'Wall Street' Loves Many Things, But It Loathes Bailouts

In the summer of 1996 I was about to go off to business school. In a conversation with my father, I was told that he and my mom would pay my tuition, but that I should utilize my own savings to cover all expenses beyond that.

This wasn't my always generous father foisting austerity on me as much as he wanted me to understand that if my room & board were a function of my parents, I would have to answer to them in terms of the kind of apartment lived in, whether or not I had a roommate, trips taken while in school, and restaurants of choice. Better it would be for my own lifestyle to not be reliant on them.

Fast forward to modern times, and this simple decision by my always giving father goes far in explaining why bailouts are so unfortunate - indeed suffocating - for their alleged beneficiaries.

Consider countries heavily in debt with no near-term way of paying monies owed back. The normal route for said countries is that they go the IMF, or other supposedly benevolent leaders of countries not so indebted.

If so, it's well known that the IMF imposes all manner of stringent conditions on supplicant countries, including conditions that are inimical to economic growth. The IMF has historically required the wilting country to devalue their currency, thus driving away the very investors and investment that would spur a turnaround, not to mention tax increases that put a price on productivity. And since most world leaders are sadly informed by Keynesian ideology, loans from countries arrive with similar demands that almost always work against growth.

Back to the individual, no doubt some readers can remember a time or times when they were heavily in debt; their debt requiring relief from a friend or a relative. Most often the aforementioned relief comes with strings attached that aren't terribly comfortable. To put it plainly, for most of us bailouts are a very undesirable last resort that we avoid at all costs.

All of which brings us to the symbol that is Wall Street. Many of its biggest names were either explicitly or implicitly bailed out back in 2008 and 2009.

At the time, and long since, it was said that ‘Wall Street' firms were the beneficiaries of the best deal imaginable: private profits that generated large paychecks, and socialized losses paid for by governments; meaning the taxpayers. It all sounds so simple, but as individual and country logic dictates, that's not the case.

For one, failure is information, and it's the surest sign of capitalism evolving. Failure of horse carriage manufacturers and the resulting loss of jobs released essential human, physical and financial capital to the next generation of transportation; specifically cars and airplanes. In a more modern sense, Silicon Valley is the destination for the world's greatest technologists despite the locale's history of constant failure that is not just allowed, but is in a strong sense, encouraged.

Banks and investment banks are no different. Collections of great financial talent, their assets are the people who arrive for work each day. Importantly, people make mistakes, that, or they miss opportunities on the way to being swallowed. If this is doubted, readers would be wise to check out most any deal ‘tombstone' from the ‘80s and ‘90s. Most of the investment banks listed no longer exist today as standalone entities.

One certain driver of high ‘Wall Street' pay over the decades has been that so challenging is financial work, and so easy is it to lose one's job for it being challenging, that those who survive earn a lot of money. High risk brings with it high reward. Beyond that, thanks to errors and opportunities missed, collections of talent have regularly been acquired by financial firms more able to navigate the ever-changing financial landscape.

Looking at Wall Street in a modern sense, the popular narrative suggesting that finance enjoys a privileged perch of private profits and socialized losses doesn't stand up to the most basic of scrutiny. To say otherwise is willful blindness as evidenced by how much of their firms the employees of Lehman Brothers and Bear Stearns owned. Wall Street pay is largely a function of restricted stock that can't be sold for years, so when risks taken by the former highflyers proved devastating, losses and bankruptcy erased the net worth of the very people who took the risks. Much the same, it's well known that certain Goldman Sachs partners remain insolvent to this day for borrowing against GS stock when it traded in the $250/share range.

Not only do employees of Wall Street firms risk losing their jobs for a bad trade, missed deal, lost client, or poor stock pick, they also bear the burden as large restricted stockholders when their firms implode. When we talk about bailouts, and they're always the wrong choice, we're usually talking about the bailout of counterparties to institutions that go under.

After that, and returning to what bailouts mean for individuals and countries, the symbol that is ‘Wall Street' no more benefits from them than do people like you and me. For one, the financial sector itself is robbed of the necessary evolution and forced innovation that failure so generously provides.

As for the banks and investments banks ‘saved' by politicians, the latter is a misnomer. Bankruptcy doesn't mean disappearance; rather it means the happy release of human and financial capital to better managers. But just as emergency loans to individuals and countries come with onerous strings attached, so is it much the same for investment banks unlucky enough to be bailed out by politicians.

Considering the institutions ‘saved' in 2008, most of the employees experienced this alongside a massive decline in net worth, and worse, the institutions that employ them now owe their existence to individuals desperate to shackle their ability to continue to earn profits. We see this with Dodd-Frank, the obnoxious ‘Volcker Rule,' calls to limit pay in a broad sense, and then monetary measures such as quantitative easing that as evidenced by the ‘80s and ‘90s when policy was less interventionist, ultimately and logically exist as barriers to economic and market health. Stocks discount the future, and they have rallied, not wilted, amid growing evidence that the lie that is QE has an endpoint.

At present stock markets are mostly at levels first reached in 2000, and then Wall Street staffing is at levels that prevailed in 1997. The bailouts have hindered, not aided the health of a financial sector that to varying degrees is being strangled by the very entity - government - that falsely saved it in 2008.

In short, the symbol that is Wall Street positively loathes bailouts for the latter restraining the ability of financial institutions to evolve, and with evolution do what is necessary to generate the kinds of profits that lead to grand pay packages. More to the point, and you won't hear this often, Wall Street in total positively embraces the low tax, light regulation, free trading, stable money values that most animate the growth spirits of Main Street.  That's because healthy stock markets are easily the biggest driver of Wall Street health. 

All of this should be remembered the next time a bank or investment bank fails. Failure can't cause a Great Depression, rather it is what drives capitalist growth since the latter is a function of limited government. Bailouts are anti-Wall Street, so in order to maintain the existence of finance as one of the U.S.'s most vibrant sectors, it's necessary that we elevate failure to its proper place alongside success. You can't have one without the other.