It's Time for 'Occupy' to Pack Up Its Tents
A member of Goldman Sachs' 1998 new associate class, one of the first things we were exposed to during training was an old deal "tombstone" from the 1950s. Though the names of the financial institutions listed on it were foreign to the vast majority of associates, the message was an essential and sobering one: investment banks have a highly ephemeral quality to them.
There lies one of the first truisms about Wall Street utterly lost on the protesters hanging around Occupy Wall Street encampments the world over. The firms they've made the objects of their scorn don't have historically long shelf lives. Operating in a business environment where one bad deal, trade or employee can imperil their very existence, each day financial firms and the talent within must prove their worth against brutal competition eager to put them out of business.
This of course helps explain why the pay, particularly for skillful employees, is so high. Engaging in very high-risk work, the financial reward is potentially great given the simple truth that the potential for extraordinary failure is even greater. Though the notion of a "job for life" in any sector of the global economy is increasingly something of the past, on Wall Street it never existed. Stating the obvious, the alleged nosebleed compensation in the financial sector is to some degree the result of how quickly it can disappear, not to mention it being a function of how valuable financial sector services are to the broader economy. More on that later.
About the street near the southern tip of Manhattan that is in fact Wall Street, it's a bit ironic that the most famous "occupation" occurred at Manhattan's Zuccotti Park, down near Wall Street. There lies a certain falsehood seemingly bought into by the Occupy Crowd, that "Wall Street" is on Wall Street.
The above may well have been true 100 or even 50 years ago, but today, with the exception of Goldman Sachs, the vast majority of financial firms have moved to midtown Manhattan, or out of New York altogether; Greenwich, Connecticut one of many popular locales for the financial world's greatest minds.
Though Wall Street in lower Manhattan was once the location of many great investment banks, today most in finance would agree that it's a very undesirable area. In short, more than ever what we know as Wall Street" is merely a symbolic, broad adjective for the myriad investment banking, trading and money management firms that dot the global landscape.
What do these firms do? They compete like crazy with each other for profitable financing, trading and investment opportunities, and for doing so, make our lives better; thus calling into question the absurd suggestion that Wall Street and Main Street are at odds with each other.
Figure one of the deals that put banking giant Goldman Sachs on the map was financing done for Sears; Sears at one time the personification of Main Street for its book size catalogues offering American consumers so much of what they wanted, but that was formerly out of reach. Goldman also famously did investment banking work for Ford Motor Company, the very company that made the once obscure automobile ubiquitous.
More modernly it was investment bankers at Morgan Stanley who attracted financing for Netscape; Netscape's IPO the precursor to an Internet boom that has profoundly changed all of our lives for the better. Investment bankers, far from objectionable individuals, find investors whose capital funds the companies we work for, pharmaceutical companies whose innovations make us healthier, clothiers whose designs make us look better, and retailers whose economies of scale make our dollars stretch further. Without Wall Street Main Street would be a depressed place, and vice versa.
Looking at the trading function of banks, the price signals wrought by this necessary activity ensure that good ideas receive more funding, and that bad ones are starved of capital so that they can't destroy any more of it. Of course the clients of Wall Street firms by definition have different viewpoints on everything under the sun, which means trading activities bring together the proverbial Google bear with the Google bull.
Regarding the "proprietary trading" activities that have so many up in arms for banks "betting against their clients", if Goldman Sachs can't bet against the trading views of its customers then as a rule those same customers can't bet against Goldman's market view. Though protesters may wish otherwise, there are two sides to every trade. And as Goldman's clients have differing views on the market direction of most everything, the firm, in its role as an investment bank, will at one time or another have trades on that will tautologically be "bets" against the market views of all its clients; those clients grateful for Goldman's trades bringing liquidity to the marketplace.
Considering the investment function of banks, well, customers large and small want to put money to work and investment banks help them to do so. There's no coercion here; rather investment banks succeed or fail, win or lose clients based on their ability to deploy the capital entrusted to them wisely.
All of which brings us to the mortgage securities that investment banks created, that took some banks down, and that have the Occupy crowd quite feverish about abolishing the banks altogether. There lies yet another example of how very much Wall Street and Main Street are joined at the hip.
Indeed, the mortgage securities at the center of today's controversy were Wall Street's way of bringing together individuals desirous of purchasing homes with individuals interested in fixed streams of income. It bears mentioning again that there are two sides to every trade, and Wall Street firms brought the two sides together much as it does investors with those interested in owning credit cards, securing a loan for a business, or selling shares in a business.
That many borrowers ultimately defaulted on the mortgages underlying the securities is hardly Wall Street's fault. Too often forgotten is that by virtue of the heavy demand for mortgages in concert with heavy demand to finance those mortgages, the counterparties in the recessionary rush to real estate (its cause a symptom of the weak dollar in this writer's mind) were willing participants. That the value of the securities declined due to mortgage defaults doesn't speak to Wall Street malfeasance as much as it speaks to a greater truth that businesses and the individuals they transact with make mistakes all the time.
Where it gets interesting is that when exposure to those mortgage securities rendered some firms insolvent, the federal government committed the grave error of bailing out with taxpayer money the banks that ran into trouble, and for doing so, their counterparties. Notable here is that if Occupy Wall Street were solely about protests against the bailouts, this writer would have joined up. It's also arguable that many Wall Street workers themselves would have joined up, and helped fund with their impressive salaries, Occupy Wall Street.
Indeed, what the banks that tragically took government money didn't understand then, but do understand now, is that money from the government never arrives without strings attached. Once any business or individual takes from the government that same government will have expectations about how they do things in the future. In that case it's no surprise that many banks and investment banks are currently in big trouble. Politicians and governments don't care about profit, and as they can now foist their blinkered views about profits on the banks they "saved", they're presently strangling them. If this is doubted, check out the share prices of banks that took TARP money in the fall of 2008 and compare them to today.
After that, a good number of Wall Street banks and investment banks had no need for TARP money over three years ago. Today they not only suffer increasingly suffocating regulations imposed on them due to the failure of some of their competitors, but they also had their futures stolen. Indeed, one of capitalism's greatest qualities (the bailouts a certain rush away from capitalism) is that when failures occur the bankrupt companies don't disappear as much as their assets are swallowed up by competitors - often at fire sale prices.
Had the political class done as it should have and let capitalism work, there firstly would have been no crisis owing to the historical truth that financial firms have been failing with great regularity for as long as they've existed; the crisis rooted in uncertainty as to government's intervention in their failure, and second, the healthy institutions not needful of bailout money would have grown stronger and more able to serve Main Street through the acquisition and better oversight of the institutions that went under. To put it simply, Wall Street was the biggest victim of the very bailouts meant to save it; failure always an author of future strength as opposed to weakness. Once again, if Occupy Wall Street were solely about protesting the ghastly bailouts of banks that should have been allowed to go bankrupt, it's fair once again to say that many on Wall Street would be loudly supporting OWS.
The simple truth is that it would be hard to find a more fruitful relationship than the one that exists between Wall Street and Main Street. Individuals and business on Main Street need financing, and the symbol that is Wall Street pairs those in need of finance with those eager to provide it. If Wall Street didn't exist Main Street would have to invent it, so for the Occupy crowd to bemoan its existence is for it to decry progress altogether. Individuals need credit, families need homes, and commercial visionaries need investment, so financial institutions of all stripes get it for them.
In short, Occupy is screaming its wrathful slogans at the wrong target. Wall Street isn't bad, but bailouts are. In that case Occupy Wall Street should pack up its guitars, pipes, tents and signs and train its sights on the world's political capitals from which the bailouts emanated.