To begin, I should point out that what is called “Wall Street” is not a monolith. Rather, it is like a giant global octopus with a central purpose (raising money for productive investment) and many different tentacles that have a broad reach, not all of which went awry in the last decades. Thus, people have to be careful not to oversimplify the subject and risk killing the entire octopus rather than targeting only those tainted tentacles.
I have spent most of my 80 years on or around Wall Street. I believe I know it pretty well and have enjoyed many of its benefits. I also still believe that the genius of “Wall Street” was and remains an essential ingredient in making possible American dreams. Now, however, I find myself agreeing with what appears to be the basic idea underlying the “Occupation.”
I hear the Occupiers’ message to be:
What happened in the economy of the country in recent years does not seem right or fair. Wall Street got us — the whole U.S. — into this mess by plying the country with excess unaffordable housing, creating too much easy credit for everything we wanted to buy, and at the same time reaping vast profits trading among themselves. The resulting bubble inevitably burst. Yet, its dire consequences linger and now we, the rest of America, are continuing to pay a stiff price for Wall Street’s selfish mistakes. At the same time Wall Street appears to have pretty much gotten off scot-free and has gone back to minting fortunes again, at our expense.
Broadly viewed, that message seems to be very close to the truth. And, it is hard and perhaps unwise to argue, or even quibble with, the relatively few points that may be overstated or exaggerated by some of the Occupiers.
Many people say correctly that they — the occupiers — have not sufficiently specified either their complaints or their wishes. Still, that does not diminish the powerful truths embedded in their overall basic message.
Frustration, a sense of helplessness and a feeling of abandonment are perfectly normal human reactions to the conditions which today embrace far too many Americans. While the Occupiers are still a relatively small number of people, they are clearly the leading edge of 15+ million Americans underemployed and unemployed, whose pains and foreclosures have been largely swept under the political rug.
Credit President Obama, Paul Volcker and the sponsors of the Dodd-Frank Wall Street Reform and Consumer Protection Act for setting out to rein in and correct much of the obvious Wall Street excesses, despite that they did it with kid gloves to avoid killing the whole octopus. But, remember also that Wall Street’s vastly well paid lobbyists quickly and powerfully thwarted too much of the original plan.
Now that the Occupiers have brought the issues front and center, what can and should be done, at least with respect to the Wall Street part of the overall larger economic problems?
- Simply dissing the Occupiers as a rag tag lot of poor losers is not a productive idea. They are as real as rain.
- Simply counting on bad weather to shut them down is wishful thinking because it is already clear they are striking a vibrantly resonant chord in many places.
- Simply appearing to be broadly sympathetic, without seriously addressing basic issues, is likely to exacerbate their anguish, anger and behavior.
Wall Street needs to start by publicly presenting a credible group of leaders who loudly say, “We get it!” and pledge to start doing the things that they already know very well need to be changed. That list includes:
- Wall Street has to stop playing games with government about the reasons their special tax breaks (for example capital gains treatment on carried interests) enhance profits to allegedly raise more capital for America, when in all honesty they really are mainly to pay ever bigger bonuses from outsized profits in competition with everyone else in the business.
- People forget that Wall Street has poured ever larger amounts of money (simply as the economy grew) through the same pipes and made the relatively few people manning those pipes (traders and investment bankers) seem to themselves, at least, like geniuses who deserved ever more pay when really all that was happening was more money was passing the meters in their pipes. Their equivalent “unit” pay for most similar functions over the years increased by many multiples in relation to most other similar types of jobs, which deflected a lot of talent away from science, engineering and education. Modern computers made ordinary people seem much smarter (and apparently more valuable) than they really are.
- Rhetoric to the contrary, Wall Street was and is perfectly capable of creating sufficient investment capital for American industry at reasonable — in historical terms — levels of pay. It boggles imagination to believe that an investment banker will quit, if the pay for raising money goes down from $4 million to $2 million a year, if global ground rules uniformly change. It may be unpalatable, but is still a better deal than many alternatives, which (heaven forbid!) could lead them to being Occupiers too.
- Wall Street preached competition while it systematically undermined it. Elimination of the Glass-Steagall Act of 1933, which separated commercial banking from investment banking, was politically powered through in 1999 during the last big wave of prosperity. That led to eliminating many competing independent players on Wall Street, which in turn, enabled the remaining too few giant players to dominate, as well as obscure, many of their most profitable activities. This led directly to the bubble and other excesses, which ended in the collapse in 2008.
- Capital adequacy and proprietary trading have also become serious problems. Wall Street loves — lives on, in fact — leverage and therefore deplores being required to have more capital to protect its depositors, lenders and counterparties. They have turned somersaults to justify their capital adequacy and frequently have pulled blindfolds over regulators’ eyes. Proprietary trading became a very large part of their profits, even though that activity truly has little to do with their avowed purpose of providing capital to American business. They really should come clean on these issues and put into effect the sound and sensible rules that have been proposed by Volcker and others to put their houses in order.
The above five categories of issues obviously involve many detailed and complex matters that go way beyond the basic purpose of this note. However, by seriously addressing those topics in the context of a genuine “we get it” attitude, Wall Street could legitimately put itself on a path of reform which could become an important part of the larger goal of restoring confidence in the American economy.
That might lead the Occupiers to getting behind the other crucial issues like overall tax reform (including more taxes from the super rich) and getting broader consensus behind sufficient economic stimulation and putting more Americans back to work and back into the malls of America.
Frank A. Weil is the Chairman of Abacus & Associates, Inc., Investments; formerly Vice Chair and Chief Financial Officer of Paine Webber and General Partner, Loeb Rhoades & Co.