Wall Street Bonuses Should Be a Great Deal Larger
Last week's announcement of a $28.5 billion bonus pool for Wall Street brought with it a highly emotional aftermath. A group called the Institute for Policy Studies (IPS) even produced a report showing that redistribution of the money to the 1 million full-time minimum wage workers in the U.S. would double the salary of each.
The IPS calculation naturally generated a lot of hysteria. Pitchforks were surely dusted off. Old friends from the Occupy movement doubtless reconnected. The New Republic's Sarah Kollmorgen suggested her readers "sit down," away "from sharp objects" before exposing their delicate psyches to IPS number. In truth, the joke's on those hyperventilating. As the report perhaps unwittingly reveals, wealth redistribution away from the productive would do very little when it comes to lifting the wealth status of workers temporarily (most, including this writer, earned the minimum wage at one point early on) earning the federal minimum.
Much more important than the folly of redistribution, what's too easily forgotten is that the pay in finance is high precisely because very few have the talent necessary to work on Wall Street in the first place. Where there's profit and high pay there are always and everywhere innovators seeking a piece of the lucrative action. That compensation in financial services remains high is a certain market signal that the work being done is rather unique, and thus hard to imitate or automate.
In that case, what should concern readers isn't a nominally lucrative bonus pool for Wall Street, but the sad fact that it's not much higher. Profits and bonuses on Wall Street are a function of those in finance successfully directing the savings of the citizenry to a better use. As Joseph Schumpeter long ago observed, financiers of varying stripes are "capitalists par excellence,' and their investment of previously created capital is a wealth (and jobs) multiplier.
We can order the world's plenty on websites like Amazon.com, have a car meet us anywhere and take us anywhere at all hours with a tap of an icon on a phone on which we can watch movies, and we can more optimistically peer into a future in which cancer cures will be more likely all thanks to finance that has a Wall Street origin. Whatever one's religion or lack thereof, Goldman Sachs CEO Lloyd Blankfein wasn't delusional when he said Goldman does "God's work."
Most Wall Street style financial institutions have private equity arms, and profits there generally result from investors buying the sickest companies around and nursing them back to health. The closer to death the company, the greater the profits (and bonuses) when those on the proverbial deathbed re-emerge. Just as investors create all the new companies and jobs through their capital commitments, so do they often revive the companies and work that are near extinction.
Arguably Wall Street's most important function involves creating a marketplace so that people of varying views can express them. Convinced Apple shares are poised to go higher, traders will pair you with an individual who feels the opposite way. Skeptical about mortgages as John Paulson was back before 2007, Goldman, Morgan Stanley, Deutsche and others will design transactions for you much as they did between the bear in Paulson and the bulls who felt mortgages were backed by healthy borrowers. Paulson's billions ultimately revealed a correct perception about lousy lending standards, and then the overall economy gained thanks to market signals that made plain the danger of committing more capital not just to home loans, but to construction of housing itself.
Have you spent your life building a company, but would like to sell it? Is your company distressed and in need of a buyer? Investment bankers with a keen understanding of your business will match your company with buyers.
Yet probably the biggest reason bonuses are often grand on Wall Street has to do with another Schumpeterian tautology about entrepreneurs: there quite simply aren't any without capital. Simply put, in order for an entrepreneur to turn an idea into something real, there has to be capital available. Someone has to be willing not just to delay consumption, but also willing to direct the unconsumed capital to ventures that almost as a rule are defined by a high rate of failure. In short, capital is exceedingly difficult to obtain. As the very successful serial entrepreneur Joel Trammell explained it in his essential 2014 book The CEO Tightrope,
"I'll be honest: my track record for providing capital is not great. Raising money is hard. Over my career of leading multiple companies, I have talked to more than a hundred institutional investors and have reached a deal exactly once. For this reason I advise companies to take the money when they can, because it isn't often there when you really need it."
Trammell's honest assessment of his own capital-raising skills should be on the wall of every business journalist and activist with a tendency to be skeptical about finance and the bonuses earned by those individuals who work for companies tagged as "Wall Street." They earn their bonuses many times over for once again doing what most can't, including top CEOs. Companies need working capital, and Wall Street earns its fees for finding it.
The modern shame about Wall Street is that due to highly unfortunate bailouts in 2008, it's now tragically true as former Morgan Stanley CEO John Mack said to present CEO James Gorman that "your number one client is government." What this means is that rather than being fully focused on serving the needs of their clients, today's banks and investment banks are increasingly serving political masters who don't care about profits, and who view the banking industry as a social concept rather than a source of profit-focused financial innovation.
Precisely because Wall Street's health is so important to entrepreneurial capitalism the troubled institutions of 2008 should have been allowed to go bankrupt, only to be taken over and recapitalized by new owners. Having been saved by the federal government they now owe their existence to same, and this reveals itself in a less vibrant financial sector.
In short, the unseen shame is how much bigger 2014 Wall Street bonuses would have been had the financial sector achieved a healthy, bankruptcy-induced cleansing back in 2008. Failure, far from something for governments to cushion, is in fact a healthy sign of rebirth in a capitalist system.
Silicon Valley isn't the richest locale in the world because all of its start-ups succeed; rather it's richest because nearly every start-up fails. When Wall Street needed failure the most, it was robbed of it. The result today is a less innovative finance industry forced to spend enormous amounts of time with regulators instead of finding the next great successes and failures in Silicon Valley, in biotech, and in transportation.
For the economy to be healthy, we need Wall Street to be in top shape. Yet bonus-pool growth in 2014 was slower than it was in 2013 and 2012. This is very unfortunate. If we love companies and jobs, then we must also love the capital allocators who make both possible. Looking into the future, we can only hope for the sake of the economy that the 2014 bonus pool of $28.5 billion eventually reads as very small in comparison to what's ahead.
