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Wall Street confesses to bonus culture's ills
By William D. Cohan |
March 1, 2012, Thursday
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IMAGINE if you could hear directly, albeit anonymously, from the normally secretive bankers and traders who manufactured and sold the trillions of dollars in toxic debt securities that pushed the world's financial system to the brink of disaster in 2008.
Would they defend themselves and their actions, or show a degree of remorse for what they caused and have not been held accountable for?
Well, you can find the answer to that question in "Conversations With Wall Street," a compact - and largely overlooked - book by Peter Ressler and Monika Mitchell published last year by FastPencil Premiere. Ressler and Mitchell worked together at a Wall Street executive search firm that specialized in finding senior people for fixed-income trading departments.
The pair set about interviewing some of the people they had recruited and placed in positions of power to "bring a deeper understanding" of how Wall Street works "stripped of its glamour."
It ain't pretty. For instance, there is "Stan," one of "those guys Main Street loves to hate," whose job was to trade mortgage-backed securities. He got paid more than US$1 million a year. "I'm just a moving man," he told the authors. "My job is to move bonds off my books as fast as possible." He gave little thought to whether the underlying value of the homes had risen beyond realistic levels.
"The whole game was about price appreciation," he explained. "We weren't concerned about the value of the housing markets, just the products offered. We are in the moving business. We buy loans and securities and move them within two months." He continued: "We sold them to money managers, pension funds, insurance companies and hedge funds. This was a seller's market. We got paid fifty cents for each hundred dollars sold. If we sold US$1 billion, we made US$5 million. We didn't care."
Another interviewee, "Sean," was the co-head of the fixed-income division of a big Wall Street firm. In his late 40s, his net worth was over US$100 million. He said he saw risks coming in the mortgage market, but he couldn't persuade his colleagues to slow down.
"There are a lot of people on and off Wall Street who are responsible for this crisis," he explained. "One of the main reasons it happened is because the Street got velocitized." By this, he meant that as risk ratcheted up and became the norm, greater risks needed to be taken to get the same adrenaline rush that bankers and traders felt originally. He likened it to driving a car, first going from zero to 60 miles per hour - "you can feel the speed as it increases," he said - but then 60 feels normal so you have to start driving 90 or more for the same feeling of acceleration. "But now you are cruising at a very dangerous speed," he said. "The level of control you have over the vehicle you're driving is substantially reduced. When the car crashes, there are usually no survivors."
Sleepless nights
Then there was "Greg," a senior executive of a Wall Street group that manufactured and sold billions of dollars of mortgage-backed securities. Ressler spoke with him in early 2008 as the crisis was reaching a peak. Greg's boss had been fired, and he was left alone to manage the portfolio. "I haven't slept in months," he told Ressler. "I toss and turn all night. I know this stuff is going to implode." He said he had known for "a few years now" that his group was creating and selling toxic securities. He said he "thought about" sharing with his bosses how concerned he was becoming. "But at the end of the year they were thrilled that we did a billion dollars" a month in securitizations tied to subprime mortgages. "After they paid my bonus, they asked if I could double that and get the number up to two billion. "
What Ressler and Mitchell have elicited from these bankers and traders rings true to me. During my 17 years on Wall Street, no one ever got rewarded for questioning whether what we were all selling - I was selling merger advice - was right, wrong or indifferent. Our only rewards came from selling our services, day in, day out. We hoped what we were doing was ethical - and legal - but there was no upside in questioning authority or what we sold or how we sold it.
What is painfully clear from Ressler and Mitchell's transcripts is that the incentive system on Wall Street that rewards bankers and traders for the revenue they generate by constantly selling whatever comes across their desks, regardless of its quality, is terribly, terribly broken. People do what they are rewarded to do, and they will continue to do that over and over again until they are rewarded to do something else.
Now, four years after the crisis started, not one thing has changed in what bankers and traders are rewarded to do. Until that happens, you can forget about preventing another crisis on Wall Street.
William D. Cohan is the author of "Money and Power: How Goldman Sachs Came to Rule the World." He is a Bloomberg View columnist.
Would they defend themselves and their actions, or show a degree of remorse for what they caused and have not been held accountable for?
Well, you can find the answer to that question in "Conversations With Wall Street," a compact - and largely overlooked - book by Peter Ressler and Monika Mitchell published last year by FastPencil Premiere. Ressler and Mitchell worked together at a Wall Street executive search firm that specialized in finding senior people for fixed-income trading departments.
The pair set about interviewing some of the people they had recruited and placed in positions of power to "bring a deeper understanding" of how Wall Street works "stripped of its glamour."
It ain't pretty. For instance, there is "Stan," one of "those guys Main Street loves to hate," whose job was to trade mortgage-backed securities. He got paid more than US$1 million a year. "I'm just a moving man," he told the authors. "My job is to move bonds off my books as fast as possible." He gave little thought to whether the underlying value of the homes had risen beyond realistic levels.
"The whole game was about price appreciation," he explained. "We weren't concerned about the value of the housing markets, just the products offered. We are in the moving business. We buy loans and securities and move them within two months." He continued: "We sold them to money managers, pension funds, insurance companies and hedge funds. This was a seller's market. We got paid fifty cents for each hundred dollars sold. If we sold US$1 billion, we made US$5 million. We didn't care."
Another interviewee, "Sean," was the co-head of the fixed-income division of a big Wall Street firm. In his late 40s, his net worth was over US$100 million. He said he saw risks coming in the mortgage market, but he couldn't persuade his colleagues to slow down.
"There are a lot of people on and off Wall Street who are responsible for this crisis," he explained. "One of the main reasons it happened is because the Street got velocitized." By this, he meant that as risk ratcheted up and became the norm, greater risks needed to be taken to get the same adrenaline rush that bankers and traders felt originally. He likened it to driving a car, first going from zero to 60 miles per hour - "you can feel the speed as it increases," he said - but then 60 feels normal so you have to start driving 90 or more for the same feeling of acceleration. "But now you are cruising at a very dangerous speed," he said. "The level of control you have over the vehicle you're driving is substantially reduced. When the car crashes, there are usually no survivors."
Sleepless nights
Then there was "Greg," a senior executive of a Wall Street group that manufactured and sold billions of dollars of mortgage-backed securities. Ressler spoke with him in early 2008 as the crisis was reaching a peak. Greg's boss had been fired, and he was left alone to manage the portfolio. "I haven't slept in months," he told Ressler. "I toss and turn all night. I know this stuff is going to implode." He said he had known for "a few years now" that his group was creating and selling toxic securities. He said he "thought about" sharing with his bosses how concerned he was becoming. "But at the end of the year they were thrilled that we did a billion dollars" a month in securitizations tied to subprime mortgages. "After they paid my bonus, they asked if I could double that and get the number up to two billion. "
What Ressler and Mitchell have elicited from these bankers and traders rings true to me. During my 17 years on Wall Street, no one ever got rewarded for questioning whether what we were all selling - I was selling merger advice - was right, wrong or indifferent. Our only rewards came from selling our services, day in, day out. We hoped what we were doing was ethical - and legal - but there was no upside in questioning authority or what we sold or how we sold it.
What is painfully clear from Ressler and Mitchell's transcripts is that the incentive system on Wall Street that rewards bankers and traders for the revenue they generate by constantly selling whatever comes across their desks, regardless of its quality, is terribly, terribly broken. People do what they are rewarded to do, and they will continue to do that over and over again until they are rewarded to do something else.
Now, four years after the crisis started, not one thing has changed in what bankers and traders are rewarded to do. Until that happens, you can forget about preventing another crisis on Wall Street.
William D. Cohan is the author of "Money and Power: How Goldman Sachs Came to Rule the World." He is a Bloomberg View columnist.
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