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The End of Wall Street As They Knew It

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And as the world becomes deleveraged, money has been pouring out. In October 2011 alone, hedge funds saw $9 billion go out the door. The London-based Man Group, the largest publicly traded hedge fund in the world, saw its stock dive 25 percent over the course of one day in September, when it shocked the market by announcing that $2.6 billion had been redeemed by clients over a three-month span.

“We used to rely on the public making dumb investing decisions,” one well-known Manhattan hedge-fund manager told me. “but with the advent of the public leaving the market, it’s just hedge funds trading against hedge funds. At the end of the day, it’s a zero-sum game.” Based on these numbers—too many funds with fewer dollars chasing too few trades—many have predicted a hedge-fund shakeout, and it seems to have started. Over 1,000 funds have closed in the past year and a half.

In October, a thousand protesters stood outside John Paulson’s Upper East Side townhouse and offered the hedge-fund billionaire a mock $5 billion check, the amount he earned from his 2010 investments. Later that day, Paulson released a statement attacking the protesters and their movement. “The top one percent of New Yorkers pay over 40 percent of all income taxes, providing huge benefits to everyone in our city and state,” he said. “Paulson & Co. and its employees have paid hundreds of millions of dollars in New York City and New York State taxes in recent years and have created over 100 high-paying jobs in New York City since its formation.” The truth was, Paulson was furious that the protesters had singled him out. Last year, he lost billions of dollars on bad bets on gold and the banking sector. One of his funds posted a 52 percent loss. “The ironic thing is John lost a lot of money this year,” a person close to Paulson told me. “The fact that John got roped into this debate highlights their misunderstanding.”

It’s certainly true that Wall Street’s money played an important part in New York’s comeback, helping to transform the city from a symbol of urban decay into a gleaming leisure theme park. Consciously or not, as a city, New York made a bargain: It would tolerate the one percent’s excessive pay as long as the rising tax base funded the schools, subways, and parks for the 99 percent. “Without Wall Street, New York becomes Philadelphia” is how a friend of mine in finance explains it.

In this view, deleveraging Wall Street means killing the goose. The next decade or so will answer the question of whether a Wall Street that’s built on a more stable foundation—and with smaller bonuses—can sustain the city the way the last one did. But as banks cast about for a new business model, the city’s economy will need to find new sources of growth (this is why the Bloomberg administration has aggressively courted the tech and science industries).

Questions about how the banking industry—and the New York economy itself—will reconstitute are being widely debated amid a grudging new consensus among financial types that the past decades represented a distorted type of capitalism. Partly, they acknowledge, the profits of past years were a function of highly specific policies—the repeal of Glass-Steagall, Alan Greenspan’s expansionist monetary policy, the government’s headlong push to encourage home ownership—that allowed Wall Street compensation to explode.

Like an addict, Wall Street is now taking its first step toward recovery by accepting its failings. “TARP led to a lot of this anger,” said Jamie Dimon. “People said, ‘Well, you got bailed out and you would have failed.’ It’s not true in our case, but I can understand why people are upset about that.”

And Dimon acknowledges the issue highlighted by Occupy Wall Street. “I do think we’ve become a less equitable society,” he told me. “So I’d ask the question—let’s say we agree it’s become less equitable—what would you do about it?”

This brand of self-criticism is clearly smart politics. But it also appears to be somewhat sincere. In recent months, a parade of financiers have jockeyed to get on the side of the Occupiers. At a public forum at UCLA’s Anderson School of Management this past November, Bill Gross, the co-head of the massive bond giant PIMCO, told the audience that he shares “sympathy for labor as opposed to capital.” Gross, a registered Republican, articulated the view that finance, and Wall Street compensation, had become disconnected from the real economy. “It’s been several decades when money and finance have dominated at the expense of labor and Main Street. How can one not sympathize with their predicament?”


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