Sobbing on Wall Street

The sight of senior Wall Street CEOs testifying in Washington, D.C. on January 13^th in perfectly tailored $5-10,000 suits, barely able to hide their “I won while you lost” smirks on their faces was almost too much to bear. They feigned humble pie, acknowledged that reform is necessary and that they “done bad.” We know not all the bankers in America are bad; we know that not all the employees at these financial institutions contributed to our economic collapse, but it’s kind of like living in a country that declared war and lost… the citizens of the losing nation are going to pay. The difference in this instance is that the Wall Street players just don’t think they will have to make up for the losses they caused if they just play their cards right creating some short-term cosmetics along the way… and if push comes to shove and they get socked with a new excess profits tax, they’ll find one way or another to pass that cost on to you.

One of my favorite financial writers, Robert Teitelman with theDeal.com, penned a terrific piece on January 14^th directed at the banking community, which noted, in part: “In short, you're a pariah, at least for now. By any measure, you make a lot of money, even if you have two jumbo mortgages and three private school tuitions. Again: No one out there cares about your personal problems. Yes, critics may miss the fact that public opprobrium, whether rational or not, is a form of moral hazard -- at least for this generation of Wall Streeters. The critics will deny this, of course, because Wall Streeters are assumed to be, to a man, so rich that criticism and extra taxes bounce off them. But let's face it: An awful lot of self-identity went into those big checks. It's the rare individual who does not, over time, begin to believe they're worth $20 million a year and be intoxicated by the power and trappings.

“But it's a democracy, and you can't escape the crowd. Public opinion is like a market shift: Suddenly the great mass of folks requires a scapegoat. And majority rules. You may think individually, but you're judged by those who have no clue about what you do (or don't do). And Wall Street has been thoughtlessly creating this image for itself over many decades, particularly since the '80s. You may have acted with modesty and rectitude. You may have created value and dealt with clients honestly. But not every one of your colleagues did, and sleaziness is contagious. Many flaunted their wealth. Others cut corners, some fraudulently. Even worse, many thousands were drawn to finance lacking skill, judgment or much in the way of interest and still got to ride on the bandwagon. When the average compensation at Goldman, Sachs & Co. (NYSE:GS) is $770,000 you have to imagine a pay bubble exists. The average deserves that?

“The truth is ‘Wall Street’ has become more about individual ‘eat what you can kill’ and less about the collective over the past 30 years. This is hard to deny. There is far more speculation, far greater conflicts and far less a sense that the client, or the firm or the public, comes first. (Sure, that's a much larger problem than just Wall Street, but no one cares about that right now either.) Wall Street remains the necessary driver of American capitalism. But it has long ceased to try to explain what it does that's beneficial and necessary, perhaps because the gap between image and reality has widened, perhaps through sheer arrogance. It has not only failed to invest in the bank of public opinion over the past four decades, it has steadily withdrawn funds and is now operating at a serious deficit. It's your right to feel personally aggrieved, even victimized. But the crowd doesn't care, and right now the crowd is calling the shots.”

The reality is that the solution may lie, not just in some temporary tax on “excess profits” or stellar bonuses, but in the nexus of regulation. First, by repealing various statutes over the years that separated commercial banking from investment and merchant banking (read: we let the lending and savings industry merge with structures focused on risk-taking), we let these giants merge and grow such that a single company’s failure can have a devastating impact on the economy as a whole. We cannot be distracted into believing that just taxing compensation will make it “all better,” not even at the $90 billion tax number we are reading in the press.

Peter Cohan, writing for the January 15^th DailyFinance.com, pits the bonus package against the damage Wall Street banks created and presents this more shocking perspective: “Wall Street is on track to pay itself near-record bonuses for its 2009 performance. The Associated Press reports that the six biggest banks will reap a $150 billion 2009 bonus bonanza, a mere 8.5% less than what they received in the record year of 2007. Do you think you have the right to protest? Of course you do. But it won't get you too far because you lack the cash for your protests to make a difference.

“It's worth remembering that Wall Street got those record 2007 bonuses in early 2008, after the recession sparked by the financial crisis had begun. As I've posted, that crisis was caused mostly by Wall Street's overextension of securitization and leverage. And the costs of that crisis have been astounding: $30 trillion in 2008 global stock market losses, record foreclosures of 2.8 million home in 2009, 27 million Americans underemployed, 10%+ unemployment, 2009 worker wages down the most in 20 years, and a government bailout that could hit $23.7 trillion.” We really need to reduce the risk that this ever happens again… ever!

Regulation has to take two forms in my opinion: 1. Literally creating transparency and responsibility in all forms of economic activity that can have a reach beyond the instant companies and transactions at issue. Hedge funds, private equity, the derivative market and credit rating services are all in dire need of such oversight, even as Wall Street fights against this trend. and 2. Just as the government did with AT&T years ago, the financial institutions that have merged and grown to be uncontrollable behemoths need to be broken back up into smaller and independent component parts. AT&T’s original break-up has spawned dozens of new companies, in competition with each other, creating new technologies and new jobs along the way. Yes, there does come a time when big, particularly when “big” was not due just to growth but more to mergers and acquisitions, is truly bad.

I’m Peter Dekom, and yes, size does matter!