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One of the questions that I spent this week discussing is this: What was Wall Street thinking? Whether it's using taxpayer money to pay itself $18.4 billion in bonuses or to buy a $50 million corporate jet after posting $35 billion in losses, people are wondering whether Wall Street gets it. The answer is yes. Wall Street gets that nobody stopped it from paying bonuses when it took our money, so it took what it could. Unless we limit how Wall Street spends taxpayer money, it will keep paying itself big bonuses.
Wall Street is a place where the people at the top are trained to grab as much as they can out of the hands of the other graspers. At least $200 billion worth of TARP money went to Wall Street with no strings attached. If you put that much money into the hands of a culture that believes firmly in taking what it can get -- it usually pays half of its revenues to employees -- you end up with Wall Street taking as much as it can from the taxpayers.
As long as the highest pay goes to Wall Streeters, our society is going to send its best and brightest into finance. Complaining about high Wall Street pay will not change the outcome. But Wall Street is going to need some of the next $350 billion in TARP money, so we face a choice. We can give it to them with no strings attached -- in which case they will pay themselves big bonuses again. Or we can give it to them with a requirement that they lend it out and pay bonuses only in bank common stock that can be sold after we taxpayers take our profits from selling our preferred shares.
If we don't change the conditions under which Wall Street gets taxpayer money, then we are going to get the same outrageous behavior we've seen in the last week.
Meanwhile, I hope that we can change our economy's incentives so that we send the best and brightest people to more useful industries. Personally, I'd like to see more talent going into high tech, teaching, and government. But one thing seems clear to me. Since the early 1980s, finance has become the tail that wags the economic dog. And that tail has brought the global financial system to its knees.
It's time to cut that tail down to size. That's because finance should be a force that supports the investment decisions of business executives who build the products that fuel the economy, rather than its economic engine. And changing Wall Street's culture and pay practices would help restore finance to that rightful place.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and is the author of You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.
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Reader Comments (Page 1 of 1)
1-31-2009 @ 12:00PM
Dionysos said...
Hear Hear!! That Wall Street Tail Needs Some Trimming, Those Greedy Goons Need to Go, But How??
2-01-2009 @ 3:46PM
J said...
People have to stop thinking that govt money is actually our money..
Sure it is based on their tax collection but what they do with this money is entirely out of our reach.
Try calling the congressman to protest about the misallocation of these funds and they still do it anyways...So stop thinking this is your money!
Now, the only money you really have control of is the money you have in your pocket.
Now, Feds are just dependent on Wall streets. That is why Walll street is getting the money...Can the government control how this money is used???
Well probably very very difficulty since any money disbursed to any private entity is done by another independent entity created for that task alone.
Many times even members of congress have to go through some channels to get any answers from these independent entities so regarding control.. There exists none really.
So relax and watch how they spend all these gazillion of funds in things that really don't work.
J
1-31-2009 @ 1:11PM
Todd said...
Is society completely deranged? Since summer of 2007 its been obvious that the most of the US financial system is utterly corrupt. No institutions were there to build wealth soundly and slowly. Instead, it has all been deceitful scheming, or manipulative bubbles, or changing regulation, or ignoring existing laws. With credit default swaps, you could buy insurance for your neighbor's house, and collect if it burnt down. Naked shorting was common, until it caught the very predators wielding it. Goldmand Sachs sold municipalties Mortgage Backed Securities, then shorted those same investments a year later. Leveraging 30-1, or 50-1, that's okay. No separation between the banking side and the investment side. They have destroyed trust in the US, and what do they get for all this? They are rewarded with even more money.