Having been on Wall Street for around three decades now, I am often asked – mostly by foreign investors – , what’s so special about Wall Street that gets people’s attention the world over and what are the facts from the fiction when it comes to this “Mecca of Finance”.
Here are some of my personal thoughts.
I guess it all started when the Panic of 1907 occurred and the New York Stock Exchange fell 50% in a year peak to trough, JP Morgan bought stocks and called up a few other Wall Street titans to buy. This prevented a total collapse of the financial system and the US economy. JP Morgan did this ostensibly to protect the country. But sometimes doing the right thing at the right time is a necessary expense to build your brand and to prove to the government and your critics that you yourself don’t need to be regulated – so you and your tight oligopoly can continue making obscene profits in normal times…. I believe this is around the time Wall Street was really shaped- followed by the creation of the Federal Reserve in 1913 and all other regulatory agencies over the next 20 years.
So what makes Wall Street so powerful and what are the facts from the fiction out there?
Let’s start by the most obvious.
1. Wall Street is important because that’s where the money is. When they asked John Dillinger, a famous bank robber, why he robbed banks, that was his answer.
2. The titans from Wall Street banks have been closely tied to Presidents, Treasury secretaries, finance ministers, CEOs and prime ministers for a long time. So, quite simply, the folks who run Wall Street care about power and they know how to get it. Money is the means Wall Street titans use to accumulate power and they love it. They love having it. Getting more of it. Befriending those who have it, and befriending those connected to the powerful.
3. Money is Wall Street’s currency to get power. When I fundraised for Romney, I spent a lot of time on Park Avenue. All the fundraisers were held there. Well 90%…. Then I got a glimpse of how things worked. These folks all gave a ton of money and did a ton of fundraising. Like, a boatload. So when you’re a leading candidate for President, you go to the wealthiest financier’s homes late at night for meetings, so you can ask them for advice they were going to give you anyway, while they make sure they have continued access to you so they can work those levers of power to their advantage – or at least not let the government get in their way.
4. Besides political fundraising, Wall Street does tons of highly relevant tasks and favors to big governments, big companies, big pensions and billionaires. If you’re one of those people, Wall Street can and will get you the money you need or want, for a fee. That’s if you need a lot of it and you can pay it back -even if you have to print it or confiscate it. Argentina, I’m looking at you.
5. Wall Street knows the folks with the real money who are seeking investments and hedges and speculative positions. Wall Street knows how to transfer all types of risks – currency, market, credit, interest rate, company, litigation and other risks – from those who want to get rid of it to those who are willing to be paid to take it.
6. Wall Street also knows market making and price discovery and efficiency. It will trade and trade and trade money and financial instruments and commodities and lots of other things in its various forms. So, Wall Street is important. And it uses its importance to be powerful.
7. To date, the Secretaries of Treasury have come from Goldman Sachs, Morgan Stanley, Merrill Lynch, etc…. When they leave the government, they go back to those elite banks. Summers, Geithner, Rubin, etc… all went to banks or private equity funds when they left government work at some point (Summers was at a fund after leaving Harvard).
8. Certainly everybody’s hands are a little bit dirty when it comes to the global financial crisis. A lot of dumb mistakes were made all around. Some of them were idiosyncratic in nature (you can pinpoint many questionable trades made by both investment banks and hedge funds), and some of the mistakes were systemic in nature (think Fannie and Freddie). You can easily assign blame to any market participant you want to, but at the end of the day, if you construct a pie chart of all the blame-able people in 2008, my hunch is that hedge funds would make up a very small portion of that pie. The reason is that they do not control public policy and regulations (which play a huge role in bringing about the crisis), nor do hedge funds put on as much risk as other market participants do because they simply do not control that much capital. Fannie, Freddie, pension funds, insurance companies, foreign central banks, investment banks, etc., dwarf the hedge fund industry by many, many orders of magnitude. I think it’s fine go out of your way and blame the 20-something hedge fund trader at Magnetar or Paulson for constructing trades which have a vested interest in seeing the mortgage market fall apart, because there’s something probably morally questionable about that, but understand that they didn’t cause that market collapse because they can’t. And before you say anything: Yes, I am probably biased being a Wall Street financier myself but No, I did not work in the hedge fund industry during the relevant time period.
9. If you think the Hollywood movie “The Wolf of Wall Street” is of any characterization of the real Wall Street, you are delusional. Nothing to do with reality and I frankly expected much better from an overrated Scorsese or a supposedly brilliant De Caprio. The movie is total fantasy addressed basically to an ignorant public and/or third rate stockbroker wannabees who know squat but think they know it all and are hustling like the movie producer and lead actor to dump their crap to the world… Sorry to spoil your enthusiasm.
10. On the same note, if you think that Wall Street abides by any of the propaganda as per below you are equally delusional. Time for a rude awakening.
- We don’t care about social costs
- We worship the invisible hand
- We don’t care about the environment
- We all go to business schools
- We’re all elitist and are all rich
- We’re all conservatives
I met Hank Paulson very briefly after he left Treasury. I name dropped a current deputy secretary of state I knew he would know from Goldman Sachs. He had a business going, helping big important governments around the world. This meeting led me to a number of similar meetings to the high and mighty which gave me a real glimpse trough luck and fate and hard work of how the financial elite work.
Bottom Line: Consider it like this. Imagine if all supermarkets, grocers, and other sellers of food closed suddenly. We need food to survive and function and would shrivel up and die without it. Now imagine if the major retailers of consumer electronics closed. The effect would be hugely significant throughout our society, but we would be able to continue on.
To major corporations, Wall Street is the “supermarkets, grocers, and food sellers.” Wall Street provides them with the lifeblood, money, that they need to continue their operations. Thus, Wall Street has power over them.
Now that you know who runs America and the world, I strongly suggest to anyone of you wanting to build a career in any industry to spend some time there – even a stint – . It is an experience second to none which will benefit you in the long run while truly learning how the “money world” works.
Share your thoughts….