The Alchemists of Wall Street

Clever financing may reward shareholders, but it does nothing to help the economy

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Heidi Gutman / CNBC / NBCU / Getty Images

Apple's share price jumped 5% on Carl Icahn's tweets that he owned a lot of Apple stock and had spoken to CEO Tim Cook about paying out bigger dividends.

One of the great ironies of American business today is that while the country's biggest, richest companies have more contact with investors and capital markets than ever before, they don't need any capital. Just take Apple, which has in recent weeks been beset by activist investors such as David Einhorn and Carl Icahn, who are urging the company, which has some $147 billion in cash on hand (and $3 billion in profit rolling in every month), to borrow money in the bond markets so it can turn around and hand the cash back to investors (like them) in the form of higher dividends or it can buy back shares. Apple is willing to play ball because it has been looking to bolster its share price, which has lagged since Steve Jobs' death nearly two years ago--the last time the company had a really big product hit.

The strategy works: Every time Apple announces a new payout--or Icahn tweets that it might--the stock soars. Apple's share price has risen to over $500 recently, from a low of $391 in April. But it also underscores an uncomfortable truth, which is that Apple, one of the most admired companies in the world, spends a large chunk of time and energy thinking about how to create value via financial engineering rather than the real kind. And that says something about the oversize and possibly damaging role that finance has come to play in our economy.

Indeed, economists are beginning to look closely at the fact that as finance has come to be a greater percentage of our economy in the post--World War II period--particularly since the 1980s--growth in the real economy has slowed. They are positing many reasons to explain this inverse relationship. One is that as banks and investors pour more money and attention into high-flying financial maneuvers like Apple's, they have less funding for plain-vanilla lending to the people and small businesses that create the majority of jobs. There's also the idea that Wall Street places huge pressures on firms to act in ways that maximize short-term profits at the expense of long-term, job-creating investments.

Unlike many small and medium American businesses, Apple has cash to spare. But isn't that cash better spent on an innovation-spurring R&D project than put in the hands of activist investors? (Not that some of them aren't smart long-term thinkers: Ralph Whitworth at Relational Investors would certainly be one.) After all, it's real-product development that ultimately spurs higher share prices--one reason that Google, which has been gaining on Apple in app development, has seen a slow but steady share-price increase rather than peaks and valleys over the past year.

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