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Dick Grasso and the Dark Side of the Moon

We now know that Dick Grasso -- Chairman of the New York Stock Exchange (NYSE) -- earns $20 million a year, or more, and has a retirement pool-that he is cashing out-in excess of $100 million. Add to that the September 9th revelation that he was due another $48 million and outrage has turned to shock.

But surely the wizards of Wall Street, people with an above average appreciation of money, must know what they're doing. Right? Would they throw away a couple hundred million dollars if it weren't a solid investment? Ken Langone (lead director of Home Depot -- a company in which Dick Grasso held a seat on the board of directors -- and the former chair the NYSE's compensation committee, the committee that granted Mr. Grasso his multi-million dollar pay package) says the Grasso pay is not excessive.

With that in mind, one has to ask oneself the obvious question: what has Dick Grasso done for the NYSE that can be worth this kind of money?

Eliot Spitzer, New York's Attorney General and architect of the recent $1.4 billion research abuse settlement, may have provided us with an indirect answer to that question. "Self-regulation," Mr. Spitzer is quoted as saying, "...was a complete abject failure, and you had to be on the 'Dark Side of the Moon' not to see it." So how does this apply to Dick Grasso and the NYSE?

The NYSE is not only self-regulatory but possess a monopoly on order flow (80% of all orders in NYSE stocks are traded by the assigned specialist in that stock). In addition, specialists -- those individuals who control this order flow -- are permitted (nay, encouraged) to use their own capital to trade with. In fact, trading profits are the largest component of their income. In addition, specialists also act as agent (charge commission for orders placed on their books). Making their lives even more charmed, the regulatory arm of the NYSE has quasi-judicial powers over those who transact through them. Not quite the free market enterprise the Big Board has managed to convince most folks they are, is it? Yet who is the wiser about these conditions?

It seems, therefore, that Dick Grasso has managed the impossible. He has apparently succeeded in keeping Earth's substantial population on the Dark Side of the Moon throughout his tenure. And how does one place a value on keeping Congress, regulators, and 99.9% of the investing public contentedly munching on green cheese while looking for a wayward cow to jump overhead?

Even now, in the midst of investor outrage and media scrutiny, the NYSE has yet to feel much more than exquisite discomfort from alleged violations. The NYSE is even in line to receive a portion of the Spitzer settlement. That, in and of itself, is a truly amazing feat deserving of mega-bucks in salary.

Just for good measure -- in an attempt to insure we have few folks planning an Earthly visit anytime soon -- Mr. Grasso has brilliantly obfuscated matters: to many it seems as if the self-regulatory arm of the NYSE is different from the other self-regulatory agencies and is quite capable of handling problems. In other words, "If it ain't broke, don't fix it."

As proof that NYSE self-regulation ain't broke, we need only analyze the most recent brouhaha involving General Electric specialist Mr. Finnerty and his alleged "front-running." Mr. Grasso sought to defuse the issue by explaining that this was never an instance of front-running (which is like murder) but was, in reality, a "failure to observe negative obligation" (the equivalent of jay-walking). The sighs of relief could be heard from the Floor of the NYSE to ... well, to the Dark Side of the Moon.

Since I have a reasonable understanding of the distinction between murder and jay-walking, I suspected I would have little trouble with this important NYSE distinction, especially since I spent a fair number of years as a Wall Street trader and executive.

So, I asked myself, what is the difference? Here's what I came up with:

In the case of front running, the specialist uses inside information about an order to buy or sell ahead of that order, insuring a risk free profit by re-selling immediately afterwards. In failure of "negative obligation," the specialist uses inside information about public orders to buy and sell and "unduly intervenes" to make a risk free profit (or at least to position his book advantageously). In both instances, the nave investor rarely realizes that their trust has been misplaced. Got it?

Once we were provided that important distinction, the NYSE suspended jay-walker Finnerty and assured everyone that the man is in deep trouble (which presumably shows how sharp the teeth of the self-regulatory arm of the NYSE are). What would have happened to Mr. Finnerty had he really front-run? Capital punishment? Worse? Well, we may have an answer.

Forgotten in all this media frenzy were two disciplinary hearings just prior to Mr. Finnerty's. Both violations look like, sound like, and smell like front-running (Jan. 16, 2003 involving Gerard Dreyer and February 24, 2003 involving Vincent Papandrea). The penalties for these murder-equivalents? A $25,000 and a $50,000 fine respectively. Neither individual admitted guilt. Hardly the stuff of classic deterrence. Maybe Mr. Grasso has yet another phrase to introduce into the investing lexicon that will diminish the relevance of these transgressions. That would sure be a relief.

So, where does that leave self-regulation with respect to the NYSE? So far, self-regulation remains solidly in place, though under more scrutiny than anytime in its 200 year history. Despite the light shining a bit more brightly these days, Mr. Grasso -- courtesy of the growing body of gobbledygook nomenclature -- has placed the public and the politicians in transit from the Dark Side of the Moon to the dark side of Pluto. And that's quite a trick.

If Mr. Dick Grasso succeeds in this cosmic transportation, then nobody can argue that he is anything but under-paid. If I were on the NYSE compensation committee and this played out as planned, I'd double his take and pony up for a more powerful telescope. After all, he'll be monitoring the investing public on their journey to ever further corners of the universe.