Picking up the Wall Street Journal this morning, I was greeted with a large advertisement from New York Life, the mutual life insurer, with the slogan: We’re Main Street. Not Wall Street.
Leaving aside the peculiarity of dismissing Wall Street in the Wall Street Journal, it struck me as a good campaign. At times like these, being associated with high finance and capital flight is a bad idea while sympathising with Main Street is all the rage.
It also struck me again how the financial world has been altered by de-mutualisation over the past three decades. Most Wall Street banks, of course, used to be partnerships, along with British building societies and insurance companies.
But many of these organisations went public, either to release equity to their partners or gain access to capital, or both.
But they also paid a price for this change of status. One effect was that they took more risk in order to raise revenues and profits, and thus satisfy their public shareholders. Another was that they exposed themselves to a crisis of confidence, either in wholesale funding markets or the stock market.
Of course, being a partnership or a privately-held company does not remove all risk of a funding crisis. A lot of hedge funds, for example, are facing calls for redemptions that are putting them under severe pressure.
But the remaining mutuals are, in general, in a stronger and less exposed position as a result of their accumulated capital and non-public status.
Indeed, partnership suits financial institutions which have cyclical earnings and do not need a lot of capital – small investment banks without capital markets divisions, for example.
