From today's Daily Reckoning.com
The "New Capitalism" is not only more global than the older form, it is
also more focused on finance. Imagine a man who makes his living digging
ditches. He may hire himself out at a daily rate of, say, $25. The old
capitalists would have paid no attention to him - he is just one of
millions of small entrepreneurs getting by in life.
But today's financial hustlers will spot the opportunity. Let's take him
public, they will say. We'll raise his daily rate to $30...pay him his
$25...and the rest will be our "profit." We'll sell shares to the public
at a P/E of 20...let's see, 20 x $5 x 250 days per year = $25,000. All of
a sudden, the ditch digger has a capital value of $25,000. Then, they
borrow $20,000 from a hedge fund...and pay it to themselves for
structuring the deal. Now, the hustler has $20,000 in his pocket; the
hedge fund has a high-yield bond worth $20,000; the shareholders have
$25,000 worth of stock; and the poor man is still digging his ditches.
Then, an even more ambitious wheeler-dealer will come along and decide to
"roll up" the whole industry - bringing the ditch diggers together into a
multi-national consortium. Now they can all do cross-border
transactions...including derivatives. And now ditch-digging is a major
business, suitable for large investors...with more investment coverage and
a higher P/E ratio. Soon all the world's banks, pension funds, insurance
companies, and hedge funds have some of the ditch digging paper - debt or
equity - and billions in fees and commissions have been squeezed out of
ditches by the financial industry.