning the Future 2012 (no page because reading her ms.)

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