The Issues, No. 50 - The Stock Market

Our stock market is way out of control and I think that it needs to be altered significantly if we want it to remain a viable and contributing American institution. The current financial crisis and the continuing drop in the market demonstrates that something seriously wrong has been allowed to go on for a long time that is causing severe harm to the country as a whole and to small investors who rely on the market for their retirement incomes and their financial security.

I think what has happened is that the institutional investors who control what happens in the stock market have acted irresponsibly and without regulation or oversight. Institutional investors are in control of huge amounts of stocks. According to WikipediA, "Institutional investors are organizations which pool large sums of money and invest those sums in companies. They include banks, insurance companies, retirement or pension funds, hedge funds and mutual funds. Their role in the economy is to act as highly specialized investors on behalf of others. For instance, an ordinary person will have a pension from his employer. The employer gives that person's pension contributions to a fund. The fund will buy shares in a company, or some other financial product. Funds are useful because they will hold a broad portfolio of investments in many companies. This spreads risk, so if one company fails, it will be only a small part of the whole fund's investment."

Most of the above behavior is good in the ideal but WikipediA goes on to say "Institutional investors will have a lot of influence in the management of corporations because they will be entitled to exercise the voting rights in a company. They can engage in (an) active role in corporate governance. Furthermore, because institutional investors have the freedom to buy and sell shares, they can play a large part in which companies stay solvent, and which go under. Influencing the conduct of listed companies, and providing them with capital are all part of the job of investment management." These are the behaviors that are a scary to me.

I'm not sure that it should be up to institutional investors to determine the fate of a company or meddle in a company's affairs. Sure they represent large numbers of shareholders who are essentially owners of the companies but they are investment managers who represent many stockholders. They are not the stockholders themselves. Their job should be to invest their client's money in stocks that they believe will provide a good return and not manipulate companies or not be a determinant as to whether a company stays solvent or goes under. I believe these to be the kinds of behaviors that have contributed significantly to the current financial crisis.

So when you add to the problems of investment companies' influence in the companies in which they invest, the out of control credit they allowed to happen, the margin buying they allowed, and the outrageous salaries and "golden parachutes" they awarded themselves, it all amounts to the institutional investors investing, and controlling the market, not for their clients, but for themselves. I think our government needs to step in and regulate the institutional investors' power to influence the management of companies in which they invest and to stop the credit practices that have caused the current crisis.