Lack of Civic Heroes

It is annual bonus time on Wall Street. The Washington Post reports that these staggering bonuses paid to brokers and executives are viewed even by those who receive them as “absurd” and “outrageously” large.

There is so much surplus money around that, the Post says, that “$10 million apartments in Manhattan, $3 million beach houses in the Hamptons, and $27,000 Hermes crocodile leather purses” are selling fast. Even the average compensation of a Wall Streeter in 1997 was $280,000 which is $120,000 more than the average paid the year before.

“Everybody here is overpaid, knows they are overpaid and is determined to continue to be overpaid,” Tiger Management’s Julian Robertson said of the compensation at his private investment firm this year, the Post reports, adding that “Robertson himself is estimated to be scoring well above $500 million this year.” Yes, that is a half a billion dollars for one man!

Over at Goldman, Sachs & Co., the 1997 bonuses for top partners reached $25 million per senior partner. Lesser partners had to make do with $3 million to $6 million each.

Anthony P. Grassi, a former managing director at First Boston Corp., told the Post: “Did we deserve it? No. It just happens to be a business where the margins are off the chart.”

This is a business where the perennial Wall Street Journal’s darts, thrown randomly at the stock market pages, do about as well as the veteran investment advisors who the Journal matches against the darts. Some months the darts win, some months the “experts” win.

This is an immensely lucrative business managing “other people’s money,” as Justice Brandeis put it decades ago, not risking their own dollars.

This business is the core of what Business Week calls “the casino economy” that deals with ever more abstract instruments of speculation more and more remote from servicing the capital needs of industry and commerce.

This business provokes and then lunches lucratively off giant corporate mergers and acquisitions that make the top executives super-rich and generate huge fees for the investment bankers.

But how come the economic theory of competitive capitalism does not seem to moderate these super-profits? One part of this theory says that if firms make huge profits, new firms come in with cheaper prices and drive those profits down. This has happened in sectors of the economy with far lesser “excessive” profits as in manufacturing and retail.

Why doesn’t it happen on Wall Street? Here are some answers I’ve received from close observers. Investment banking and large brokerage houses get the business due to superior “know-who” -¬≠the social and business contacts with corporate executives and bankers that clinch the dealers with the wheelers. Such “intangibles” are very difficult to compete against by newcomers. As a result even if the big corporate customers want to bargain down the fees, they cannot because those crucial “intangibles” are not purchasable elsewhere.

In Japan such “intangible” closeness go by the names of “zaibatzu” or keiretsu.” In Korea they are called “chaebols.” Because of different laws these conglomerates are not exactly similar in structure and network to the Wall Street firms, but they are quite similar in terms of “know-who” intangibles. In short, status.

All this goes counter to the presumed rational meritoriousness of the marketplace to shop around and maximize values on such variables as price, quantity and quality.

Another theory is the “winner take all” system, whereby a few receive enormous rewards (e.g. athletic superstars, big-time attorneys, actors, fashion designers, television anchors) while the rest of the working stiffs in these businesses try to make ends meet. This theory is more an observation rather than an explanation.

In Wall Street’s case, there is another puzzle. Some large investment and brokerage firms are publically owned and are listed on the New York Stock Exchange. They have millions of shareholders and some large institutional owners such as pension funds. Paine-Webber only pays a 1.3% dividend; Merrill Lynch pays its owners 1.2%. Why don’t these shareholders demand bigger dividends from these immensely profitable companies? Well, the small shareholders are not organized and the large stockholders are satisfied with capital gains.

So, all in all, it is hard to see, short of a deep recession or depression, how these Wall St. bonuses that Wall Streeters themselves think are excessive will be trimmed either by their owners or by their competitors.

In the meantime, most New Yorkers are barely making it or not making it at all. A tale of two cities; a tale of big time “status capitalism” forsaking the cautions, restraints and foresight of its Golden Age.

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