Folks, I want to pick up on something Heidi says about John Gutfreund. I agree that Gutfreund's appearance in the book is solipsistic, as if Wall Street itself begins and ends with Michael Lewis' experience of it. But Gutfruend is there to personify the transition from private partnerships where the principals in a firm"”not the shareholders"”deploy the capital, to publicly traded banks where executives in charge own only a microscopic portion of the company's stock. Be that as it may, there's a bigger issue in the separation of ownership from control on Wall Street.
What Lewis is trying to say is that harnessing shareholder dollars is the beginning of moral hazard. Even with bank employees' own net worth tied up in the bank's stock, there is an incentive toward greater risk when you're playing with other people's money. When compensation comes off the top, that hazard gets a bit worse. Owners have an interest in buttressing the balance sheet; bonus-mad bankers, much less so. In end, you have a classic case where the owner's interest is separated from those in charge of the firm.
Historically, this separation was said to be one of the great weaknesses of industrial America. From the 1930s to the 1980s, the fact that corporations were run by persons who were not the owners was considered the central feature of advanced industrial life. To many it was a dangerous one. But to some, it suggested the wisdom of the technocracy and the socialization of industry. It was the liberal democrats' apotheosis of economic peace.
But then came the Reagan revolution and leveraged buyouts that made it possible for managers to buy the companies they ran. Private ownership was seen as the tonic for sclerotic industry. And, indeed, for 25 years after Reagan's election, there was an almost uninterrupted economic boom driven by a new type of owner's pursuit of personal profit. This new figure was either an entrepreneur or a buyout-leading manager. Direct ownership of this type gave rise to the owner as manager. (Or, really, the manager as owner.)
That leads us to Wall Street and 2010, the events of the past two years would suggest a similar reunification of ownership and control in order to repair the broken model of big banks that cannot be allowed to fail. Already, during the boom, Wall Street watched as hedge funds and private equity firms reproduced the most profitable features of banking without the mess of public disclosure and responsibilities toward shareholders.
Without the government's intervention, that process might have been accelerated. Over time, we may indeed see it happen. Perhaps this is the real antidote to "too big to fail""”not breaking the banks up, but starving them of talent until they're forced to give up assets.
As the big banks atrophy, privately held firms like hedge funds and private equity firms could pick up the slack. Over time we would have an orderly transition. That, I think, is one of the frustrating aspects of the bailout. The government is standing in the way of a natural life-cycle in which the financial system would regenerate itself from the inside out, letting the competitive greed of the financial class do the public's work for it.
It feels like the financial world has entered its own kind of 1970s, culminating in a massive federal bailout. If that's the case, history tells us the small, private firms that resolve the issue of ownership and control will be the victors.
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