Wall Street the movie - Essay Example

Full “Wall Street” – the movie (Economics) 19 December Summary – The movie is all about the wheeling and dealing in Wall Street done by stockbrokers especially those who really count in the industry as their actions can influence the movement of stocks they trade in or out of; these people are called as market movers. This is the case with the main character Gordon Gekko and as the film progresses, also that of his protege named Bud Fox who started out as a bit player in the stock brokerage industry but in due time became a significant stockbroker due to the profitable trades he made as he engaged in extremely complicated and often illegal schemes to minimize his trading risks. One of his favorite tools is insider trading, which is using information on a firm that is not available to the general buying public which gives him an undue and illegal advantage (McGee 36). Insider trading is a capital crime because it erodes confidence in the stock market as it is one of the leading sources for capital formation; the stock market is just like any market where buyers and sellers met and agree on a deal, except that what they deal and agree upon are monies and in effect, financing for starting a business and expanding an existing business by providing much-needed capital for entrepreneurs and businessmen. The entrepreneurs are the ones who need money while the investors provide that money buying their stocks offered on Wall Street by these stockbrokerage and investment houses who earn a commission. Gekko and Fox teamed up and plotted to engage in a hostile takeover of an airline where Fox’s father works by using a leveraged buyout (LBO), and then turn around by using excess pension funds to pay off the debt incurred in this hostile takeover and earn profits from breaking up the airline and selling its assets individually. However, the law and the Securities and Exchange Commission (SEC) arrested both Fox and Gekko for insider trading. Economic aspects – the film showed how a stock market is essential to the economy of a nation as it serves as the marketplace where lenders and borrowers can meet and in turn help the economy achieve growth by providing the essential capital to finance new business ventures and expand existing ones such as introducing a new product line that requires money or enter new foreign markets to expand the sales by generating new revenue streams. The film also touches on the sensitive topic of greed which is why securities laws and regulations are put in place to protect the investing public from unscrupulous individuals and trading firms. A good example is the case of Martha Stewart who was convicted of insider trading regarding the sale of stocks she owned by using insider information before the stock price collapsed. In her case, she used an illegal method which is also unethical as it constitutes fraud. Capital – the word as used in economics means the man-made goods which are then used to produce a future continuous supply of goods and services. Capital is essentially of two kinds in terms of their ultimate end user: the first is capital goods used for further producing new capital goods for perpetuity (a continuous supply) and the second is for consumption in which there is eventual depletion. Capital gets worn out from use over a period of time, gets destroyed in natural or man-made calamities, and also become obsolete due to technological advances (like the telegraph equipment replaced by newer telephones and the old typewriters being replaced by personal computers). Obsolescence happens when a thing or service is still in good working condition and usable but no longer wanted (same case with the telephone landline which has been replaced by the cellular phone and other mobile electronics gadgets). Economics deals primarily with the concept of how to deal with scarcity and making trade-off decisions regarding where capital should be invested in the most efficient way. In the film, the monies of Gekko could have been used to fund capital expenditures (capex for short) of the target airline to replace/upgrade old aircraft and acquire a new fleet to avoid obsolescence. Initial public offering – it is the first sale of stocks originally owned by a private firm to the investing public. Smaller firms use initial public offering (IPO) as a way to raise much- needed capital to fund their start-up costs and other incidental expenses associated with their business venture while large firms also use IPO to raise additional capital or retire old debts. The IPO is a way for privately-owned firms to now become publicly-traded companies and subject to the rules and regulations of the SEC to protect the investing public like requiring a third-party auditor and regular filing of audited financial statements to regulatory agencies. Types of stock – a corporation can issue two kinds of stocks to investors: either it is a common stock or a preferred stock. Common stocks are the ordinary shares of a corporation. It is the lowest form of ownership in a public company because there is no guarantee of any dividend payments if there is a profit distribution and it is also more risky because if a firm is bankrupt, then it gets paid last from the proceeds of liquidation proceedings. The positive side of a common stock despite its risks is its upside potential because theoretically, its share price can go up if the market reacts favorably to the company by bidding up its stock price. On the other hand, a preferred stock is called preferred because it has a higher priority over common stocks in terms of dividend distribution from accumulated earnings or profits; preferred stocks also get paid first if ever a company goes bankrupt and its assets are sold or liquidated. The preferred stock is like a hybrid corporate bond and a common but with regular dividends. On the other hand, a common stock’s upside potential in terms of price appreciation and its voting rights are incentives for most people to own common stock rather than preferred stock. Only common stocks are given the right to vote and there are even different classes of a common stock like Class-A (with 10 voting rights) or Class-B (with only 5 voting right, as examples) and called as “founder’s shares” to retain ownership control and prevent hostile takeovers. The idea is to allocate more voting rights to a certain class than ordinary equity stocks. Greed is good – this phrase gives the film its singular characterization as it gave the impression that all stockbrokers are greedy and justify it as good to make money out of other people’s money through illegal, unethical, and dubious means. However, a free-market capital economy requires that people should be “greedy” because if it is otherwise, then no one will be starting a new business venture to earn profits and improve his lot in life to be wealthy. It is what Scottish economist Adam Smith called as the “invisible hand” which guides unregulated markets but people have to moderate this greed and not resort to immoral or unethical acts. Conclusion – the film is a good way to discuss the moral and philosophical issues associated with a capitalist free-market economy because it showed the darker side of greed when stockbrokers, capitalists, and takeover specialists engaged in leveraged buyouts. Furthermore, the father of Bud Fox in his own but simple-minded estimation lamented how a person can make tons of money out of speculating instead of doing real, hard productive work that contributes to the economy in a concrete way. But then again, capital markets like a stock market perform a vital function in capital raising and formation to fund new businesses which provide jobs like what Fox’s father is doing in the airline to be taken over by Gekko. A sub-prime housing mortgage crisis back in 2007 showed how unmitigated greed can wreak havoc in the economy causing millions of job losses and a recession, so it is also imperative that the government has to step in and regulate capital markets to avoid speculative market “bubbles.” Work Cited McGee, Robert W. “An Economic and Ethical Look at Insider Trading.” Insider Trading: Global Developments and Analysis. Eds. Paul U. Ali and Greg N. Gregoriou. Boca Raton, FL, USA: CRC Press, 2008. 35-48. Print. Read More