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Does Wall Street Earn Its Keep?

WALL STREET doesn't come cheap. Harvard economist Lawrence Summers has calculated that investors paid $75 billion in various fees and commissions to keep financiers across the country in their yachts in 1988. To make some comparisons, that sum is more than half of the net investment of United States business on plant and equipment, and somewhat larger than half of corporate tax revenues.

Are Wall Streeters worth that big money?

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Professor Summers ducks that one by citing an old saying, ``The value of a thing is what it will bring.'' He adds, ``People who pay those people probably think they are getting their money's worth. But whether the country is getting its money's worth is another question.''

That $75 billion pays the expenses, salaries, and profits of brokerage houses, investment banking firms, money management shops, and other aspects of the nation's financial system. It doesn't include commercial banking or the thrifts.

About 20 to 25 percent of Wall Street earnings goes to dealmakers - the investment banks, law firms, and others who help with mergers, acquisitions, and leveraged buyouts.

Such deals often involve fees that raise the eyebrows of those making substantially less. To take an extreme case, the original 1989 buyout of RJR Nabisco Inc. by Kohlberg Kravis Roberts & Co. generated more than $1 billion in fees for Wall Street. The food and tobacco company has budgeted another $250 million in fees for banks, Wall Street firms, and other advisers in a $5.3 billion debt refinancing planned for this summer.

With that sort of money slushing about, Wall Street salaries are often fat. Summers wonders if they are drawing talent ``that could be more usefully employed elsewhere.''

When a famed dealmaker not long ago started his own firm, Wasserstein, Perella & Co., some 36,000 applications were received for eight jobs. About half of Yale University's 1987 graduates applied for positions with First Boston Corporation, another investment banking firm.

Why hasn't fresh competition driven salaries down?

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One reason is that corporate executives faced with takeovers or planning an acquisition themselves want the best, most experienced help possible. As a rule, the fees are small compared to the size of the transaction. And the stakes are so high for both a company and its executives that fees fade in importance.

Another reason is that those initiating deals expect to make much more money than the transaction costs.

Summers wouldn't want to see regulations limiting Wall Street fees. He figures corporate executives are sophisticated enough financially that they don't need consumer-type protections.

Nonetheless, he would like changes in the law to discourage mergers and acquisitions that are marginal, offering little prospect for improving the efficiency of the corporations involved. One such change would be to reduce the tax advantages of interest payments over stock dividends. The economics of some buyouts hang on saddling Uncle Sam with reduced tax revenues. In paying for the takeover, the new managers raise corporate debt and thereby boost a company's tax-deductible interest payments. Further, Summers would rule out ``equities in drag'' - securities described as bonds to take advantage of their favorable tax position but which are really corporate stocks.

Summers would strengthen the role of directors, enabling them to force executives to trim the flab that makes companies attractive buyout candidates. He suggests officers of investment institutions owning large chunks of corporate stocks, such as pensions funds, should be ``hassling'' executives of these companies, seeking more wisdom and efficiencies. And he would clarify the currently murky laws in the merger and acquisition areas so that expert legal advise becomes less valuable.

It seems unlikely that Wall Street salaries this year will be as huge as in earlier years. The value of fee-rich mergers is down some 50 percent. Another important source of commissions, those which firms earn from underwriting stocks and bonds, amounted to a ``paltry'' $1.2 billion in the first half of 1990, notes Securities Data Company. That's down 17 percent from a year earlier, and a five-year low. Yacht builders may face a slump.

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