The Crash of 2008 was the end to what I call, “the old capital markets”.

A new era is beginning, but form and detail are hidden in the mists of change. It may be a decade or so before new structures and directions are visible.

But before getting into the unpleasant chore of actually looking for a job, you should consider whether or not you even want to work in the new capital markets.

Warning: This is not a short article, but then, finding a new job is not always easy.

A different work environment

Historic events are unfolding in capital markets.

Hundreds of thousands will attempt to seek employment in a changing market. Some have been laid off as a consequence of institutional de-leveraging, bankruptcy, and the elimination of product lines.

Others, still employed, will be thrown onto the market soon enough, as the recession grinds on.

Students of finance and business, still in college, will soon be forced to consider whether to continue their current plans, marching forward to face stiff competition in smaller, perhaps less profitable financial fields, or whether it would be wise to re-direct their careers along a different path.

As the size of the market shrinks, due to de-leveraging and simplification of product lines, not everyone will find a job in “Post 2008 Wall Street”.

Hundreds of thousands unemployed in the financial sector

According to the Bureau of Economic Analysis, the number of people employed in the US finance and insurance industries peaked at 6.1 million in December 2006 and had fallen by 345,000 by January 2009.

However, many that are or will be unemployed by the contraction in the financial sector have no particular commitment to capital markets as a career path. There are many that work in human resources, building maintenance, clerical or secretarial positions, and similar “non-financial” jobs that can move to other sectors without discarding job skills or hard-earned professional credentials.

This article, however, is about those who have their educational background and job skills closely tied to financial markets and who would abandon professional qualifications by moving to a different sector of the economy.

It’s hard to say how many fall into this category, other than that it is far less than the number who will need to find new jobs as a result of contraction of the financial industry.

Financial markets may be shifting, but will not go away

Whatever the form the new capital market takes, people will continue to be gainfully employed in the field. Worldwide, the size of financial markets may even increase.

However, in certain cities, employment may be permanently reduced. College degrees that have currency in these markets will be accordingly devalued.

New York City, the traditional “Wall Street”, is an area that seems likely to be blighted for a long time. The net present value of Ivy League diplomas will suffer accordingly.

I, myself, have an Ivy League diploma that was useful decades ago in getting a first job on Wall Street. However, over the years, working in foreign markets, I found the credential to carry far less weight.

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In the article, The quarter-century buyback era draws to an end, I announced the demise of the dominant role of stock buybacks in the economy, although there has been no official death certificate and the body has not yet been found.

The buyback era began in 1982 when the US Securities and Exchange Commission promulgated Rule 10b-18, granting “safe harbor” to corporations that wished to use equity repurchases to boost market prices in order to give value to executive option schemes.

The justification given by the SEC, at the time, displayed a breath-taking irrational naiveté that demonstrated the government’s total lack of concern for the interests of small investors. Here is what they said when issuing Rule 10b-18 in 1982:

The Commission has recognized that issuer repurchase programs are seldom undertaken with improper intent, may frequently be of substantial economic benefit to investors, and, that, in any event, undue restriction of these programs is not in the interest of investors, issuers, or the marketplace. Issuers generally engage in repurchase programs for legitimate business reasons and any rule in this area must not be overly intrusive.

It should be noted that the Securities Exchange Act of 1934 includes broad general anti-fraud and anti-manipulative prohibitions meant to protect investors.

The SEC, in Rule 10b-18, without an Act of Congress, abrogated these investor safeguards, allowing corporations to fraudulently manipulate the price of their stock whenever they wished, barring investors from satisfaction in the courts and protecting corporate fraudsters from criminal prosecution.

Nevertheless, as the fraud unleashed by Rule 10b-18 robbed investors of trillions of dollars of value, the SEC continued to mouth pious platitudes about “protecting investors”, while most people, like the victims of Bernard Madoff, were happily unaware of what was going on.

How big was the buyback movement?

The impact of stock buybacks on the US economy can be measured from Federal Reserve Flow of Funds table F.102: Nonfarm, nonfinancial corporate business.

This table shows the net change of corporate financial assets and liabilities from one period to the next. The line item, Net equity issues, is expected to show a positive number, indicating that the corporation has issued more new shares than it has redeemed. However, since Rule 10b-18, net equity issues have generally been negative, reflecting the fact that US nonfarm, nonfinancial corporations have been buying back more stock than amounts raised through initial public offerings.

SEC Rule 10b-18 opened the door to the buyback era

Total net buybacks of corporate equity from 1983 to 2008, according to Federal Reserve flow of funds table F.102, was $3.6 trillion.

However, we know that even in years with negative net new equity issues, there have been initial public offerings. The amount of these IPOs must be added back to the flow of funds figures to measure the size of the buyback phenomenon.

Also, there has been steady erosion of the value of the dollar since the Reagan years. To evaluate the impact of buybacks in terms of 2008 dollars, we must re-inflate the historic date in terms of today’s money.

Negative equity flows, adjusted for IPOs and inflation

Using Flow of funds table F.102, adjusted for inflation by the CPI index, and estimates of yearly IPOs (from Renaissance Capital data and Wolter Kluwer’s IPO Vital Signs ), we are able to put a value on the total amount of corporate buybacks since SEC Rule 10b-18, in 2008 dollars, at $5.77 trillion.

This is a very big number, even compared to the size of the Obama administration’s “stimulus” plans. It is more than 100 times the size of Bernard Madoff Ponzi scheme — and no one will go to jail.

Where the money came from and where it went

The mechanics of a stock buyback are quite simple. A company uses money that should belong proportionately to all shareholders, to buy back stock on a non-proportionate basis from a relatively few shareholders. Most stockholders get nothing from a corporate buyback, except the right to own part of a company with less cash.

As the SEC admitted, way back in 1982 when it issued Rule 10b-18, the purpose of buybacks is to manipulate the price of a stock upwards. This is good news for corporate executives who happen to be holding stock options (for which they paid nothing). It is also good news for mutual fund managers who earn fees based on the market value (not intrinsic value) of the portfolios they manage.

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In March 2009, HSBC PLC strengthened its finances by making a preemptive rights offering of new equity. The bank quickly raised $18.5 billion dollars.

Unlike Citibank, Bank of America, and other giant US banks, HSBC did not have to sell its soul to the government to stay in business.

HSBC had the good fortune to be headquartered in the UK and to have much of its investor base in Europe and other countries where preemptive rights are the law and the customary way to raise capital.

The hidden beauty of a preemptive rights issue

Some countries, including the United Kingdom, insist that companies give shareholders the preemptive right to subscribe to a new issue of the same class of stock that they own, in proportion to their holdings. If shareholders do not wish to subscribe, they may sell their rights to others on the stock exchange.

Often, to encourage shareholders to exercise their subscription rights, the issuer will offer the new shares at a discount from current market value. In the case of HSBC the discount was 40% — which virtually forced the issue to be taken up.

HSBC at Canary Wharf, London

Preemptive rights are advantageous to stockholders that don’t want to see their equity diluted by a board that might be too inclined to issue stock to take over other companies, or to hand out stock options that provide extra remuneration to management.

Companies with conservative ownership, looking to the long-term, find preemptive rights useful because a rights issue at a substantial discount from market, effectively frees the company from expensive and intrusive investment bankers.

Who hates preemptive rights and why

The mortal enemies of preemptive rights issues are investment bankers and fund managers.

The reasons are obvious:

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