Browsing the blog archivesfor the day Monday, April 27th, 2009.


Some People Still Got Some Learnin’ to Do

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Financial Crisis

Here are a couple of articles that ought to be read together. Paul Krugman points to an article in yesterday’s New York Times (no link provided, sorry; if you know what article he’s talking about, let me know) saying that the pay at investment banks is roaring up again, to pre-financial crisis levels.

Why are paychecks heading for the stratosphere again? Claims that firms have to pay these salaries to retain their best people aren’t plausible: with employment in the financial sector plunging, where are those people going to go?

No, the real reason financial firms are paying big again is simply because they can.

Also,

There’s a palpable sense in the financial press that the storm has passed: stocks are up, the economy’s nose-dive may be leveling off, and the Obama administration will probably let the bankers off with nothing more than a few stern speeches. Rightly or wrongly, the bankers seem to believe that a return to business as usual is just around the corner.

After you’ve read Krugman’s article, check out “The Wail of the 1%” by Gabriel Sherman in last week’s New York magazine. It expands upon Krugman’s premise, that Wall Street execs consider their “humongous paychecks” (Krugman’s words) part of the natural order of the universe. It’s their “normal,” in other words, and they fully expect to go right back to the compensation packages of 2007 as soon as this little financial crisis inconvenience is out of the way.

The sense of entitlement that Sherman captures is pathological, but it also goes a long way toward explaining why Wall Street Is Screwed Up. These people feel they are owed the humongous paychecks just because of who they are, not because of what they’ve accomplished. For example:

“No offense to Middle America, but if someone went to Columbia or Wharton, [even if] their company is a fumbling, mismanaged bank, why should they all of a sudden be paid the same as the guy down the block who delivers restaurant supplies for Sysco out of a huge, shiny truck?” e-mails an irate Citigroup executive to a colleague.

Well, no offense to anyone who went to Columbia or Wharton, but your diploma is not a ticket to welfare for life.

To Wall Street people who have grown up in the bubble, the meaning of the crisis is only slowly sinking in. They can’t yet grasp the idea of a life lived on less. “Without exception, Wall Street guys have gotten accustomed to not being stuck in the city in August. So it becomes a right to have a summer home within an hour or two commute from Manhattan,” says the Goldman vet. “There’s a cost structure of going with your family on summer vacation that’s not optional. There’s a cost structure of spending $40,000 to send your kids to private school that is not optional. There’s a sense of entitlement, that you need that amount of money just to live, that’s not optional.” …

… That was an argument I heard over and over: that the high cost of living like a wealthy person in New York necessitates high salaries. It was loopy logic, but expressed sincerely. “You could make the argument that $250,000 is a fair amount to make,” says the laid-off JPMorgan vice-president. “Well, what about the $125,000 that staffers on Capitol Hill make? They’re making high salaries for where they live, maybe we should cut their salary, too.”

Dude, you’re laid off. How much are you makin’ now?

Both Sherman and Krugman point out that one of the reasons Wall Street got so careless with money is that the people handling it were buffered from personal risk. Krugman:

Why, after all, did bankers take such huge risks? Because success — or even the temporary appearance of success — offered such gigantic rewards: even executives who blew up their companies could and did walk away with hundreds of millions.

Sherman:

Bonuses were paid based largely on short-term profits. “It was the culture of what some called IBG-YBG: I’ll be gone, you’ll be gone,” says Jonathan Knee, a senior managing director at Evercore Partners. Wall Street championed the ethos of “Eat what you kill.” The most aggressive employees, those who took the greatest risks, thought of themselves less as members of a firm and more as independent contractors entitled to their share of the profits. In this system, institutions tended to be hostage to their best employees. “The feeling is, if people don’t get compensated adequately, they’re going to go out and do this on their own,” says Alan Patricof, who founded the private-equity firm Apax Partners.

Sherman points out that this cutthroat culture is generational. He spoke to a 55-year-old who says his age group missed out on the megabucks. The group that benefited the most graduated and got to Wall street 1990 and after. Sherman and Krugman both suggest that the reality that needs to be returned to is pre-1990 (I would argue pre-1980), not 2007. But that’s a reality the current generation of Wall Street execs don’t remember.

However, as pointed out in Simon Johnson’s Atlantic article “The Quiet Coup” and Thomas Geoghegan’s “Infinite Debt,” our nation’s financial survival depends on a financial sector run with some restraint and responsibility, not like a casino.

I’m not entirely sure what safeguards need to be in place, but somehow there must be assurance that the people running the financial sector cannot simply reward themselves as much as they like regardless of how their companies are performing. They have to be made to understand that if they take big, stupid risks and lose, they will live out their lives in the suburbs of Queens, driving their kids to public school in a Hyundai. And no one will pity them but themselves.

Otherwise, even if we bounce back from this financial crisis (I am skeptical) sooner or later there will be another financial crisis . And another. And another.

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