You don’t belong on Wall Street

THE LAST time the stock market hit a new high, a lot of us gathered to watch it live on TV. Bars in New York City tuned to CNBC in anticipation, and barbers took bets on what time it would happen. The staff at the Internet start-up where I worked cheered the news because it meant we were all on the verge of becoming very rich.

That was January 2000.

The Dow Jones industrial average is again on the cusp of a new milestone -- and most of us could care less. Even the Wall Street Journal had a hard time getting excited. And when the Dow crosses its all-time peak of 11,723, it’s a good bet that most bartenders in Manhattan will hardly notice.

The reasons for this are both reassuring and alarming: the end of the stock market as a spectator sport (a good thing for investors) and the complete transformation of Wall Street into an insiders’ game (not a good thing at all).

As it happens, I didn’t get rich in 2000. Our start-up, like hundreds of others, died a year and a half later when the dot-com bubble burst and we ran out of venture capital money.

We certainly weren’t alone in our pain. Most who cheered the rise of the Dow that January were left wondering where all their money went. Many of the companies that were stock market darlings went belly up, as did some of the analysts who used CNBC to pump up their bogus picks.

And that is partly why a new record is being met with a collective shrug. A lot of us are still nursing our eToys and Pets.com wounds.

But it’s also being ignored because Wall Street today is an entirely different place than it was six years ago. Then, riches came from initial public offerings, or IPOs. The people who ran these new companies were our rock stars, and the air of business had a revolutionary whiff. Everyone knew someone who knew someone who had gotten rich in the stock market. The basic rules of finance, we were told, had changed forever.

Because the money for all these IPOs was coming from investors like you and me, the firms underwriting the deals had an incentive to make us feel as if we were players. Business reporters covered the markets like a game. Bookstores were stocked with advice books on ways to “beat” the market. Analysts from Goldman Sachs and Merrill Lynch gave us tips that sounded like sure things.

A lot of it turned out to be untrue. As we have learned from the lawsuits that followed the bust, the stock market democracy was rigged; insiders were being fed tips that the rest of us weren’t getting, and some analysts were touting stocks they knew were dogs. We were the chumps.

When it all ended badly, Wall Street’s biggest firms were left with a dilemma: After staffing up enormously to handle all the deal-making, they suddenly found themselves with fewer deals to do and fewer investors willing to play along.

So, they did something ingenuous: They made us, the average investors, all but irrelevant.

Make no mistake. This is a great time to be in the banking business. This year’s bonus pool at Goldman Sachs, for instance, averages out to about half a million dollars per employee (and that factors in security guards and secretaries); the chief executive of Bear Stearns is expected to pull in about $25 million before all is said and done this year.

Yet the record profits -- and the surge in the Dow that’s helping to drive them -- aren’t coming from IPOs or even from advising on mergers and acquisitions, which used to be Wall Street’s cash cows. Instead, most of the industry’s gains are coming from dealing in options and derivatives and other complicated financial instruments -- investments that most of us not only never see but wouldn’t know what to do with if we did. At Goldman Sachs, Wall Street’s current standard-bearer, less than half of the firm’s profits this year are expected to come from traditional investment banking activities. The majority of the firm’s money instead will come from trading in derivatives and other private deals, often for its own accounts or in concert with hedge funds or other private traders.

By inventing new derivatives products or trading in futures involving everything from the weather to gas prices, Wall Street, in general, and the markets, in particular, have reinvented themselves, morphing into an enormously profitable machines that operate almost entirely outside of public view.

The size of this thing can get kind of scary. In 2004 -- the last full year for which numbers are available -- the gross domestic product of the U.S. totaled $11.8 trillion. During the same period, trading in derivatives amounted to $320 trillion. Throw in other aspects of this new financial world -- hedge funds, currency swaps and the like -- and the total exceeds $780 trillion, or 67 times our gross domestic product.

Not only that, but in many cases, regulators are out of the loop. According to the Economist, the exposure of Goldman Sachs alone in the derivatives business could be as much as $1 trillion. But because much of that is in private deals, it’s not as aggressively tracked by the Securities and Exchange Commission, and it certainly isn’t highlighted in the market commentary on CNBC. To say that we, as average investors, are out of the loop would be an understatement.

What’s clear is that the Dow’s current status as a nonstory, despite the coming record, is the norm. For most of its history, the stock market has operated beyond the reach of average people, who saw it largely as a playground for fat cats.

It was only in the 1990s, during the absurd window of the dot-com craze, when the rest of us came to believe -- mistakenly -- that we could understand how the market worked.

Now, most of us don’t have a clue, and given how risky Wall Street has become, that’s probably not a bad thing.