EEUU, THE ROAD TO FEUDALISM STATES: How the US financial system change... to worst

By Charles Gasparino.- A few weeks after Dick Grasso was ousted as chairman of the New York Stock Exchange, I ran a hypothetical scenario by a senior media-relations executive at Goldman Sachs. “With Grasso gone,” I began, “does this not open the door for a Goldman takeover of the NYSE?” The flack laughed and said I sounded like an overcaffeinated conspiracy theorist with way too much time on his hands.The next time we spoke about the matter was roughly two years later. Goldman’s then-CEO, Hank Paulson, had sold the company’s ECN, Archipelago, in which Goldman owned a 15 percent stake, to the NYSE. Paulson’s No. 2, former Goldman president John Thain, was now the NYSE’s CEO. Additionally, Goldman served as the Big Board’s investment banker on the deal, which essentially took the exchange public. The NYSE was finally entering the modern age. Grasso was out, electronic trading in. The floor would suffer, but it would be for the best: cheap, efficient electronic trading and the final expiration of specialists’ license to print money. The end of an era.

It has been four years since the diminutive but powerful Grasso was fired amid outrage over his massive retirement package. For the skeleton crew of floor brokers and traders who are left (and the scores who aren’t), life will never be the same. The exchange is a shell of its former self. Many guys are making the best of it, but most are long gone — and resentments linger. They used to call the NYSE “The Club.” Now some on the floor call it the “Goldman Sachs Exchange.”

I have to wonder what would have happened had Grasso’s pay remained a secret. Would Goldman be running the Club?

Grasso’s compensation package, of course, did not remain secret. The ensuing firestorm required months to extinguish.

Most people I know believe Grasso is, in fact, a victim of his own avarice. After all, the accepted story goes, the obliteration of his chairmanship would never have happened were it not for the extraordinary disclosure of the fact that his contract entitled him to nearly $200 million in deferred compensation — and that, furthermore, he wished to withdraw $140 million of that sum immediately as part of his contract extension. The conclusion of this narrative entailed public outrage boiling over so furiously that it forced the ruling body of the stock exchange — its board of directors — to do the right thing and remove the audacious autocrat.

Like most widely believed historical tales, this one is grounded in some truth. Grasso’s boneheaded decision to demand his retirement money in 2003 — amid Eliot Spitzer, Enron, WorldCom and the bursting of the tech bubble — no doubt caused him to become a symbol of corporate greed. However, given that Grasso didn’t steal the money, and considering his payday reflected a 35-year career, his vilification was a tad unfair.

Had you or I accrued a few bucks in a dormant savings account, wouldn’t we claim it?

Remember that when Grasso wanted to claim that money, the exchange’s board of directors was his board. Not that it was made up of his family and childhood friends. It was a combination of executives representing Wall Street firms and companies that listed their stock on the exchange, but they were all people Grasso had chosen, many of whom he regulated as part of his job.

But what if that changed? What if the Club (which, if you think about it, is a most apt moniker for the place, given its lack of corporate governance) were forced to change its insular ways and appoint people who weren’t the chairman’s friends and allies — or, as Grasso would call them, his “brothers”? As the corporate scandals raged, Grasso told people he didn’t want to see if that scenario would play out. So he traded a contract extension for an immediate $140 million. A few weeks later, he was out of a job. But Grasso’s ousting was part of something larger than his desire to take his huge retirement package at the wrong time.

For a long time, no one wanted to trifle with Grasso — no one except Hank Paulson, anyway. The former Goldman CEO knew that no matter how much Spear, Leeds & Kellogg, his firm’s specialist unit, was earning during the Grasso years, Goldman could make more money if Grasso and the specialists were gone. Profits could be generated through a practice known as “internalization,” in which big Wall Street trading desks internally do the specialists’ job by matching buyers and sellers who would ordinarily be linked on the floor. The benefits of such an arrangement are enormous for a trading shop like Goldman, because it gets a sneak peek at the positions of its biggest clients: large institutional investment firms that trade huge blocks of stock each day.

Wall Street insiders have for years suspected that some of the huge profits pocketed by Goldman’s savvy traders were in part derived from their getting an inside look at the trading positions of the firm’s buy-side clientele — a charge Goldman has denied. What it can’t deny is that with Grasso enforcing the best-price rule, internalization remained a back-alley practice. With him gone, Goldman could do what it wanted.

Internalization, though, is just one aspect of how Goldman benefited from a Grasso-less stock exchange. Grasso, as most people know, was the best defender the floor ever had. Specialists who hated his imperious manner nonetheless owed him their jobs once cheap, efficient electronic-trading platforms came into vogue in the ’90s. One of those systems, Archipelago, was funded by none other than Goldman Sachs.

As I show in my forthcoming book, King of the Club, Goldman had big plans for Archipelago almost from the moment it made its first investment in the late ’90s. It was designed to compete directly with the NYSE and made noisy, deliberate attacks on the specialist system. It’s also no coincidence that around the time Goldman made its investment in Archipelago, Paulson made his first direct assault on Grasso’s exchange leadership, pushing something known as the Central Limit Order Book (CLOB), which would have forced most of the big stocks listed at the exchange to be traded electronically. And because the exchange itself didn’t have the technology at the time to complete those trades, were Paulson successful in wielding his CLOB, Goldman would make Archipelago available to fill the void.

Paulson’s attempt to take over the exchange hit a roadblock, though: Grasso. In 1999 and 2000, the “little guy in the dark suit” wasn’t burdened by messy disclosures about his pay package or a probe of sleazy floor-trading practices. He went toe-to-toe with Paulson, who was joined by two other firms, Morgan Stanley and Merrill Lynch, a threesome Grasso dubbed the “MGM crew.” They were the biggest trading-order providers at the exchange, making them Grasso’s biggest customers. They were powerful Washington players as well, and they appealed to lawmakers to let them pull their trades from the floor and run them through computers.

Grasso counterattacked by engaging in a little class warfare: The floor was the great equalizer that forced Wall Street to treat all investors the same. What, he intimated, was to guarantee that Wall Street would send its orders to the computer when it could get the best price internally? And who would make sure all investors — not just Goldman’s big clients at Fidelity — were getting the best price if he wasn’t there watching the store? In the end, Grasso won.

He won the battle, that is, but not the war. It’s no surprise that when the controversy surrounding Grasso’s pay was raging, Paulson launched the effort to get him out. Paulson has said that he did so to save the exchange; Grasso, he maintains, was a drag on business. The pay controversy was all-consuming. Large institutional investors were threatening to stop sending trades to a place that paid a regulator like a CEO. All of which might be true, but that’s not really why Paulson, I believe, wanted Grasso out. Paulson saw big money in asserting his control over the exchange. He saw a merger with Archipelago, and Goldman running the show.

The specialist traders got destroyed, but I’m not sure how much investors have benefited now that the NYSE is becoming the world’s largest electronic marketplace. From what I hear, more trades are getting matched internally by Wall Street trading desks than ever before. How do I know? Just look at the percentage of NYSE-listed stocks that get matched by the exchange itself. Under Grasso, it was more than 80 percent; now it’s under 50.

I still can’t believe it’s been four years since Grasso’s fall from grace. It seems like it was just yesterday. I remember calling him just a few weeks after the story broke. Grasso seemed like half the man I knew when he was running the Club. He was depressed and shell-shocked. He still couldn’t fathom how he had gone, almost overnight, from the guy who rebuilt Wall Street after 9/11 to a universally reviled specter of corporate greed.

Our conversation then turned to Hank Paulson. By now, Grasso was calling him “the snake” for leading the effort to remove him, and in a burst of clarity he predicted that Goldman would find a way to impose its will on the Club in a matter of months.

I sat and listened and then began to make some calls, including one to the Goldman flack. To this day I wonder how a conspiracy theorist ever survived so long on Wall Street.