It will be a day that will go down in infamy. The biggest symbol of America’s economic might—the preeminent institution of Anglo-Saxon financial domination—is about to be sold.
And to a German rival.
No institution represents America like the New York Stock Exchange. It is the home of capitalism. And through the years, by and large it has served America well. No other country in the world has generated so much wealth so quickly. Sure, the super-rich have a disproportionate share of it, but—knock capitalism as you might—it has also generated the largest middle class in history.
Throughout most of its 219 years, the New York Stock Exchange has also powered the growth of exceptional American corporations, connecting them with deep pools of financing to power rapid expansion—and just as importantly, punishing those companies that refused or were unable to adapt and innovate. For better or worse, it is the tool that has helped keep American companies sharp, competitive and accountable.
And now, the nyse is dying a very capitalistic death.
When the bell chimes for the last time at American-owned 11 Wall Street, it will be an ominous, portent-filled day. But probably not for the reason you think.
Where U.S. and German Media Disagree
American media are selling the story as a merger of equals. The new combined company will be the world’s largest exchange group by revenues—valued at over $25 billion. The chief executive officer will come from the nyse group, while the chairman will come from Deutsche Börse.
But that is where the equality ends.
In Germany, it is being reported as a takeover through and through. The “merger of equals” talk is window dressing to keep Americans happy. Sixty percent of the new merged company will be composed of shareholders of Deutsche Börse—giving them the voting power. The current plans may call for New York to remain a head office to supplement Deutsche Börse’s regional hubs in Frankfurt and Paris. But the reality is that both Paris and New York will become little more than token headquarters for the new company.
“There is going to be no ‘triangle concept’ here,” one source told the Financial Times (February 11).
The only triangle concept will be that of a pyramid—with Frankfurt on top. “New York is going to be important, but it’s not the financial center,” says Michael La Branche, a member of a family-run firm that has traded on the floor of the nyse for 87 years.
But even before the merger, about half of the nyse group’s shareholders were already European. In 2006, nyse merged with Euronext, consolidating New York with exchanges in Paris, Brussels, Amsterdam and Lisbon, along with a futures exchange in London. Now if the Deutsche Börse deal goes through, U.S. shareholders may own even less. Plus, more than half of the board of directors will come from Deutsche Börse.
The baton of economic leadership is being passed again: From London to New York in 1919, and now from New York to Frankfurt in 2011.
According to some experts, U.S. regulators most likely won’t be able to block the nyse sellout either. Just a few years ago they approved the nyse merger with Euronext. Plus, as the Financial Times brought out, there is “‘good support’ at the highest political level in Germany” for the deal. So U.S. regulators would risk offending an important trade partner and ally if they blocked the deal.
What is happening to America? Has it really lost so much economic strength that a company from a nation once bombed to rubble is now purchasing the institution that helped raise the funds to make America’s war effort possible?
Is This a Strategic Risk?
Questions regarding national security arise in light of an international deal such as this. For its part, the German government has said that since the two companies involved in the sellout are private, it will only have a “limited” role in the new entity.
But as our August 2006 article “Will the U.S. Lose the NYSE?” asked, “What if relations between America and Europe were to become strained? Is it unrealistic to be worried that foreign interests, in a position to sabotage America’s largest stock exchange, would be tempted to do so?”
Even beyond just sabotaging markets, think of all the data on U.S. companies that foreign interests would be able to mine. Already the nyse sells high-speed access to its computers to hedge funds so they can trade a fraction of a second ahead of regular customers, according to the Daily Finance.
Yet here is perhaps the most ominous part about the deal.
The Germans probably don’t even want the New York Stock Exchange!
For all the patriotic flag-waving that has ensued over the impending loss of the nyse, the truth is that it has been in dramatic decline for decades. Scandals have shattered its reputation, and its profitability is shrinking. The last few years were especially devastating. Since the Wall Street meltdown in 2008, even Americans disparage it. In 2005, it handled 80 percent of all trading in stocks it listed; now it handles less than a quarter. As a public company, its stock has plummeted 64 percent since it was listed.
Its business model is broken too. With the march of technology, there is nothing New York does that cannot be done elsewhere for less: less cost, less regulation, and less taxation.
The sad, simple truth is that New York is no longer the coveted economic crown jewel it once was. It is more like tarnished costume jewelry—pretty to wear, but not worth much.
German companies don’t even bother listing in New York anymore. Deutsche Telekom was the latest to pull out on June 18 of last year. Daimler called it quits a couple of weeks before that. Of the 11 firms on Germany’s dax index (its biggest blue-chip companies) once listed in New York, only four still think it is worth the effort.
The Real Prize for Germany
For Deutsche Börse, the real prize is in what nyse Euronext owns—with the emphasis on Euronext.
In 2006, the nyse and Deutsche Börse fought over control of Euronext, which owned the Paris, Amsterdam, Lisbon and Brussels stock exchanges as well as a derivatives exchange in London. Deutsche Börse officials touted the potential Euronext tie-up as the creation of a “truly pan-European exchange organization” and “significant step forward in the integration of European financial markets” (Agence France-Presse, May 22, 2006; emphasis mine).
New York won the battle when it thwarted Deutsche Börse and merged with Euronext.
Five years later, Deutsche Börse looks like it is about to win the war. Deutsche Börse is about to get Euronext after all—and the nyse, for whatever that is worth.
And from Germany’s perspective, it couldn’t have come at a better time. With much of the periphery of Europe in economic crisis, Germany is pushing for greater economic union—on its terms. In return for bailout money, Germany is forcing indebted countries to turn over national sovereignty. Gaining ownership over the largest stock exchanges in Europe will just add additional firepower to Germany’s already impressive financial weaponry. In the years ahead, the European Union is set to become a much more German-looking institution.
If this merger goes through, the stock exchanges in Amsterdam, Paris, Lisbon, Brussels, Frankfurt and nine other European countries will all fall under control of Germany’s Deutsche Börse. And that is not all.
The Deutsche Börse will also gain control of the former Euronext derivatives unit Liffe. Once combined with Deutsche Börse’s derivatives units, the new company will dominate the global derivatives market, which the Bank of International Settlements estimated at an astounding $1.28 quadrillion notional value in 2008.
A Glimpse of America’s Real Value
But if Germany isn’t really even interested in the New York Stock Exchange (except for maybe its little remaining prestige), what does that say about America? It means America is no longer the preeminent economic superpower it thinks it is.
“This will further confirm in the minds of the world political and financial leaders that gaping U.S. budget and trade deficits, and all the foreign borrowing and high unemployment that results, are significant attributes of an economic superpower in decline,” says Peter Morici, a University of Maryland professor of business.
Morici is right. Americans sit and talk about patriotism and about how bad it is that one of their icons should be sold, but that is missing the bigger point. America is falling so fast that its most famed financial institution is at best a side asset to Germany.
America is rapidly following Britain’s footsteps to becoming a second-rate power in a third-rate financial position bordering on untenable. Stock exchange or no stock exchange, Americans should be scared silly of ending up like the Brits. And both should fear the fate of a much earlier power: the doomed kingdom of Belshazzar.
You can read about it in Daniel 5. It read something like this: Mene Mene Tekel Upharsin: “You are weighed in the balances, and are found wanting.”
Americans need to read the writing on the Wall Street. You know what happens next. ▪