It’s been four years (give or take a few days) since the dawn of New Wall Street, born at 1:45 a.m. on September 15, 2008, when Lehman Brothers filed for bankruptcy. That day, which was also the day Merrill Lynch sold itself to Bank of America in a last-minute fire sale, marked the end of an era in Wall Street culture and ushered in a new era marked by squeezed profits, higher regulatory hurdles, and social backlash across the world. But four years later, it's worth asking: Is anything actually different?
Times columnist Joe Nocera wrote that after the fall of Lehman, “everything changed,” including our common attitude toward debt and our willingness to address income inequality. But skeptical critics like Dennis Kelleher, the CEO of advocacy group Better Markets, say that Wall Street is much the same as it ever was, with big banks still engaging in risky and unethical behavior with impunity, threatening the stability of the U.S. economy.
Both the change-proclaimers and the cynics have arguments in their favor, so let's weigh the evidence.
Five ways the New Wall Street is different:
1. Smaller, leaner banks. Since the end of 2006, AIG and the five U.S. investment banks that compose the so-called "bulge bracket" (Goldman Sachs, JPMorgan Chase, Citigroup, Bank of America, and Morgan Stanley) have lost nearly $600 billion in market value. That evisceration, caused in part by new regulation, the lingering effects of the recession, and the dry-up of the capital markets business, has outraged shareholders, led to massive rounds of layoffs and cost-cuts (RIP, Goldman Sachs office plants), and led industry insiders to wonder whether the go-go days are ever coming back.
2. No more prop trading. Before Lehman, most investment banks were structured on the mullet model — a patina of old-fashioned business in the front (an old-line M&A business and flow trading operation) and a risky, lucrative party in the back (proprietary trading desks). The Volcker Rule changed all that. Now, banks are back to earning money the old-fashioned way: through fees from corporate clients and high-net-worth individuals and commissions from market-making trades. The change has made banks less risky, but at a cost. In 2006, Goldman Sachs made $2.8 billion in revenue from its proprietary trading group. Today, that group is gone. (And yes, JPMorgan Chase's London Whale lost $5 billion on what amounted to a prop bet gone wrong, but that incident only furthered Volcker's cause.)
3. Muted celebrations. In precrisis days, it wasn't altogether unusual for banks to go all-out in celebrating big years and big deals. Banks like Goldman Sachs hired A-listers like Bette Midler to entertain guests at their holiday parties. But when Lehman died, so did the outrageous after-hours events. Now, with budgets slashed and a new fear of reprisal, the most galling things Wall Street does almost always happen during business hours.
4. The Occupy effect. When Lehman went under, Occupy was still years away. But the sentiments that the bankruptcy fomented — the outrage at Dick Fuld's having gotten off scot-free, the reaction to troll-so-hard stories about Lehman Wives, and the teeth-gritting madness induced by TARP, which was passed two weeks later — set the stage for the movement. Without Lehman and the moral outrage that accompanied it, "the one percent" still refers to a type of milk.
5. The education of the masses. Four years ago, the term "vampire squid" was known only to marine biologists, and the only people who had ever heard of a "credit default swap" were bankers, credit traders, b-school professors, and a handful of regulators. Today, thanks to Matt Taibbi and an army of journalist explainers, even your grandmother stands a decent chance of knowing what a CDS stands for (even if she still doesn't quite understand how they work). That narrowed knowledge gap has given everyone from Park Avenue to Park City, Utah, an understanding of how Wall Street's obfuscating acronyms affect the rest of us.
Five ways New Wall Street is still Old Wall Street:
1. Risky business. The passage of Dodd-Frank and the institution of the Volcker Rule helped reduce the amount of risk inherent in the big-bank business model. But the global financial system is still as intertwined as ever, and many of the old risky behaviors Wall Street banks once conducted have now been off-loaded to the shadow banking sector — an unregulated, opaque mess of financial institutions and lenders whose size has more than doubled since 2002, according to the Financial Stability Board. That's good for big-bank shareholders, but it could still cause a maelstrom if another crisis rears its head.
2. OPM FTW. Wall Street's precrisis ethos of using OPM ("other people's money") to create massive profits is still with us. At the nation's biggest banks, traders still make massive wagers with deposits and client funds, reaping big bonuses if a trade works out and having their losses capped if it doesn't. It's an incentive system as old as Wall Street itself. When JPMorgan CIO Ina Drew oversaw a unit that lost $5 billion, she lost her job (and her bonus), but most other Wall Streeters, whose losses don't become national news, have faced no such penalties. (Witness, for example, today's news that Citigroup CEO Vikram Pandit's 2011 compensation package will likely still be huge, despite a flagging stock price and a massive write-down of the bank's Morgan Stanley Smith Barney stake.) Until that changes, the basic risk/reward model of high finance is still broken.
3. Still no accountability. After Lehman's fall, Main Street wanted scalps. But few major figures from the bankruptcy and subsequent crisis have been so much as questioned by prosecutors, and crisis-era cases against Goldman, Lehman, and AIG have all been dropped. The SEC has extracted $2.2 billion in penalties for what went down during the crisis, but that's a drop in the bucket. What the rest of the country needed — and what prosecutors were unable to provide — was a little old-fashioned catharsis.
4. D.C. is still a Wall Street satellite campus. Part of the reason that the Wall Street scalp-hunt has faltered is that many of our nation's financial regulators and politicians are deeply conflicted due to hefty campaign donations and the revolving door between the public and private sectors. When Jamie Dimon came to Congress to testify about JPMorgan's trading losses, he was exalted and praised by lawmakers, many of whom had taken campaign contributions from Dimon's bank. As the Huffington Post points out, banks have spent an estimated $250 million on lobbying since 2010, meaning that "the Blob," as former senator Ted Kaufman calls the mass of lobbyists, regulators, and bank executives who meander the halls of Capitol Hill together, is not only alive and well, but fat and happy.
5. The party itch remains. While life at bulge-bracket banks is still markedly different post-Lehman, traces of Wall Street's old culture are still showing up. Last holiday season, with their official parties shuttered, Wall Streeters turned to an underground network of smaller, unofficial events to blow off steam. But look outside the bulge bracket for real proof that the culture of money is still there and yearning to get free. Last week, Rodman & Renshaw, a small investment bank whose stock is down more than 70 percent this year (and which, it turns out, is about to go out of business), had an opulent party at Rockefeller Plaza. If big banks thought they could get away with it, they'd be doing the same.