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The Wall Street Mind: Anxious...

Stage 3 (left), Stage 4 (right)  

Of course, pushing the edge of savory was always part of the allure of Wall Street; it’s what made it badass. The popular image of Wall Street, in the eponymous film and Tom Wolfe’s The Bonfire of the Vanities, was never about rectitude, but it was glamorous. It can be fun to be considered rich, powerful, and ruthless, to understand how things really work. Fabrice Tourre, the former Goldman mortgage-bond trader who still faces SEC charges, e-mailed Marine Serres, his “super­smart French girl in London,” that he’d been told by his boss “that business is totally dead and the poor little subprime borrowers will not last so long!!!”

But there was always a way to justify the greed, some faith in the necessity of the larger system. As Tourre put it, “Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the U.S. consumer with more efficient ways to leverage and finance himself, so there is a humble, noble, and ethical reason for my job ;).”

That explanation began to seem a bit unconvincing, even to bankers, as reality played out over the last three years. Some wonder openly if the profits and bonuses of the mortgage boom were as fanciful as Madoff’s Ponzi scheme—a temporarily self-reinforcing bubble that was bound to end in massive losses. “Lots of the money the banks reported they were making was really an illusion,” says Tavakoli.

One Wall Street executive (few of whom would be quoted by name) admits that it is harder to attract recruits out of business school. “It is hard for people coming out of school now to get a job, so any job is a good one. But there is less enthusiasm and less of a feeling that this is a hot place to be. There is definitely a stigma,” he says.

Each year, Ray Soifer, a veteran bank analyst, monitors what percentage of Harvard M.B.A. graduates choose careers on Wall Street. The figure peaked at a record 41 percent in 2008, just before the crash, and then dropped to 28 percent in 2009. It recovered slightly last year to just over 31 percent. Instead, interest has increased in other professional services, such as consultancy. Engineers and mathematicians are choosing the Internet as a possible route to great fortune over investment banks’ derivatives operations.

This reflects not only ethical qualms but also doubts about the future of the business. “Most people are fairly pessimistic,” says Terry Smith, chief executive of Tullett Prebon, a Wall Street bond brokerage. “When you look back at the last 25 years, there was an extraordinary wave of deregulation and an upsurge in pay. You had the slaying of inflation and then a dot-com bubble that rolled into a credit bubble. People are still getting paid, but they know they are in the last-chance saloon and it won’t be so easy now.”

One could argue that Wall Street has been the last-chance saloon for decades now. The abolition of fixed commissions on bond and equity brokering in 1975 ended the era of partners in white-shoe firms’ being able to live comfortably in a protected industry that could support ranks of traders, brokers, and analysts. Since then, Wall Street’s challenge has been to run fast enough to outpace a relentless squeeze on its old business.

In theory, this should have reduced profits at each investment bank. In practice, it had the opposite effect. The underlying returns fell: Even at the height of the mortgage boom, return on assets (a measure of the margins on each deal) in securities firms was less than a third of the level in 1968, according to figures from Deloitte Consulting. Yet profits and bonuses soared.

Wall Street managed to escape destruction through a wave of mergers (helped by the abolition of the Glass-Steagall Act, which separated banking and securities, in 1999), a rapid increase in leverage and debt, and an astonishing ability to ferret out new ways of making money, from initial public offerings of Internet companies to mortgage securitization. As it did, Wall Street bonuses exploded and the industry loomed ever larger in the New York economy. The securities industry contributed 20 percent of state-tax revenues before the crash.

The banks that survived 2008 didn’t even do so badly in the aftermath. Helped by Treasury and Federal Reserve support in the form of very low interest rates and asset guarantees, Wall Street made profits of $61 billion in 2009 and paid $22.5 billion in bonuses.

Then, in 2010, profits dropped by half,to $27 billion, and the mood is correspondingly deflated. It’s still awaiting (and lobbying fiercely against) a wave of new regulations, both from the central bankers who meet in Basel and from Congress, in the form of the Dodd-Frank bill. The latter passed last year but includes a huge number of new rules that are yet to be drafted in detail by regulators such as the SEC.

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