The New York Stock Exchange: Poof!
Bet you didn’t you see this one coming. Merry Christmas. “Just over 200 years since traders first met under a buttonwood tree on Wall Street, the institution they created, the New York Stock Exchange, was acquired by an upstart electronic marketplace, the IntercontintalExchange (ICE), nominally based in Atlanta, Georgia, but more accurately located in the electronic stratosphere,” according to The Economist magazine.
“The deal was announced on December 20th, with little advance leakage, possibly because the participants did a particularly good job of keeping it a secret, or possibly because the importance of the exchange, owned by NYSE Euronext, has faded so much that few cared.” The stock exchange was already merged into Euronext in a “merger of equals.” No such fig leaf now.
And how much was the New York Stock Exchange worth? “The price of $8.2 billion, or $3.12 a share, carries a substantial premium yet still represents significantly less than a deal floated within the past two years. The share price is a small fraction of the $108.26 it reached in late 2006. Even that may understate the decline in value of the historic exchange, in as much as the key asset in the acquisition is the Euronext futures business.” That’s right. The New York Stock Exchange was the equivalent of the non-elite prospect to be name later in a baseball deal. The trading floor of the New York Commodities Exchange has pretty much disappeared, too.
I’m going to use this historic day to briefly summarize a couple of points I have made previously on Room Eight. Briefly because there is no guarantee anyone will ever be able to read them. And to provide a little history.
Back in the late 1990s, the New York Stock Exchange wanted a new building with a new trading floor, to try to entrench its little unionized sinecure from the growing threat of electronic trading. And it wanted the city to pay for it. This was just before I left City Planning and then, finally, the entire public sector.
My boss and I wrote a carefully worded memo that said electronic trading was coming, and that subsidizing the NYSE would be a bad idea for the city. So the head of City Planning and then Mayor Giuliani chose to use the usual “objective” analysis from EDC, which held that if New York City didn’t give the stock exchange everything it wanted it would move to New Jersey and New York City’s economy would collapse, leaving it roughly the size of Pittsburgh. And even if the stock exchange merely moved to Battery Park City, its preferred site, all its jobs would go to New Jersey residents. No, the city would pay any price for the New York Stock Exchange to have a new building in the center of Downtown, where the Downtown Lower Manhattan Association, a real estate lobbying group, wanted it.
A deal was cut on a private plane between the city and Dick Grasso, the head of the exchange. And the City of New York paid big bucks to condemn by eminent domain an office building in the center of Downtown that had been recently converted to apartments, to subsidize the past while continuing to tax, harass and ignore the future. And started evicting the residents. Then 9/11 happened, and the new New York Stock Exchange was never built. How much money did the City of New York lose on that building? No one ever went back to add it up. Why talk about the past? I’ll tell you why. So those who end up getting screwed can identify those responsible, and factor it in to judgments about whether they should be listened to in the future.
So what will happen to the New York Stock Exchange building? Well, Governor Cuomo wants to “give in to reality” and expand gambling in the state. Prostitution and drug dealing next? Anyway perhaps, in an act of symbolism, the building could be licensed as a high-end casino. If an operator can be found who doesn’t expect that whole industry to move online as well. Perhaps the NYC Comptroller could go and gamble the pension fund money there, as an excuse to justify the promise of higher expected returns.
Now that we have yet another example of jobs disappearing, let’s review how jobs are created.
One third of all private sector jobs are typically in business establishments that did not exist five years earlier. New York City needs 20,000 new business establishments per year to break even. New York State needs 50,000. Both large and small firms are created, grow, decline and disappear through bankruptcy or merger, at a high rate. That is the finding of a special data run that Jay Mooney, then of the New York State Department of Labor, did for me back in the 1990s.
In the early 1980s David Birch had used data from credit data firm Dunn and Bradstreet on business openings and closing to conclude that most jobs were created by new business openings, not static larger firms. That finding soon became conventional wisdom.
But it was quickly debunked. Most people actually work for large corporations and other large organizations. Many new business openings are merely the local affiliates of these larger organizations. Small businesses open, close, and change owners frequently, seeming to create jobs each time, but really the jobs are the same. The example given was a row of stores next to a steel mill, with a bar, a restaurant, a small grocery. Those small stores could open, close, and change hands multiple times, in theory creating lots of jobs each time, while the steel mill just stood there. But all those “small business” jobs were in reality created by the steel mill across the street, whose workers spent their money at the stores.
This was then re-debunked in the 1990s, after it was found that large organizations are nearly as transient as small businesses. They also open and close, rise and fall. The literature on who creates jobs is apparently summarized in this paper.
My own view, looking at the data in my past life as a regional economist, is that most jobs are in fact created by locally-founded businesses and (other organizations) that start small but eventually grow into large ones. Not the businesses that never leave their one storefront. And most jobs are lost by large organizations that shrink, disappear or are merged into other organizations. Such as the New York Stock Exchange.
I have in my possession a “New York City Business Fact Book” published by the State of New York, Department of Commerce in 1957. (I once tried to produce something like it at City Planning, but like most of the work I tried to do for the city, it didn't go anywere. But at least I found the way to save the city may salary -- by leaving). The document includes a list of large employers. Let’s leave aside various governments and utilities, most of which still exist in some form (New York Telephone is Verizon, Brooklyn Union Gas is National Grid) though some are not as influential as they used to be (the United Nations). Who is on the list?
Alexander’s Department Store. B. Altman & Co. department stores. H.C. Bohack grocery stores. Federated Department Stores, now shrunk and merged into Macy’s which was also on the list. Gimbel’s is also part of that now shrunken firm, recently recovering. B. Gertz Inc. FW Woolworth – gone. Lord and Taylor and Sach’s & Company. Are they still independent? The Great Atlantic and Pacific Tea Company. A&P is pretty much gone, isn’t it?
Hilton Hotels, The Horn and Hardart restaurant chain, Frank G. Shattuck restaurants were major employers back then.
These firms employed tens of thousands and were paying taxes to fund the road system that wiped them out or sent them out of existence or into the public sector: Fifth Avenue Coach Lines, the New Haven Railroad, the New York Central Railroad, the Pennsylvania Railroad, and Surface Transit Inc.
American Airlines, Pan Am Airlines, and Trans World Airlines – are now bankrupt, merged, gone, or at least mostly gone from New York City, where JetBlue is the only locally headquartered firm I believe. I still call it the PanAm building, and always will. United States Lines and Moore –McCormack Lines steamship lines are of course gone. If International Terminal Operating and Jules S. Sotteneck, two stevedoring firms, still exist, the certainly employ far fewer, and are probably in New Jersey. National Transportation Corp. (taxis). Most taxi drivers are now “independent contractors” with low wages and no benefits; taxi firms have few employees and just lease cars and medallions.
Among the companies pulling headquarters and operations of out New York City and then perhaps disappearing altogether – Union Carbide, Western Electric, Bell Labs, IBM (long since gone to Westchester), Standard Oil of New Jersey (Esso), Standard Oil of New York (Mobil), General Motors – now down to a small office in the General Motors Building. General Electric, now in Fairfield County, except for its media operations (or has it sold NBC?). The United Fruit Company, then on the list, is now Chiquita Brands. A Cincinnati magnate bought it and moved the headquarters to Cincinnati in the 1980s. North Carolina subsidy bribed the company to move its headquarters to Charlotte a year ago. AT&T moved its headquarters to New Jersey to flee New York City. And then to San Antonio where the CEO of acquirer SBC lived. And then to Dallas-Fort Worth after he was replaced.
There were some manufacturing firms on the list, although most NYC manufacturing was in small, low paid firms in categories such as apparel. Leviton Manufacturing Inc, electrical – still around, headquartered in Mellville, Long Island. Mergenthaler Linotype Co., printing machinery. National Biscut Company. Charles Pfizer & Company – manufacturing gone, headquarters still here last time I checked – though perhaps not for long.
New York has lost its headquarters and manufacturing economic base. Headquarters can now be anywhere with a decent airport that the CEO wants to live, and no longer employ large numbers of clerical workers. Those can be located as far away as India if their function hasn’t been automated out of existence. Manufacturing has moved to places with lower wages, lower land costs, lower taxes, and no unions.
Today New York’s economic engines, the sectors that bring money into town that, when spent, generates a multiplier effect that creates jobs in the local economy, are finance, professional and business services, media, culture and entertainment, and certain health and education institutions.
Back in 1957, Columbia University, Mount Sinai Hospital, New York University, Society of the New York Hospital, and Presbyterian Hospital were on the major employers list. All stayed in New York City. None pay city taxes.
Among media firms, major employers then included the Columbia Broadcasting System, Hearst Publishing, the New York Times, News Syndicate Corp. and Radio Corporation of America. CBS, the Times and privately owned Hearst are still around. Sent a Western Union Telegraph lately? That firm was among the city’s largest employers in 1957.
Chase Manhattan Bank, Chemical Bank, the Hanover Bank, Manufacturers Trust Company – all merged into one firm with a big loss of jobs. First National City Bank, which stumbles into every financial crisis and requires a rescue, and has nonetheless absorbed a bunch of other formerly large firms, with a big local net job loss. Merril Lynch, which was taken over by Bank of American a few years ago. Irving Trust – gone. American Express, Bankers Trust, Equitable Life Assurance, Guarantee Trust, and Metropolitan Life still round. Are all still independent. I never heard of Royal Insurance Corp. or Home Insurance Corp. Still around? Still that big? AIG rose and fell between 1957 and 2008.
Let’s talk about finance for a moment. It is the sector that brings the most money into New York City. Instead of many competing firms, New York is down to a mere handful of large ones. It was already a well-paid sector, but starting in the mid-1990s pay soared and those working in it asserted they deserved it due to all the value they were creating for investors. But there was no value – just a series of bubbles. Not only that, but the financial sector actually votes the shares of stock that are in fact owned by investors, savers and pension funds, and has voted for the pay of executives in other sectors to become inflated as well, in exchange for nothing.
New York City’s financial sector is where Detroit’s “big three” automakers were in the 1970s. A politically powerful oligopoly that is overpaid from top to bottom, has ripped off its customers, and is much despised. Detroit didn’t create any new auto manufacturers to offer customers a better deal, and its auto sector eventually collapsed. New York isn’t creating any never major financial firms that perhaps could be trusted more than the old ones.
Moreover, the public employee unions and the politicians they control have cut deals with each other to enrich their already rich pensions the way top executives have voted to increase each other’s rich pay. But they claim that the rest of us will not be made worse off, because Wall Street would, or could, or should pay for it all.
After all, New York will always be the home of a massively rich, overpaid financial sector right? It is, after all, the home of the New York Stock Exchange. And we subsidized it. Or at least we tried to.
Don't bet on it.