Of course, it is precisely the flawed risk management that has brought Wall Street salaries under scrutiny. No one has ever been hurt—not financially, anyway—by a Julia Roberts movie. But with their jobs in jeopardy and their 401(k)s in the toilet thanks to a market in which banks took risks with great upside and seemingly little downside, the Minions of the Universe are looking at the Masters with a newly skeptical eye. “There’s this perception that the people on the Street were making money for nothing,” says a mortgage-investment banker. “You have a political and media class who make the mortgage originators and bankers out to be the villains. But are they? They were doing what Congress wanted them to do. Is the guy who lied on his mortgage application the victim here? This whole narrative that the downtrodden were the victims and the money guys were the perpetrators really doesn’t stand up to rational challenge.”
But the issue of pay is hardly ever discussed rationally. “Compensation gets so emotional,” says the Bear Stearns managing director. “Everyone has a point of view. The truth is, the market determines what people are worth. Did I think I was overpaid? You betcha. But a lot of people are overpaid.”
The fault line in the argument over compensation is whether the last 30 years of wealth accumulation are part of the natural order of the economy, to be tampered with at the nation’s peril, or an aberration—a giddy, delirious break from reality in which eight-figure bonuses were considered normal.
For those who spent their entire careers in the boom, the natural order of things looked something like this: Newly minted Ivy League graduates flocked to the city to position themselves close to the ever-expanding capital pie and collect the seven-figure crumbs. In return, they joined charity boards, donated to philanthropic causes, booked reservations at restaurants, bought art, kept the waiters and artists and chefs employed, and, yes, paid taxes that cleaned up the city. Consumption and benevolence merged into an enlightened, if garish, form of economic organization. The noblesse oblige was trickle-down.
Now they were feeling shamed. “You wear a nice suit on the subway, and people look at you.”
As Washington denuded the regulations that had constrained finance, the banks themselves encouraged their employees to pursue maximum risk. Bonuses were paid based largely on short-term profits. “It was the culture of what some called IBG-YBG: I’ll be gone, you’ll be gone,” says Jonathan Knee, a senior managing director at Evercore Partners. Wall Street championed the ethos of “Eat what you kill.” The most aggressive employees, those who took the greatest risks, thought of themselves less as members of a firm and more as independent contractors entitled to their share of the profits. In this system, institutions tended to be hostage to their best employees. “The feeling is, if people don’t get compensated adequately, they’re going to go out and do this on their own,” says Alan Patricof, who founded the private-equity firm Apax Partners.
For these people, it is difficult to imagine a world in which they are not at the top of the socioeconomic heap. But a number of economists and academics are arguing that it was not always this way, and that what we’re seeing now is “a return to normalcy,” as Mitchell Moss, a professor of urban policy and planning at NYU, puts it. Until the late seventies, banking was a career choice more akin to being a corporate lawyer or a doctor than a high-flying hedge-fund manager. Until the eighties, Wall Street counted for about 20 percent of all corporate profits in America, but by the peak of the bubble, it had grown to an astounding 41 percent. “Wall Street became a high-margin business because of the deregulated environment,” Moss says. “You basically had a casino culture operating in the financial-services industry.” And that huge profitability led to great influence. “The system as a whole became unstable because Wall Street developed this disproportionate influence. It’s an entire system of belief they had to create,” says Simon Johnson, the former chief economist of the IMF. In a recent Atlantic article, Johnson describes Wall Street’s influence as a ruling oligarchy, not dissimilar to those of the crony capitalists that have controlled the levers of power in places like Russia, Argentina, and Indonesia. The solution, according to people like Paul Krugman, is to make banking regulated, less profitable, and “boring” again.
It should come as no surprise that being a banker—indeed, simply being rich—is going to be a lot less fun under an Obama administration. In winter 2007, as the Democratic-primary contest got under way, Obama showed up at a Goldman Sachs client meeting to explain his economic agenda to a conference room full of potential campaign contributors. When he opened up the session to questions from the audience, one attendee lobbed the question that was surely on the mind of everyone in the room. “Are you going to raise my taxes?”