Magazine | March 14, 2016, Issue

Accursed Wall Street

(Cultura RM Exclusive/Walter Zerla/Getty Images)
Our ritual, shallow denunciations of the finance industry

Everybody hates bankers, and they’re a hateable bunch: After making a series of insanely hubristic bets on the U.S. housing market, they created a credit crisis and helped set off an ugly recession. A few rat bastards lost their jobs, and for a couple of months the waiting list for a boat slip at the Greenwich marina went from a few hundred to a few dozen. The big banks took billions in bailout loans at sweetheart rates and used a fair bit of the subsequent profits to finance the presidential campaign of Barack Obama, with Goldman Sachs becoming the Democrats’ largest business donor in 2008.

Bernie Sanders hates Wall Street: “The business model of Wall Street,” he declares, “is fraud.” Hillary Rodham Clinton, who was paid $6,000 a minute to give speeches to Goldman Sachs, Morgan Stanley, and other Wall Street firms, threatens to break up the banks. John Kasich (R., Lehman Bros.) bemoans Wall Street’s lack of ethics and says there is “too much greed” there. Kasich was attacked for his Wall Street ties by a super PAC supporting Chris Christie — funded by the founder of SAC Capital Advisors, an investment firm that corporately pleaded guilty to insider trading and paid $1.8 billion in fines. Donald Trump, whose company went bankrupt after defaulting on its junk bonds, hates Wall Street, and that’s understandable: He owes hundreds of millions of dollars to practically every bank on the street, from Capital One and Deutsche Bank (he’s in hock at least $50 million to each, according to his financial filings) to BNY Mellon, Amboy, and UBS (between $5 million and $25 million each). Marco Rubio lambasts bankers for purportedly going around bragging about being too big to fail, Ted Cruz denounces Marco Rubio as a candidate with Wall Street Journal values, and Rand Paul blasted Ted Cruz as a pawn of Goldman Sachs, where Cruz’s wife worked. For five minutes, everybody was making a stink about the fact that Cruz took out a large loan from Goldman Sachs, until somebody (I think it might have been me) explained that Cruz’s margin loan — essentially a cash advance against investment assets on deposit with the bank — was an utterly ordinary transaction available to any old schmoe with a million or so in assets to use as collateral. 

Jeb Bush of Lehman Bros. and Barclays was practically alone in failing to vilify Wall Street. All he did was complain that “systematic risk” was higher now than before the so-called reform under the Dodd-Frank law — and propose an enormous tax hike on private-equity companies.

Why do politicians hate Wall Street? Because people hate Wall Street, and politicians are always looking to get out in front of the parade. Show them a sufficiently large and stupid mob, and they’ll find a reason to join it. (Cf. “Trump, Donald, supposedly conservative supporters of.”) Americans hate Wall Street because they blame it for the 2008–09 credit crisis, which they are largely right to do, and for the subsequent recession, which they are only partly right to do. They resent the bailouts of firms such as Chase, without quite understanding that many of those were perfectly healthy banks pressured to take bailout money to disguise just how bad things were at the worst institutions. Many Americans resent what seems to them an asymmetrical outcome: Most of the deadbeat borrowers who defaulted on their mortgages lost their homes and saw their credit get pretty well jacked, while the big Wall Street players (give or take the odd Dick Fuld) seem to have got one over on the Treasury Department and the taxpayers. That’s not entirely untrue, but that’s not what caused the so-called Great Recession, which is what happened as American households adjusted to the ugly facts of economic reality after their inflated house values collapsed.

Politicians and ordinary people also resent that Wall Street types make so damned much money. Washington is full of lawyers and professors who live in $5 million and $8 million homes. (Senator Elizabeth Warren, that great and holy scold of the hated 1 percent, lives in a multimillion-dollar mansion in Cambridge, Mass., plus whatever quarters she inhabits in Washington, and she made a tidy profit buying and flipping homes in foreclosure.) But it should not surprise anybody that it is so profitable to work on Wall Street. Modern economies run on credit, from Fortune 500 companies to three-man start-ups, but the business of lending and investing money is very, very tightly regulated, meaning that there are not that many firms in the market. Bigger firms tend to do better in highly regulated industries (because they can more easily bear regulatory-compliance costs), which is why it’s no surprise that the “too big to fail” banks are bigger in both absolute and relative terms today than they were before Dodd-Frank. And while top-shelf investment banks such as Goldman Sachs expand their market share, their counterparts in commercial banking are doing the same: Between 2007 and today, the assets of the nation’s commercial banks grew by more than $2 trillion, even as the number of commercial banks declined by more than 1,000. Lots and lots of eager, willing demand meets severely restricted supply: That’s a pretty good formula for big profits, supercharged by cheap money from the Fed.

Bankers are like lawyers and congressmen: Nobody likes them in general, but everybody likes his own guy okay, and likes him a great deal at those moments when he proves useful. We all love Silicon Valley’s “angel” investors, but that kind of hands-on venture capital is no substitute for what Wall Street does: provide credit and risk-management services that enable the relatively smooth functioning of everything from corporate payrolls to large-scale inventory management. For all of the cheap and irresponsible talk about “Wall Street vs. Main Street,” our pinstriped financier friends contribute a great deal to America’s small businesses and farms. You think those $500,000 John Deere combines bringing in the cotton crop are financing themselves?

Credit matters. Donald Trump was forced to finance one of his daft casino projects at 15 percent interest, which is approximately what an unemployed felon with tax liens pays on a used-car loan. It was that high interest rate — the great dealmaker’s inability to secure himself affordable financing — that drove Trump’s enterprise back into bankruptcy (his third) in 2004. Business simply does not get done without financing.

That is why, with the recent exception of Dodd-Frank, a disastrously cumbrous piece of misregulation, attacks on Wall Street tend to be mainly rhetorical — a great deal of “Harrumph!” and not much more. Senator Sanders, a self-identified socialist and an avowed enemy of Wall Street, hardly so much as lifted a finger in behalf of financial reform prior to the 2008–09 credit crisis. His big idea on banking reform before that? Putting federal caps on ATM-withdrawal fees. Having listened to the gentleman from Vermont speak extemporaneously on the subject of financial reform, I would be willing to bet a non-trivial sum of money that he couldn’t explain what a derivative is, as perfervid as he is in his insistence that whatever it is, it needs stricter regulation.

We are suffering a bout of populism in American politics just now, which means we are having a national Us-and-Them moment. The reality is that, when it comes to Wall Street, Us is Them. But populists hate Big Business for its bigness as such, and thus Senator Sanders and batty old Hillary Rodham Clinton get wild applause when they promise to break up the big banks. (Perhaps Mrs. Clinton one day will make the content of her richly remunerated Goldman Sachs speeches public and we can see whether she previewed her threat on Wall Street’s home turf.) Never mind that the problem in 2008 wasn’t the bigness of the firms but the leverage associated with them — try explaining the basics of the situation to the typical Trump, Clinton, or Sanders voter and you’ll see high-speed glazing over of a caliber that would turn the Dunkin’ Donuts guy himself green with envy.

Barack Obama ran against Wall Street while powered by Wall Street money. Eight years later, with squat to show in the way of meaningful financial-industry reform, it is, apparently, enough to proclaim one’s hostility to Wall Street, even if one is suckled by that great money teat in New York, as Mrs. Clinton is, or sleeping with a Wall Street veteran, as Ted Cruz and John Kasich’s wife both do. There is still much that needs to be done in the way of Wall Street reform — and it isn’t caps on ATM surcharges.

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