One of the many questions plaguing the occupants of the C-suites on Wall Street these days is whether the malaise in their investment-banking and trading businesses is merely a temporary downturn caused by the sluggish global economy and tougher regulation or whether it is indicative of a broader, more systemic change in the industry.
At Goldman Sachs Group Inc., where fourth-quarter net income fell 58 percent, the thinking seems to be that the business slowdown is temporary. When the cycle turns back upward, it is assumed, the firm will be well-positioned to get more than its fair share of the fees that result from the pent-up demand for its investment-banking services.
“The world will snap back, and it will be a surprise, and it will be faster than people think,” Goldman Chief Executive Officer Lloyd Blankfein said unequivocally at an investor conference on Nov. 15.
On Jan. 18, after the firm released unimpressive fourth-quarter earnings, David Viniar, Goldman’s longtime chief financial officer, reiterated the party line that business would probably improve, but then struck a more cautious tone. “We’ve all been doing this for a long time, and we’ve seen downturns before,” he told analysts. “Every time you’re in one it feels like it’s never going to end and this world is different now.” He continued: “So is it cyclical? Is it secular? It’s a very difficult question to answer.”
Will Boom Again
Other banking honchos are also scratching their heads on this subject. Jamie Dimon of JPMorgan Chase & Co. thinks investment banking will pick up significantly when the economy improves because it is an inherently cyclical business. “There’s no part of the investment bank that is naturally stable,” he said on Jan. 13. “I think when things come back, these numbers will boom again.”
But Vikram Pandit, the chief executive officer of Citigroup, is closer to being in the Viniar camp. “The cycle that brought us here is not the cycle that is going to bring us out of this,” he told a panel at the World Economic Forum in Davos, Switzerland, last week. “It is going to be a new cycle, it is going to be a new paradigm and we are all still searching for it. As we search for it, it creates uncertainty. It creates uncertainty that is of a kind that goes well beyond risk.”
Ruth Porat, the chief financial officer of Morgan Stanley, is unsure, too. “It’s either a slow cyclical recovery or secular, and I don’t think it’s clear what it is,” she told Dawn Kopecki and Christine Harper of Bloomberg News. “However you look at it, it’s a slower growth environment.”
It is hardly surprising that these executives are hoping for a return to the status quo. After all, they are responsible for the jobs and livelihoods of hundreds of thousands of people worldwide and, despite the Hollywood image of the callous Wall Street executive -- “Margin Call,” anyone? -- nobody can possibly enjoy firing thousands of people and then having to admit that the size of one’s kingdom is shrinking. Plus, their own fortunes and considerable power depend on commanding armies of loyal subjects and trillions of dollars in assets. On Wall Street, it seems, more is always better.
Still, whether Blankfein and Dimon turn out to be right, and Wall Street’s fortunes snap back bigger and better than ever, is no longer the real point. What is essential at this crucial moment in Wall Street’s history is that industry leaders like Blankfein and Dimon begin to redefine what Wall Street is about and take meaningful steps to restore the confidence that Americans have lost in banking and the capital markets -- in other words, the very essence of capitalism.
Other People’s Money
What’s needed from these executives is not some vague hope that the status quo gets restored, but a road map for an entirely new way of doing business on Wall Street.
For starters, this would include ending the casino-like atmosphere that has reigned for decades, in which bankers and traders are encouraged to take big risks with other people’s money in hopes of getting huge bonuses. That swing-for-the-fences incentive system brought us, among others, the collapses of Bear Stearns, Merrill Lynch, Lehman Brothers and AIG, and the near-collapses of Morgan Stanley and Goldman Sachs. It also brought us the pathetic -- and quite needless -- collapse of MF Global. The pay system on Wall Street must change to one where the armies of bankers and traders are rewarded to take prudent, well-reasoned risks with their shareholders’ money.
Blankfein and Dimon could begin to rectify this dynamic by paying the people who work at Goldman Sachs and JPMorgan less -- easily 50 percent less in terms of salary and bonus -- in order to create more profits for the shareholders who actually own the companies. (Yes, banks have cut compensation costs in recent years -- including Morgan Stanley and now Bank of America Corp., which said last week that cash bonuses will be capped at around $125,000 -- but otherwise Wall Street has preferred to cut people rather than change pay scales in a way that will truly change the culture.)
How do public companies on Wall Street continue to get away with paying out 40 percent to 50 percent of revenue as compensation to employees? Where is it written in stone that a Wall Street banker or trader, with little or none of his or her personal capital at risk, deserves a million-dollar bonus, or more, year after year? Hearing their weepy stories of disappointment on Compensation Communication Day, as bonus day is referred to at Goldman Sachs, isn’t just absurd, it is insulting to every other hard-working American not lucky enough to have a desk at Goldman.
What’s needed is not a return of the status quo on Wall Street, but a whole new way of thinking about the industry and its role in the global economy.
(William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.)
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