
Wall Street and Silicon Valley - dirtyaura
http://baselinescenario.com/2011/10/09/wall-street-and-silicon-valley/
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chime
> Whenever someone criticizes “Wall Street,” someone else tries to defend Wall
> Street by saying that without it we wouldn’t have Silicon Valley and all of
> its wonders.

Criticizing Wall Street is a very broad term and its defense is equally
general. No person who knows anything about markets will say corporations,
stock exchanges, or liquidity shouldn't exist. The author is replying to
someone who is broadly defending Wall Street's role in VC, private equity,
IPOs, and debt. This is a diversion from what the problem with Wall Street
really is. I have no problems or complaints about the actual functions and
goals of markets. My problems with Wall Street are things that nobody tries to
defend but nobody seems to stop:

1) Revolving-Door: Between the top banks, Federal Reserve, and US Treasury.
Ex-CEO of GS should not be allowed to dictate or enforce monetary policy.
Similarly ex-management of big pharma should not be allowed to run FDA. I saw
an OccupyWallStreet sign that expressed this beautifully: Separation of
Corporation and State.

2) Capital Gains tax: Income tax is progressive. Why not Capital Gains tax
above 15%? I understand the whole I'm taking a "risk" factor. But will pg
really shutdown YC if long-term CG is higher? Short-term CG is already same as
Income Tax:
[http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United...](http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States)
\- but long-term is just 1 year. This means, instead of giving a CEO a salary
of $10m (taxable at 35%), you just give him $10m in stock that he can collect
after 12 months. After the first year has rolled by, it is no different from a
regular paycheck. I'd say 99.9% of people cannot afford $0 income for a year
but those who can, pay significantly lower taxes. And there are other ways to
treat short-term gains as long-term. So why not make long-term to actually be
long-term, like 5 years?

3) Funny Quant business: My friends and professors in college suggested that I
switch my major from CompSci/Econ to Operations Research/Math because banks on
Wall Street were looking for kids like me who loved numbers. The more I looked
into it, the more disgusted I felt. Yes, I can comprehend why improving a
linear optimization algo. by 0.01% can result in $5m in profits so as a
business, it makes perfect sense to hire the smartest people you can find to
work on these problems. The issue I have with this is that these operations
serve no capital market purpose. I know they're not illegal and I know they're
not directly harmful. But they are also not necessary and they indirectly harm
everyone because the banks find them as bigger sources of profit than their
investment operations. It's like an MD selling power bracelets - not illegal,
not directly harmful but you know that if they keep this up and make a lot
more money this way, they have less incentive to dispense regular medical
advice which is harmful.

~~~
prostoalex
I never quite bought into the concept of treating long-term capital gains in a
special way. In fact, a glance at
<http://en.wikipedia.org/wiki/Capital_gains_tax> suggests that only Hungary,
India and United States have a notion of special taxation for long-term
capital gains (it's 12 months in India and USA and 3 years in Hungary).

Treating LTCG as income would simplify tax preparation, but any time this gets
brought up, the politicians bring up the small business owners who are
unfairly penalized for selling their business.

~~~
chime
> small business owners who are unfairly penalized for selling their business.

If you work for little profit and low salary for 10 years and finally managed
to sell your business for $200k gains, I can understand why you don't want to
pay 33% just for that one year, especially since you no longer have a source
of income until you create another business or get a job. Paying 33% instead
of 15% seems unfair. I personally fit into the same dilemma where in 2011 my
wife and I will have high income but I won't be making anywhere close in 2012
when I go full-time on my app/startup.

I believe there can be solutions to this such that SMBs are not harmed while
at the same time, making sure top 0.01% doesn't qualify for it. Changing the
brackets for LTCG can work (15% for < $250k, 20% for < $500k, 33% for < $1m,
35% otherwise). Tax deferment could be another solution.

Problem is that SMBs are used as a shield to defend the ones with Cayman
Island and Swiss Bank accounts. It's not about being anti-corporation or anti-
government. It's about being pro-fair.

~~~
prostoalex
But let's say you knew your LTCG would be taxed as income. It seems you
would've either

1) opted in for a larger salary over the last few years to realize the income
under a bracket that you're comfortable with, and drive the sale price of a
business down

2) come up with a structure where you can split up the proceeds over several
tax years (selling 50% on Dec 31st and 50% on Jan 1st comes to mind, but
there're probably better ways to optimize this)

~~~
chime
I agree. Both 1 and 2 are possible. However 1) is unknown because of the
inherent risk. You can't give yourself a large salary just in case business
sells. 2) is probably possible already (sorry, not a tax accountant) but might
be costly/friction.

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justincormack
Our modern institutions, the banks and the corporation, arose in a period when
business was very capital intensive, you had to build big factories to
compete. But recently, large areas of business have been changed by technology
to require far less capital. Not all of them, building chip factories has not,
but look at say the media business, it used to cost a huge amount to build
printing plants for newspapers, but this is all starting to go away, taking
with it the rationale for the large corporation which used to have to be that
big to finance the capital.

Silicon Valley is funding the smaller scale firms of the new economy, but that
does not require huge amounts of money; meanwhile Wall Street is mostly large
amounts of leveraged capital that does not have productive use in the real
economy any more, so it tends to feed into asset price bubbles.

Its a big long term shift in the balance.

~~~
cellis
Ironically, one of these asset price bubbles is...Silicon Valley! How else
could a photo app get $40 million before it even has customers?

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jwatte
Saying risk capital worked before a liquid second market existed is like
saying food distribution worked before the supermarket. I agree that Wall
Street financiers seem to focus too much on using secondary (and tertiary)
effects to simply amass wealth, and i worry that that actually has a negative
overall effect on society. But without a liquid secondary market, the primary
market is significantly stymied!

~~~
nandemo
Exactly. As I was reading, I was thinking "yeah, record players were invented
a 100 years ago, who needs MP3 portable players?"

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Shenglong
The art of investment banking has been around for centuries, and by no means
started with Wall Street. If you look back many hundred years, the Church had
outlawed usury (charging interest on loans), effectively meaning lenders had
no more incentive to lend to people who needed it.

To solve this problems, some of the first derivatives were invented (yes, some
derivatives have a purpose). A lender would trade money to a farmer in
exchange for, say, a flock of sheep (although the farmer would keep the
sheep). Their repurchase agreement would state that after a year, the farmer
would buy the sheep back from the lender, but any baby sheep would still
belong to the lender because they were born while the sheep were in the
lender's possession.

SV might do fine with WS, but I really do believe finance and tech work well,
hand in hand.

~~~
winestock
>If you look back many hundred years, the Church had outlawed usury (charging
interest on loans)

Correction: Usury was the charging of interest on an _unproductive_ loan. If
the principle of the loan was meant to buy food for a family, then the lender
could not charge interest. If the principle was meant to start a business then
the charging of interest was not usury.

The big problem was that, for a long time, theologians followed Aristotle on
the question if money, itself, was "fruitful" or not. Aristotle said that it
wasn't. In the later Middle Ages, theologians made a distinction between money
and the uses of money. That distinction led to the conclusion I gave in the
previous paragraph.

Okay, I'm nitpicking, but this medieval usury issue is a pet peeve of mine.

~~~
Shenglong
I actually was not aware; I appreciate the clarification!

