spursncowboys
11-23-2009, 10:07 AM
A Defense Of Wall Street
John Tamny, 11.23.09, 12:00 AM ET
Every period of so-called economic excess invariably ends with the media and politicians discrediting the symbols of the alleged greed that characterized the era. Michael Milken and other innovative financiers from outside the clubby world of Wall Street were castrated at the end of the Reagan '80s. The late Ken Lay--of Enron fame--saw his reputation destroyed after the '90s Clinton boom, along with Tyco's Dennis Kozlowski and Worldcom's Bernie Ebbers.
This time around, after the relatively mild and certainly overrated "Bush Boom," Wall Street will likely take the lion's share of the blame for the uncertain economy. Popular history will say that Wall Street "overconsumed" when it came to risk and that the result was a near collapse of the world's financial system. Yet this was not the case.
Now, this is not an article exposing the various weak-dollar or universal-home-ownership policies emanating from Washington that helped push the financial system over the edge. That is an article for another time.
Nor is it a defense of TARP or the various bailouts of Wall Street firms that should have been allowed to fail. TARP was and is a massive economic setback. It has inhibited the healthy process in which poorly managed assets are freed up so that others can manage them more prudently.
Nor is this a defense of the financial institutions that paid back their TARP funds, such as Goldman Sachs and Morgan Stanley. Goldman and Morgan aren't deposit-taking institutions, so their transformation into "bank holding companies" is a black mark on both and indicates that they too were bailed out on the backs of unwitting taxpayers.
This is, instead, a defense of Wall Street itself. Thanks to bailouts that should never have occurred and looming bonus payouts for the banks that survived, Wall Street's reputation has taken a huge--and unfair--hit.
Goldman Sachs CEO Lloyd Blankfein's proclamation that his firm is doing "God's work" has attracted unending scorn, and New York Times columnist Joe Nocera recently trashed all of Wall Street, saying that "In no other segment do so many people get rich for doing so little for broader society." Wall Street is presently the demon, but the simple truth is that Blankfein is right.
Blankfein is correct about investment bankers doing "God's work." The simple truth is that life and economy-enhancing concepts such as Microsoft, FedEx and Amazon were once just that: concepts. Thanks to the genius of investment bankers seeking to find the best use for investor capital, those concepts became reality in ways that have enriched us all.
Investment banks help society by seeking the best commercial ideas and introducing opportunities for growth. When successful, these ideas elevate everyone's standard of living. Therefore, investment bankers who recognize value where others don't (Silicon Valley is littered with venture capital firms that turned down opportunities to finance Google) should get massive bonuses--it is the logical and happy result of visionary finance.
Nocera decries Wall Street pay because he believes investment bankers do so little for society, but in making this incendiary proclamation, he ignores why the pay is so impressive to begin with. Just as players in the NFL can make millions one season only to be released the next, Wall Street pay is high because it's so ephemeral.
Investment bankers sometimes get paid like NFL quarterbacks because just as Tom Brady is an injury or interception-filled season away from the waiver wire, investment bankers and traders are one bad deal or trade away from the unemployment line. In that sense, it can be assured that the bankers and traders who brought their firms to failure or the brink of failure are no longer in their employ.
Nocera asks "What in the world does a Citi trader do that makes him worth so much more than a General Motors executive?" The answer is pretty basic. Traders at Citi and elsewhere are "pricegivers"--in seeking trading profits, they are constantly moving capital to what the markets see as its highest use.
While trading profits surely offend some, these profits tell investors they should stop wasting limited funds on capital destroyers such as GM and redirect them toward more responsible managers. To suggest that traders don't do society a great service is to say that prices don't most efficiently organize any economy. Those who believe this should dust off their books about the old Soviet Union, where there were no prices and everyone went without.
Of course the natural response to the positive role of traders is that when they deemed Wall Street firms themselves unworthy of further investment, why didn't we let them fail? The response is the correct one, and the financial firms that couldn't attract private investment in 2008 should have been allowed to bankrupt. The bigger the failure, the bigger the opportunity for prudent financiers to expand their market share.
The lesson that Wall Street has gained from this latest crisis is that it should never again let its firms take government money. Never. Instead, investment banks should serve their shareholders and partners by maximizing profits and compensation while explicitly stating that no government aid will ever be taken should private investment dry up.
If so, Wall Street will be doing God's work in a way that will only offend the congenitally socialist in our midst. As for the rest of us, there's nothing wrong with gargantuan pay packages as long as the recipients don't ask for our help when there's no pay at all.
http://www.forbes.com/2009/11/22/wall-street-traders-gods-work-opinions-columnists-john-tamny.html
John Tamny, 11.23.09, 12:00 AM ET
Every period of so-called economic excess invariably ends with the media and politicians discrediting the symbols of the alleged greed that characterized the era. Michael Milken and other innovative financiers from outside the clubby world of Wall Street were castrated at the end of the Reagan '80s. The late Ken Lay--of Enron fame--saw his reputation destroyed after the '90s Clinton boom, along with Tyco's Dennis Kozlowski and Worldcom's Bernie Ebbers.
This time around, after the relatively mild and certainly overrated "Bush Boom," Wall Street will likely take the lion's share of the blame for the uncertain economy. Popular history will say that Wall Street "overconsumed" when it came to risk and that the result was a near collapse of the world's financial system. Yet this was not the case.
Now, this is not an article exposing the various weak-dollar or universal-home-ownership policies emanating from Washington that helped push the financial system over the edge. That is an article for another time.
Nor is it a defense of TARP or the various bailouts of Wall Street firms that should have been allowed to fail. TARP was and is a massive economic setback. It has inhibited the healthy process in which poorly managed assets are freed up so that others can manage them more prudently.
Nor is this a defense of the financial institutions that paid back their TARP funds, such as Goldman Sachs and Morgan Stanley. Goldman and Morgan aren't deposit-taking institutions, so their transformation into "bank holding companies" is a black mark on both and indicates that they too were bailed out on the backs of unwitting taxpayers.
This is, instead, a defense of Wall Street itself. Thanks to bailouts that should never have occurred and looming bonus payouts for the banks that survived, Wall Street's reputation has taken a huge--and unfair--hit.
Goldman Sachs CEO Lloyd Blankfein's proclamation that his firm is doing "God's work" has attracted unending scorn, and New York Times columnist Joe Nocera recently trashed all of Wall Street, saying that "In no other segment do so many people get rich for doing so little for broader society." Wall Street is presently the demon, but the simple truth is that Blankfein is right.
Blankfein is correct about investment bankers doing "God's work." The simple truth is that life and economy-enhancing concepts such as Microsoft, FedEx and Amazon were once just that: concepts. Thanks to the genius of investment bankers seeking to find the best use for investor capital, those concepts became reality in ways that have enriched us all.
Investment banks help society by seeking the best commercial ideas and introducing opportunities for growth. When successful, these ideas elevate everyone's standard of living. Therefore, investment bankers who recognize value where others don't (Silicon Valley is littered with venture capital firms that turned down opportunities to finance Google) should get massive bonuses--it is the logical and happy result of visionary finance.
Nocera decries Wall Street pay because he believes investment bankers do so little for society, but in making this incendiary proclamation, he ignores why the pay is so impressive to begin with. Just as players in the NFL can make millions one season only to be released the next, Wall Street pay is high because it's so ephemeral.
Investment bankers sometimes get paid like NFL quarterbacks because just as Tom Brady is an injury or interception-filled season away from the waiver wire, investment bankers and traders are one bad deal or trade away from the unemployment line. In that sense, it can be assured that the bankers and traders who brought their firms to failure or the brink of failure are no longer in their employ.
Nocera asks "What in the world does a Citi trader do that makes him worth so much more than a General Motors executive?" The answer is pretty basic. Traders at Citi and elsewhere are "pricegivers"--in seeking trading profits, they are constantly moving capital to what the markets see as its highest use.
While trading profits surely offend some, these profits tell investors they should stop wasting limited funds on capital destroyers such as GM and redirect them toward more responsible managers. To suggest that traders don't do society a great service is to say that prices don't most efficiently organize any economy. Those who believe this should dust off their books about the old Soviet Union, where there were no prices and everyone went without.
Of course the natural response to the positive role of traders is that when they deemed Wall Street firms themselves unworthy of further investment, why didn't we let them fail? The response is the correct one, and the financial firms that couldn't attract private investment in 2008 should have been allowed to bankrupt. The bigger the failure, the bigger the opportunity for prudent financiers to expand their market share.
The lesson that Wall Street has gained from this latest crisis is that it should never again let its firms take government money. Never. Instead, investment banks should serve their shareholders and partners by maximizing profits and compensation while explicitly stating that no government aid will ever be taken should private investment dry up.
If so, Wall Street will be doing God's work in a way that will only offend the congenitally socialist in our midst. As for the rest of us, there's nothing wrong with gargantuan pay packages as long as the recipients don't ask for our help when there's no pay at all.
http://www.forbes.com/2009/11/22/wall-street-traders-gods-work-opinions-columnists-john-tamny.html