These headlines lately about how Wall Street movers and shakers are throwing lavish parties for the holiday season, one featuring a performance by the hip-hop star Lil’ Kim dressed up as a black cat, reminded me to look for article I’d heard about called “What Good is Wall Street?”
The hosts are reported not to be celebrating as much about extravagant year-end bonuses, but instead about a mood of rosy optimism in the financial world that happy days, if not here again already, are surely close to returning again for the long term. To Wall Street, the late summer-early fall of 2008, when the system folded in on itself only to be rescued by government intervention, is a long time ago.
Now what about the rest of us?
The stories of bonhomie at the Battery also brought to mind something that has stuck since I read it more than a year ago in a column by the economist Paul Krugman, published in July 2009. The column came out just as investment banker Goldman Sachs reported record quarterly profits and gave out bonus money comparable to the heady pre-crash days of the run-up of the real estate market, hefty hedge fund profits and the lucky streaks in general of the high rollers.
Adding it all up, Krugman writes that it means Goldman is good at what it does. It also means that the compensation system there that helped put us in the dog house in the first place remains pretty much intact. Further, as he notes, “ … by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely.”
I sure hope not, but what’s that got to do with anything?
In the Cassidy article, a full-length magazine feature, the suggestion is strong that it’s business as usual once more by the pared-down big players like Goldman and the investment arms of institutions such as Bank of America, Citibank and JP Morgan Chase, whose bank branches dot the North County landscape like so many In-N-Out Burger places and Jack in the Boxes.
The article also gets you to wondering about the inherent worth of this brokerage and investment banking function; or, in other words, why are these Street people are so highly paid? One leading economist tells Cassidy that they’re basically a utility that moves capital through pipelines and channels much as a water district moves H20 around and delivers it to the customers. Someone said toll takers.
At best, that makes these financial folks middle men and middle women. Here comes the money train. Switchman, hit the button and send it into credit-default swaps.
Now someone has to be the go-between and send out the chits that come in to wherever, granted. But what social purpose beyond that is being served here by the high financiers who apparently are willing to spend as much as $400,000 to rent a big place in the Hamptons for the summer?
Here’s a sample of some of the factoids generated by the New Yorker article:
— The chairman of Britain’s financial watchdog, the Financial Services Authority, says a lot that happens on Wall Street, and in other financial centers around the world, is a “socially useless activity.” He says activities are engaged in that add no real economic value even though they generate revenue and profit. This is called extracting “rent” from the real economy.
— Look at all the profits produced by businesses in the U.S. as a big cake. Twenty-five years, the slice cut for the financial firms, was around one-seventh. Last year, it was more than a quarter.
— In 2006, pay in the financial sector was some 60 percent higher than in other sectors. At Goldman Sachs, average pay jumped last year by 27 percent, or to $340,000.
— A top senior officer at the Bank of England says it’s in the interest of bank managers to “make mirages look like miracles.”
— An anonymous blogger cum Wall Street insider with the handle “The Epicurean Dealmaker,” asks his colleagues to question whether their work is “worth more to society” than that of, say, an elementary school teacher, a firefighter, or an infantry soldier in Afghanistan. “Good luck with that,” he blogs.
As for me, I guess it’s caveat emptor, let the buyer beware, ratcheted up another notch.
Filed Under: Not That You Asked