How should we> reform Wall Street? The conventional wisdom is slash the mega-bonuses and bring on the regulators (not to mention taxpayers). But what about the culture of Wall Street itself? The Ivy Leaguers who work 11- and 12-hour days, seven days a week? The insistence on shareholder value above all else? What role did those things play in the meltdown? And are they fixable?
Karen Ho, an anthropology professor at the University of Minnesota, sets out to answer these questions in her recently-released book, "Liquidated: An Ethnography of Wall Street Culture." Originally a dissertation that Ho started as a grad student at Princeton in the mid-1990s, "Liquidated" approaches investment bankers much as Ralph Linton approached the hill tribes of Madagascar. She goes to work at Bankers Trust (which was subsequently acquired by Deutsche Bank) for a year to observe her subjects (sleeping under desks, refusing to be seen brown-bagging lunches), debriefs them and once the economy begins to unravel in 2007, updates her material to make it timely.
Ho s main finding: Coddled investment bankers, who come from privileged, educated backgrounds, don t or can t empathize with the people whose lives are affected by layoffs, mergers and economic downturns. Because of their good-old-boy networks, the bankers find jobs easier than the rest of us, and get paid better for doing it. In Ho s view, Wall Streeters push as many deals through as possible during their day and assume the rest of the U.S. work force operates as they do. They have adopted the growth of shareholder value as their primary motivator, which Ho sees as misplaced. Instead, she argues that management, employees, and shareholders should drive advancement in business
Ho spoke to SmartMoney about her first-hand experience on Wall Street, and what she learned.
You spent several years studying Wall Street culture, even working an investment-banking job. As an anthropologist, how would you sum up that culture?
I would say that the culture is one of expediency and one of liquidity This culture actually comes at the nexus of a few things. One, the elite biographies and social networks of investment bankers. Two, the culture of these particular workplaces. These converge to actually help to produce the kinds of markets that, I would argue, are prone to crises.
What do you mean by liquidity?
Wall Street looks favorably upon institutions that are constantly changing, constantly restructuring, where many of the corporate assets are seen as liquid sites for short-term shareholder appreciation.
When I say liquidity I also mean particular culture on Wall Street, a culture that has constant job restructuring, constant job changes This particular model of the liquid worker becomes a model that has been used for workers throughout the U.S.
How does that system cause problems?
Investment bankers are paid through a bonus compensation system. And the bonus compensation system is not premised on the quality of the deals that the investment banks actually give to their corporate clients the bonus is actually based on the number of deals that are pushed through at a given time.
Many bankers live in an environment of constant change They're actually culturally incentivized to push through the deal, even though they might not think that it's going to improve long-term corporate productivity.
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Does that hurt them as much as the rest of us?
Many investment bankers are from fairly privileged backgrounds. They re recruited from elite universities, they're from upper-middle-class backgrounds -- for them constant restructuring does not necessarily herald downward mobility. Their networks are privileged enough that many of them land on their feet.
Many [workers] are not from the same kinds of elite backgrounds and many of them are not compensated as exorbitantly, so Wall Street expectations writ large actually might have negative consequences for the average worker -- and produce really volatile and crisis-prone markets.
You write about the "origin myths," or a myth that leads to a belief system, of Wall Street culture. What are these? Could you walk me through them?
The sacred cow that's used to justify current Wall Street values and practices is that shareholders are the true owners of corporations Because of their ownership status, they re the ones that should be managing and controlling corporations.
And I argue that this is a myth, although a very powerful one. I think historians would agree with me -- it's actually the modern corporation and the growth of modern corporations that generated the stock market, and not vice-versa. The folks who have historically governed corporate America are the employees and their managers.
If there's going to be reform of the industry, what aspects of the culture do you think most need to be changed? And how do you do that? It seems that it's very entrenched.
It will be very, very difficult to change.
To answer the first part, I would radically reform their bonus culture. Bonuses are mainly tied to the number of deals bankers are able to push through, and not to the quality of the deals. I would tie investment banking and Wall Street bonuses to the quality of the advice that they give.
I would also re-institute the Glass-Steagall Act. [The Glass-Steagall Act prevented commercial banks from investment banking and collaborating with full-service brokerage firms.]
Why could this be so hard to change?
So much of our social safety net, especially retirement, has been outsourced to financial markets. Corporations and institutions don t have defined benefit plans, they have 401(k) plans. So to the extent that people s retirements are tied to a Wall Street bubble culture, then it s actually going to be quite hard to reform.
People are invested in the stock market and thus have a very ambivalent relationship to real critique despite their disagreements with Wall Street.
If the social safety net has been outsourced to Wall Street, doesn't that enforce the sacred cow origin myth of shareholder value?
I would say that even though many Americans are shareholders, most Americans don t hold enough stock that that they would actually rather give up a well-paying job for an appreciating 401(k) plan.
The rationale over the past 20 to 30 years has been that constant corporate restructuring and constant corporate change to boost the stock price is good for everyone. I would argue that most workers would actually prefer their $45,000-a-year job over the fact their 401(k) plan has increased $300.
At the same time, I agree with you in the sense that if Wall Street actually did produce long term, more stable shareholder value, that would actually be quite a bit better than what they actually do.
Then would you say the culture deserves some or all of the blame for the current financial crisis?
I would say it definitely deserves some of the blame and that it's part of the culture, their bonus culture, their culture of liquidation and their culture of always wanting to be in lockstep with the market.
When one investment bank got into subprime, everyone felt that they too had to be in the vanguard, on the cutting edge of the market, so they all had to be in subprime as of yesterday. Everyone wanted to push through deals to get the next largest bonus.
Do you think there are any aspects of the culture that should be protected? Any parts that are valuable?
The culture certainly is innovative in lots of ways, and I think if the innovations were channeled in a way that was a little more long term, in a way that was a little more responsive to shareholder productivity... if we can capture some of that innovation and attach it to the making of more productive enterprises, I think that could certainly be salvaged.
What are your thoughts on the idea that the bankers were too smart for their own good, and that s what caused the crisis?
The culture of smartness is a key factor here. Investment banks recruit from a very few elite universities... the Ivy Leagues. And I think part of what has allowed investment bankers and banks to have such cach , to have what they say be so believed is the understanding that all of the bankers are so elite and so smart. Many journalists have been saying in the wake of the crisis, how did the smartest people in the room do this to us? If this were used as a referendum, one could argue that they weren t necessarily the smartest, they just had elite backgrounds.
Would you ever go back to a Wall Street job?
I would not. I actually had a very interesting time on Wall Street and made good friends there and I guess part of the point of writing this book was to understand from Wall Street's point of view, as an anthropologist might say, the native's point of view, how these kinds of practices made sense for them.
If you went to lunch with Lloyd Blankfein, what would you push him on?
To the extent that Goldman Sachs claims that their mission statement is to generate shareholder value, I would want him to actually point to, for all the corporate clients, all the shareholder value that they ve generated over the long term To the extent that they care about shareholder value, does it make sense that shareholder value only happened for two months? I would press him on the Wall Street bonus culture and how it often shoots shareholder value in the foot.