When the financial histories are written, the New York Stock Exchange's decision to convert from a member-owned nonprofit institution to a for-profit, publicly traded company will go down as a seminal sign of the quick-buck mentality that ruled the fin de siecle markets.
Chairman Richard Grasso says converting the 207-year-old nonprofit institution will allow the Big Board to raise capital to compete with other markets. True. But it so happens that a conversion would also shower billions of windfall bucks on the exchange's current seat owners and let Grasso and other executives supplement their pay with stock options. If all goes as the NYSE board hopes, the conversion would take place next year, and stock in New York Stock Exchange Inc. would trade on--you guessed it--the New York Stock Exchange.
It would be a cheap shot to say this is a sign of the market's peaking. But you have to worry when an upscale financial icon goes to the mass market for money. Rockefeller Center, for example, proved a disastrous investment after the Rockefeller family graciously sold the investing public a piece of the action in 1985. More recently, Goldman Sachs Group Inc., Wall Street's last big private investment-banking partnership, in May let public investors buy into the firm. Such a deal. The stock closed Friday well below the $70 billion it fetched at the close of its first day of public trading.
The Big Board's proposed conversion raises plenty of public-policy questions here--including how a for-profit institution that collects fat listing fees squares its profit lust with the need to kick out ailing and sleazoid companies--but let's go straight to the question of money.
One of the major frustrations of successful chief executives who lack stock options is watching other CEOs make bazillions on their options. Call this '90s phenomenon can't-stand-it-itis, a disease that frequently attacks through the subconscious mind. Convert your employer to a company with public stock, and suddenly you can get options and a shot at making major, ma-jor money.
And for NYSE seat holders, converting into a for-profit company means it's windfall time. That's because seat holders would get NYSE stock essentially as a freebie. How so? Because even after the Big Board converts, seat holders would retain their right to trade on the floor of the exchange. And they could use, sell or lease out those rights, as they do now.
The stock is pure gravy. A nice little going-away bonus if the NYSE, as many people expect, ends up competing with electronic exchanges by evolving into an institution that uses computers and the Internet more, and leaves less of the pie for its seat holders. (Grasso denies this is a motivation.)
How much stock would each seat get? Here's the math. A conservative estimate of the NYSE's value in the stock market is $3 billion. That's based on the exchange's most recent annual profit ($101 million) and a stock price-to-earnings ratio of 30, about the level of the Standard & Poor's 500-stock index.
The exchange has 1,366 seats. But we'll be sports and assume that each seat gets only 1/1,500th of NYSE's stock--we've got to allow for stock options, you know. Divide $3 billion by 1,500, and each seat gets $2 million of stock. That's not much compared with a Net billionaire, but it beats a sharp stick in the eye. And $2 million is a good piece of change considering that the last seat to change hands fetched only $2.65 million.
Anjali Arora contributed to this column.
Sloan is Newsweek's Wall Street editor. His e-mail address is firstname.lastname@example.org.