Paper Chase MARKETS

By R.Z. Sheppard

A market, children learn, is where one goes to buy a fat pig. Grownups call it pork belly, but rarely come home with the bacon. Instead, they hold a slip of computer-generated paper that represents a bet on the future price of the commodity. Not having to handle the meat makes it much easier for traders. They have time to think up creative ways of profitably shuffling their paper ^ or, as the case is today, manipulating numbers on a computer. The game can now be as bewildering as three-dimensional chess played internationally at the speed of light.

This makes the concept of modern markets hard to understand and difficult to explain, even for the distinguished explainer Martin Mayer. Following an arcane account of a portfolio-hedging strategy, he writes, "You can read it twice, or three times, or you can take my word for it." Which is sound advice. Mayer has been one of the educated layman's best guides to the covert worlds of Wall Street and finance. The Bankers (1974) was a best seller. More recent books include The Fate of the Dollar (1980) and The Money Bazaars (1984).

Since Mayer's last outing, a robust greenback has grown anemic, the U.S. has become the world's largest debtor, and the stock market dropped more than 500 points in one day, symbolically if not literally ending the avaricious '80s. Mayer patiently brings the reader up to speed on the intricacies of trading stocks, bonds, commodities and imaginative financial instruments with names like STRIPS, zero-coupon bonds and "Heaven & Hell" warrants.

School briefs are enlivened and focused with anecdotes and sage quotes from jaded codgers. What former New York Stock Exchange Chairman Bernard J. ("Bunny") Lasker said just before the bull market of the mid-'70s would be true enough in the '80s: "I can feel it coming, SEC or not, a whole new round of disastrous speculation, with all the familiar stages in order -- blue-chip boom, then a fad for secondary issues, then an over-the-counter play, then another garbage market in new issues, and finally the inevitable crash."

This decade added wrinkles, such as computerized trading and increased use of sophisticated techniques for minimizing losses. One of the most popular examples is gambling on where Standard & Poor's 500 stocks are going. A successful bet that the index will fall could offset losses in declining stocks. Stock-index futures are traded much like any other commodity, except that they do not represent anything real, such as wheat, tin or pork bellies.

Mayer defines markets the old-fashioned way -- as mechanisms for the efficient allocation of resources -- and so looks on "buying the market" (playing the S&P 500, for example) as an unproductive distortion of the system. "What made stock markets important in an economy," he writes, "was their transmission of investors' judgments as to which industries and which companies were most likely to thrive and thus should find it easiest to raise fresh money. For professionals to invest huge pools without exercising that sort of judgment subverted some part of the legitimacy of market capitalism."

Just how straight is the system? Less than brokers would have us believe, according to Mayer. Insider-trading indictments make headlines, but outside investors are also disadvantaged by a structural convenience that benefits the professionals: brokerage houses buy and sell for their own accounts as well as those of their customers. This can be a conflict of interest, especially during volatile periods. Mayer corroborates the Brady commission report on last October's crash, which suggested that many Wall Street firms unloaded their own falling stocks before executing customers' sell orders.

Mayer would like changes, though he is a pragmatist rather than a reformer. He even seems to have been partially seduced by the pre-crash '80s, a period as supercilious about amassing money as the '70s were overbearing about running up the sexual score. Greed, he concludes, "is the cleanest of vices, the one most easily and publicly rebuked by reality." His good book suggests otherwise. Its lively pages testify to the tendency of greed (or any other vice) to distort reality and ensure that those in its grip will keep coming back for more.