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Excerpt: "Everybody on Wall Street is talking about the new piece by New York magazine's Gabriel Sherman, entitled 'The End of Wall Street as They Knew It.' Listening to Wall Street whine about how it is misunderstood is nothing new. It's been going on for years (often in that same mag). But if Sherman's piece heralds a new era of Wall Street complaining about how it is not only misunderstood but undercompensated, you'll have to excuse me while I spend the next month or so vomiting into my shoes."

Matt Taibbi at Skylight Studio in New York, 10/27/10. (photo: Neilson Barnard/Getty Images)
Matt Taibbi at Skylight Studio in New York, 10/27/10. (photo: Neilson Barnard/Getty Images)



Why Wall Street Should Stop Whining

By Matt Taibbi, Rolling Stone

09 February 12

 

verybody on Wall Street is talking about the new piece by New York magazine's Gabriel Sherman, entitled "The End of Wall Street as They Knew It."

The article argues that Barack Obama killed everything that was joyful about the banking industry through his suffocating Dodd-Frank reform bill, which forced banks to strip themselves of "the pistons that powered their profits: leverage and proprietary trading."

Having to say goodbye to excess borrowing and casino gambling, the argument goes, has cut into banking profits, leading to extreme decisions like Morgan Stanley's recent dictum capping cash bonuses at $125,000. In response to that, Sherman quotes an unnamed banker:

"After tax, that's like, what, $75,000?" an investment banker at a rival firm said as he contemplated Morgan Stanley's decision. He ran the numbers, modeling the implications. "I'm not married and I take the subway and I watch what I spend very carefully. But my girlfriend likes to eat good food. It all adds up really quick. A taxi here, another taxi there. I just bought an apartment, so now I have a big old mortgage bill."

Quelle horreur! And who's to blame? According to Sherman's interview subjects, it has nothing to do with the economy having been blown up several times over by these very bonus-deprived bankers, or with the fact that all conceivable public bailout money has essentially already been sucked up and converted into bonuses by that same crowd.

No, it instead apparently has everything to do with the Dodd-Frank bill, and specifically the Volcker rule banning proprietary trading, which incidentally hasn't gone into effect yet.

He quotes Dick Bove, the noted analyst who last year downgraded Goldman Sachs. Bove's quote on the bonus sadness:

"The government has strangled the financial system," banking analyst Dick Bove told me recently. "We've basically castrated these companies. They can't borrow as much as they used to borrow."

When I read things like this I'm simultaneously amazed by two things. The first is the unbelievable tone-deafness of people who would complain out loud, during a time when millions of people around the country are literally losing their homes, that their bonuses - not their total compensation, mind you, but just their cash bonuses, paid in addition to their salaries and their stock packages - are barely enough to cover the mortgage payments for their new condos, the taxis they take when walking is too burdensome, and their girlfriends with expensive tastes.

The second thing that amazes me is that Sherman is buying all this. I don't know this reporter at all, and I'm happy to concede that he probably hangs out with more Wall Street people than I do. But I'm still in touch with plenty of people in the business, and I have yet to have any investment bankers crying on my shoulder about how the Dodd-Frank bill is forcing them into generic breakfast cereals.

Now, I'm sure if you put it to them the right way - "Hey, Mr. Habitually Overpaid Banker, do you think Barack Obama and the Dodd-Frank bill are ruining your bonus season?" - you'll get a good percentage of people who'll take that cheese and cough out the desired quote.

But in reality? Please. Wall Street people complain a lot, but in the last six months, the grave impact of Dodd-Frank on bonuses hasn't even been within ten miles of the things these people are really panicked about. The comments I've heard have been more like, "My asshole has been puckered completely shut for four months in a row over this Europe business," or, "If the ECB doesn't come up with a Greek bailout package, I'm going to have to sell my children for dog food."

Bonuses are indeed down this year, especially when compared with the bonuses of recent years, but let's be clear about why. It has nothing to do with Dodd-Frank. We can posit three other factors:

1. Banks have unfortunately had to give up the practice of simply printing trillions of dollars out of thin air by selling off worthless mortgages for huge profits and/or making millions of synthetic copies of those same worthless mortgage assets;
2. After twice being saved from the execution chamber by Ben Bernanke's Quantitative Easing programs, which printed trillions of new dollars and injected them straight into Wall Street's arm, Wall Street was rocked this summer when Helicopter Ben decided to temporarily forestall QE3;
3. Europe, a slightly more than minor factor in the global financial picture, is imploding, causing mass hoarding of assets all over the world, severely impacting the business of investment banks everywhere.

Now, Sherman barely even mentions Europe in his article, which is interesting, because the banks on whose behalf he wails so loudly in this piece have mostly all pointed to Europe as more or less the sole reason for their reduced revenues of late.

Take for instance Lloyd Blankfein and Goldman, Sachs. Lloyd has the most famous reduced bonus on Wall Street - he's making $7 million this year (it was $12.6 million last year) as his bank, Goldman, had a disastrous fourth quarter. Goldman's $6.1 billion in revenues was down 30% off last year's fourth quarter. To what does the big Lloyd attribute this sad development?

"This past year was dominated by global macro-economic concerns which significantly affected our clients' risk tolerance and willingness to transact," Blankfein said, "While our results declined as a consequence, I am pleased that the firm retained its industry-leading positions across our global client franchise while prudently managing risk, capital and expenses. As economies and markets improve - and we see encouraging signs of this - Goldman Sachs is very well positioned to perform for our clients and our shareholders."

Translation: Europe is such a mess right now that all our biggest clients are sitting on their money instead of letting us steal it from them. However, once Europe rebounds, as we expect it to, we will be well positioned to start stealing from them again.

Goldman's numbers offer a hilarious counterpoint to Sherman's piece. The bank's earnings in total for last year were $4.4 billion, down some 65% off of last year's numbers. Its revenues for the year were down 26%. Despite these bummerific numbers, Goldman reduced bonuses and compensation by only 21%, down to (a mere) $12.2 billion. If the era of outsized bonuses is over, how come the biggest banks aren't even cutting them to match revenues, much less profits? One could even interpret Goldman's numbers as a major increase in the size of the bonus pool, relative to earnings.

But what about other banks? Well, Citigroup also saw a drop in revenues for the year (although its net income actually went up, from $10.6 billion to $11.3 billion). But what was most concerning was the bank's crappy fourth quarter, when it suffered an 11% drop in earnings.

So where did CEO Vikram Pandit lay the blame for the lost revenue? Dodd-Frank? Reduced leverage? Uh, no. He blamed Europe, too:

"Clearly, the macro environment has impacted the capital markets and we will continue to right-size our businesses to match the environment," Pandit said.

How about JP Morgan Chase? The bank's CEO, Jamie Dimon, was breathlessly quoted in the Sherman piece, and in fact had this to say to Sherman about the culture change:

"Certain products are gone forever," Dimon tells Sherman. "Fancy derivatives are mostly gone. Prop trading is gone. There's less leverage everywhere."

So it's prop trading and derivatives that's the problem? That's not what Wall Street analysts said, when Chase posted a 23% drop in earnings in the fourth quarter. While Dimon in a Q&A last month did go off on the potential problems the Volcker rule might inspire in the future, he was careful to note that those problems are still very much future problems ("I'm going to put Volcker aside, okay, because that really hasn't been written yet").

Instead, virtually every headline about Chase's fourth-quarter earnings drop pegged Euro troubles. "JPMorgan Chase (JPM) ended a long run of profit gains when it logged a steep drop in fourth-quarter earnings Friday, as weakness in Europe contributed to a decline in investment banking revenue," wrote Investor's Business Daily.

The Telegraph commented thusly: "JPMorgan Chase chief executive Jamie Dimon struck a positive note on the outlook for the US economy even as Europe's debt crisis dragged down the bank's quarterly profits."

And Dimon himself seemed to go along with his counterparts at Goldman and Citi in blaming macro troubles for the recent drop, talking about issues with the "current environment":

The bank's third-quarter profit fell 4% as its businesses were hit hard by Europe's financial woes and the fragile recovery in the United States...

 

"All things considered, we believe the firm's returns were reasonable given the current environment," said Jamie Dimon, JP Morgan's chairman and chief executive.

When I look at the revenue and bonus numbers on Wall Street this year, I see a number of companies that, despite being functionally insolvent in reality and dependent upon a combination of corrupt accounting and cheap cash from the Fed to survive, are still paying out enormous amounts of money in compensation.

In fact, when one considers the lost billions and trillions from the end of the mortgage bubble scam and the expiration of the quantitative easing program, it's pretty incredible (one might even call it an inspirational testament to the industry's dedication to the cause of high compensation) that bonuses are even in the same ballpark as they used to be.

***

And all of this is just looking at things from a bottom-line, Wall-Street-centric point of view. Looking at the question from the point of view of an ordinary human being, however, Sherman's thesis is even more nuts. He's written a sort of investment-banking version of Jimmy Carter's "malaise" speech, complaining about a lost era of easy money, when in fact there are two damning realities he's ignored:

1. He's wrong. See the above argument about Europe, QE, etc.
2. Even if he wasn't wrong, which he is, his reaction to the "news" that Wall Street's outsized bonuses are dropping is all wrong. If it were true, it would be good news, not bad news.

Since 2008, the rest of America has suffered a severe economic correction. Ordinary people everywhere long ago had to learn to cope with the equivalent of a lower bonus season. When the crash hit, regular people could not make up the difference through bailouts or zero-interest loans from the Fed or leveraged-up synthetic derivative schemes. They just had to deal with the fact that the economy sucked - and they adjusted.

This ought to have been true also on Wall Street, but in a curious development that is somehow not addressed in Sherman's piece, the denizens of the financial services industry managed to maintain their extravagant lifestyle standards in the middle of a historic global economic crash that, incidentally, they themselves caused.

After suffering one truly bad year - 2008, in which the securities industry collectively lost over $42 billion - Wall Street immediately rebounded to post record revenues in 2009, despite the fact that the economy at large did nothing of the sort. The numbers were so huge on Wall Street compared to the rest of the world that Goldman slashed its 4th-quarter bonuses, just so that the final bonus/comp number ($16.2 billion, down from what would have been $21 billion) didn't look so garish to the rest of broke America.

What Sherman now argues is that Dodd-Frank has so completely hindered Wall Street's ability to magically invent profits through borrowing and gambling that, unlike those wonderful days in 2009, its fortunes are now reduced to rising and falling - heaven forbid - along with the rest of the economy. Things are so bad, his interview subjects argue, that one is now more likely to make big money going into an actual business that makes an actual product:

"If you're a smart Ph.D. from MIT, you'd never go to Wall Street now," says a hedge-fund executive. "You'd go to Silicon Valley. There's at least a prospect for a huge gain. You'd have the potential to be the next Mark Zuckerberg."

Once upon a time, Sherman argues, banking was boring. "In the quaint old days, Wall Street tended to earn its profits rather boringly by loaning money, advising mergers, and supervising bond issues and IPOs," he writes. But then, in the eighties, the business became "turbocharged" when new ways to create leverage were introduced. A sudden surge in credit turned this staid business into the realm of super-compensated superheroes:

Credit was the engine that powered the explosion in bank profits. From junk bonds in the eighties to the emerging-markets crisis in the nineties to the subprime mania of the aughts, Wall Street developed new ways to produce, package, and sell debt to willing investors. The alphabet soup of complex vehicles that defined the 2008 crash - CLO, CDO, CDS - had all been developed to sell more credit.

But all of this leverage led to problems, Sherman grudgingly concedes, and those problems led to reforms, and now Wall Street is being threatened with a return to those "quaint" days of loaning money and supervising bond issues and such.

Such a return is being demanded by the 99-percenters, much-loathed by Sherman's interview subjects and portrayed as a bunch of ignoramuses who don't understand where their bread is buttered. In New York especially, it's the regular people, he argues, who benefitted from all that crazy leverage. Why, without ginormous leverage-generated bonuses, New York would be … Philadelphia!

Consciously or not, as a city, New York made a bargain: It would tolerate the one percent's excessive pay as long as the rising tax base funded the schools, subways, and parks for the 99 percent. "Without Wall Street, New York becomes Philadelphia" is how a friend of mine in finance explains it.

Sherman then goes further:

In this view, deleveraging Wall Street means killing the goose.

Look, the financial services industry should be boring. It should be quaint. Let's take the municipal debt business. For ages, it was a simple, dull, low-margin sort of industry, in which banks arranged municipal bond issues and made small but dependable profits as cities and towns financed improvements and construction projects.

That system worked seamlessly for decades, until people like Sherman's interview subjects suddenly decided to make the business exciting. You know what happens when you make municipal debt exciting? Jefferson County, Alabama happens. Or, on a macro level, Greece happens.

When making a few points on mere bond issues stops being enough, and you have to cook up crazy swap schemes and indices to bet against those schemes, ingenious scams allowing politicians to borrow billions of dollars that they will never in a million years be able to pay back, you might end up getting a few parks, schools, and subways in New York.

But what you get everywhere else is a giant clusterfuck that costs the rest of us years and even more billions of tax dollars to remedy.

This is what the protests are all about - it's anger that Wall Street has been profiting from an imaginary economy that leaves bankers overpaid, but creates damage everywhere else. Sherman doesn't get this. He seems to subscribe to the well-worn straw-man position that protesters are simply upset that bankers and financiers make a lot of money. Take for example his view on John Paulson, the hedge fund titan who was involved in Goldman's infamous Abacus deal:

In October, a thousand protesters stood outside John Paulson's Upper East Side townhouse and offered the hedge-fund billionaire a mock $5 billion check, the amount he earned from his 2010 investments. Later that day, Paulson released a statement attacking the protesters and their movement …. The truth was, Paulson was furious that the protesters had singled him out. Last year, he lost billions of dollars on bad bets on gold and the banking sector. One of his funds posted a 52 percent loss. "The ironic thing is John lost a lot of money this year," a person close to Paulson told me. "The fact that John got roped into this debate highlights their misunderstanding."

Hey, asshole: nobody misunderstands anything about John Paulson. They're not mad that he made billions the year before, and they're not happy that he lost money this year. They're mad that the way he made his money in previous years - which involved putting together a born-to-lose portfolio of toxic mortgage bonds and then using Goldman Sachs to dump them on a pair of European banks, who in turn had no idea that Paulson was betting against them.

At least part of this transaction was illegal (so ruled the SEC, anyway), and all of it looks pretty damned underhanded. And if the benefit to society from this sort of work is the tax money New York City received from the proceeds of this fleecing, well, we're willing to go without those taxes, thank you very much.

Listening to Wall Street whine about how it is misunderstood is nothing new. It's been going on for years (often in that same mag). But if Sherman's piece heralds a new era of Wall Street complaining about how it is not only misunderstood but undercompensated, you'll have to excuse me while I spend the next month or so vomiting into my shoes.

The financial services industry went from having a 19 percent share of America's corporate profits decades ago to having a 41 percent share in recent years. That doesn't mean bankers ever represented anywhere near 41 percent of America's labor value. It just means they've managed to make themselves horrifically overpaid relative to their counterparts in the rest of the economy.

A banker's job is to be a prudent and dependable steward of other peoples' money - being worthy of our trust in that area is the entire justification for their traditionally high compensation.

Yet these people have failed so spectacularly at that job in the last fifteen years that they're lucky that God himself didn't come down to earth at bonus time this year, angrily boot their asses out of those new condos, and command those Zagat-reading girlfriends of theirs to start getting acquainted with the McDonalds value meal lineup. They should be glad they're still getting anything at all, not whining to New York magazine.

 

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+39 # RNF123 2012-02-09 09:06
As usual, Matt is right on! Keep up the good work and ignore the spin!
 
 
+23 # Barbara K 2012-02-09 10:20
Agree with you RNF, let them whine and eat cake. Maybe they can dip it into their caviar while feasting in their ivory towers. There are people out here with nothing because of the actions of Wall St. They get no sympathy from me.

NEVER VOTE REPUBLICAN !!

we are living the results of the last one
 
 
+44 # k8carroll 2012-02-09 09:07
Dear Morgan-Stanley investment banker whose bonus has been so severely capped. You poor thing! How will you ever make it? Before you answer, consider that your $75,000 BONUS is twice my annual income. Like you, I have a mortgage. I don't know if you have children, but I am putting a daughter through college. The last time I bought a new pair of shoes was 4 months ago. The last time I bought new clothing, was December 2010. Stop your miserable whining! You may be getting a bonus check, but your reality check bounced. I'll trade places any time you like.
 
 
-46 # Robt Eagle 2012-02-09 11:39
k8carroll, get a second job like the rest of us who are making ends meet and stop your whining!
 
 
+18 # Glen 2012-02-09 14:07
Robert, folks would be sympathetic to your post, if you had suggested Wall Streeters, like Morgan-Stanley, had to get a second job to make ends meet. How about the military sell a damn fighter plane to help pay for education in this country, instead of schools having to have bake sales to even buy books or take students on educational field trips.

You cannot legitimately blame the victims of government and Wall Street corruption for being in the situation they are in. That is exactly how those government and Wall Street types get away with their theft of public monies: keep citizens criticizing and squabbling with each other.
 
 
+22 # grouchy 2012-02-09 09:13
Vomit in their shoes!
 
 
+35 # bugbuster 2012-02-09 09:28
A born thief steals property because he wants it and therefore feels entitled to it. He is born without the capacity to understand or empathize with his victims' reactions to his crimes. That is my understanding of the term "sociopath." This sounds a lot like the people who speak for the banking racket, which they call the banking "industry."
 
 
-42 # Robt Eagle 2012-02-09 11:40
Also sounds like a Democrat who want everything for nothing and are "entitled" to it from the wealthy.
 
 
+22 # bugbuster 2012-02-09 12:28
So when you go to your investment broker in good faith, accept his recommendation, and give him your money to invest, and then he knowingly puts your money into a losing investment and at the same time bets against it, you think he is entitled to collect on your losses?

Listen Robt Eagle, I have this sure thing investment. You'll make a 50% return on it in one month. Just send your money here and I'll take care of everything...
 
 
+8 # reiverpacific 2012-02-09 17:29
Quoting bugbuster:
So when you go to your investment broker in good faith, accept his recommendation, and give him your money to invest, and then he knowingly puts your money into a losing investment and at the same time bets against it, you think he is entitled to collect on your losses?

Listen Robt Eagle, I have this sure thing investment. You'll make a 50% return on it in one month. Just send your money here and I'll take care of everything...

Good point and hits home.
My wife (against my advice) gave quite a chunk of a bequest to a "Family friend" broker who commandeered it and totally blew it without any accountability.
They don't give a shit as long as they get theirs. Nice repertoire of apologies tho'.
 
 
+4 # Texas Aggie 2012-02-09 12:43
This null set that you're talking about exists only in your projective fantasy. Your projection of your own desires onto people who stand in your way does not reflect well on you.
 
 
+6 # reiverpacific 2012-02-09 17:42
Quoting Robt Eagle:
Also sounds like a Democrat who want everything for nothing and are "entitled" to it from the wealthy.

"The unbelievable tone-deafness of people who would complain out loud, during a time when millions of people around the country are literally losing their homes" . Hello -anybody home in there?
 
 
+12 # elmont 2012-02-09 09:29
As usual, Matt hits the nail on the head. Another great article from my fave RSN contributor.
 
 
-8 # artful 2012-02-09 09:40
>>"The government has strangled the financial system," banking analyst Dick Bove told me recently. "We've basically castrated these companies. They can't borrow as much as they used to borrow."
 
 
+12 # jwb110 2012-02-09 11:19
Quoting artful:
>>"The government has strangled the financial system," banking analyst Dick Bove told me recently. "We've basically castrated these companies. They can't borrow as much as they used to borrow."

It's not about borrowing as much as they used to. It's about not being able to steal the money from the American public in Bernanke, Schemeville and them pay themselves with that money and leave the average American, who has to work for a living not wait for his bonus, to pay for it all.
 
 
+16 # OrlandoDFree 2012-02-09 11:09
Maybe their bonuses should only be paid in the securities that their firm is betting against. And maybe they have to wait five years for those bonuses to vest. That would give them a healthy disincentive to package bad securities.
 
 
+16 # Feral Dogz 2012-02-09 11:10
Great article Matt. What these whining thieves need is some hard time in Sing Sing to think about the consequences of their actions. If I weren't an atheist, I would pray that they find redemption making big rocks into small ones with an 9lb. hammer.
 
 
+17 # sweetsali 2012-02-09 11:14
Dear Matt...Please watch your back. These people are dangerous and will become more so as they're cornered.
These guys orchestrated fraud on an unsuspecting and huge number of American citizens who believed in and invested in the "prudent banker myth."
They need to be prosecuted, tried and incarcerated for their misdeeds...and banned from trading for life!
 
 
+13 # Jim Rocket 2012-02-09 11:42
Reminds me of the Daily Show piece a few weeks ago where a mafioso, as oblivious as these Wall Streeters, told Jason Jones that government regulation was killing the Mafia. "Because of RICO, guys don't even want to get "made" anymore."
 
 
+14 # ER444 2012-02-09 12:23
WTF !!!??? The government has strangled the banking system????!!!! The banks are borrowing money(actually they are almost being given it for free) at record low prime rates, and charging 17% and more interest for credit cards. The poorer you are(see high risk) the higher the interest rates the banks demand for credit. No one is talking about the fact that these poor bastards are caught in a vicious circle and are that last ones that can afford these obscene interest rates. If I were in charge I would lend the money directly to the public (see state banks) and would personally tie the noose around the collective wall street necks and hang them out to dry !!!
 
 
+14 # Texas Aggie 2012-02-09 12:40
They're mad that the way he made his money in previous years

You can tell this to the rightwingnuts until you're blue in the face, and they won't comprehend. As far as they're concerned, making money in and of itself is totally moral. How you make it is irrelevant and they don't have a clue as to why other people don't share their view. It just does not register with them. He's got his bundle so that means he's a job creator and wonderful and beyond reproach.
 
 
+9 # Eliza D 2012-02-09 18:07
When bankers, including Freddie and Fannie, learned they could make more betting against their own clients, to whom they are legally bound to do no harm, the world turned upside down. Why work for money when you can type a few words, and in a few moments ruin the dreams of thousands of innocent, hard working people who believe the bankers and mortgage lenders are giving them a square deal. We all have to learn to watch our backs, sweetsalli, forevermore. We haven't been in Kansas in a long time.
 

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