As someone who spent fifteen years at various major Wall Street firms, and nearly my entire twenty-four career to date having a discretionary bonus as a major (and often predominant) form of my compensation, I thought I’d chime in on the recent commentary.
Let me start of by saying that as I’ve written before, failing firms need to be allowed to fail. Poor management needs to be separated from capital so that capital can find a better steward, and the genuine threat of failure is vital to ensure that proper risk management and operational caution is exercised at every step. Likewise, I’d agree that for a company to be on the public dole and pay non-contractual, discretionary “bonuses” to any employee would be reprehensible. That said…
In the fall of 2008, a group of supposedly very smart people decided that our financial system was on the brink of “collapse”. Never mind for a moment that the long term demand for banking, capital raising and investment management would exist regardless of what particular firms were around to provide those services. Hundreds of billions of dollars were assembled and in foie-gras style, crammed down the throats of companies that didn’t ask for it (just like the geese).
Firms like Goldman Sachs and JP Morgan have since been pretty clear that although they were sweating it, word of their demise had been greatly exaggerated. At last Wednesday’s assembly of the Financial Crisis Inquiry Commission, Lloyd Blankfein of Goldman reminded his inquisitors that they had raised substantial amounts of fresh capital, and could have raised more, prior to having the TARP money put to them, and JP Morgan’s Jamie Dimon stated in a CNBC interview shortly thereafter that they did not need TARP funds to ensure their survival.
It should be no surprise that in the volatile markets of 2009, containing one of the most ferocious upside moves in stocks ever recorded, Wall Street firms were fantastically profitable. Most of the major Wall Street TARP recipients have paid back their cramdowns with interest, and yet there’s a lot of money left over. But in an age of record-breaking deficits and politically-stoked class warfare, a demagoguing President Obama eying the money pot has the courage to say “We want our money back, and we’re going to get it”. Why does he think it’s his money? I’ll also take the bet that you will never hear Obama utter those words to General Motors. But I digress.
There are sorry parallels between what’s happening with employees of Wall Street firms and the minority communities that are the supposed beneficiaries of affirmative action, another quasi-bailout program with terrible unintended consequences. Although filled with the best intentions for helping any particular needy minority individual, every person in these groups created solely by skin-color (thus perpetuating the need to categorize ourselves as such — take note of your upcoming census) must now face the occasional (or not occasional) silent wondering of their fellow students or co-workers: “I wonder if he’s here only because of his skin color”. That any member of such a targeted group might possibly endure that kind of unspoken criticism is disgusting.
Isn’t the same now possible towards employees in the banking industry? “Yeah, the new neighbors both work on Wall Street. I wonder if they’d be buying that house if it wasn’t for TARP? We so bailed them out, and look at them now.” And a possible response: “But we didn’t ask to be bailed out, and our departments made money. We’re not investment bankers — we’re computer programmers. Not to worry, with our 80 minute commutes and 50-70+ hour work weeks, we won’t see you too often.” I’m not sure it’s equally disgusting, but it is artificially divisive nonetheless.
I like to say that “honest achievement is the root of self-esteem”. By stuffing money into the Wall Street firms, by having a Federal Reserve that can keep rates so low for so long that it’s hard for banks to not make money, but then railing about it when they do, our government has once again used its power to fracture civil society that much further. It has now sown the seeds of doubt about that achievement, and with it, the self-esteem.
But what would Obama do with the money anyway? It would get thrown into the vortex that is our Congress and spent on grand designs that can not work. By contrast, the voluntary spending and investing of Wall Street bonuses is for many regions of the country one of the primary economic engines, with ripple effects literally worldwide. Ask the waiters at the Manhattan steak houses what they think of Wall Street bonuses, or the car dealers, or the home improvement contractors, or the real estate agents. Ask them if they’d rather have some derivative scrap of a nanny-state program, fought for by political gamesmanship, or a bunch more customers fueled by Wall Street bonuses.
Obama’s problem is that he can not get away from the Wall Street vs. Main Street rhetoric. When will he and his disciples own up to the fact that it’s all the same street? Something tells me that Obama and his staff, let alone much of Congress, have never read Leonard E. Read’s short but brilliant classic, “I, Pencil”. It’s never too late.
The more Obama and his ilk pursue the sort of vindictive, utterly unpredictable legislative and public-relation campaigns against Wall Street’s top earners, the more these earners will simply pull a John Galt and say, that’s it, it’s not worth it. They won’t retire. They’ll simply form or join private organizations that will do everything the public organizations do, but with the exception of not playing in the public arena. And if we can assume that there is at least some correlation between compensation and talent, then by extension, returns in which the general public can participate will go down, while a separate caste of privately-accessible returns will increase in scope. Civil society’s splintering will be furthered once again.
One of my most lasting lessons from college was an ex-Westinghouse executive-turned-professor describing the concept of a big company holding up a “price umbrella” for other smaller, more aggressive companies to get under. Here we have our government calling out a supposed price umbrella. So by extension, there would seem to exist an opportunity for one or more companies to swoop in and steal all of the customers being over-charged by these overpaid Wall Street types. It isn’t happening.
In a recent column, John Tamny wrote the following:
So far, however, “discount” investment-banking firms and traders have yet to reveal themselves in a substantial way. That said, if what Wall Street’s myriad critics say is true about its employees being overpaid, it seems there’s a very real and enriching opportunity for these same critics to put up or shut up. If investment banking and trading are really as easy as they suggest, here’s their chance to prove it.
To those critics: Please “put up” and prove your case. Then spend the profits any which way you’d like, if they haven’t been confiscated first.