Which is the Bigger Threat: Terrorism or Wall Street Bonuses?
Monday, 07/26/2010 - 1:25 pm by Wallace C. Turbeville | 17 Comments
The current system of trader compensation will continue to decay the heart of Wall Street.
Which is a greater threat to the nation — terrorism or the relentless decline of middle income families? Unless we abandon our core values out of unwarranted fear, terror cannot fundamentally change our way of life. The number of people affected by growing income disparity is vast. When I was a student, income disparity was indicative of an underdeveloped and unstable society.
The government appropriately devotes enormous resources to protect our lives and property from terrorism. It is unthinkable that a leader would display any weakness opposing this threat. Politicians have stiff backbones when it comes to terrorism.
In contrast, the government is timid and half-hearted in its approach to the system which perversely rewards a few Wall Street traders with billions of dollars of bonuses, yet allows the foundation to decay.
Kenneth Feinberg issued his report identifying outrageous Wall Street compensation of executives despite their role in the financial disaster and bail out. He proposed that the banks voluntarily adopt “brake provisions” that permit boards of directors to nullify bonuses in the event of a new financial crisis.
He might have more success asking the lions of the Serengeti to give the wildebeests a sporting chance of making an escape.
Over the last fifteen years, the financial sector’s percentage of GDP has increased dramatically. At the same time, the median family income stagnated and then declined. I do not believe that this is a coincidence.
The large banks have changed. They slice and dice the constituent elements of a stagnant economy, squeezing value out in ever more sophisticated ways. Wall Street has turned away from its roll as the financial backer of industry and commerce. In the short term, it is more profitable for them to use their capital for trading. Newfangled software and MIT “quants” allow the traders to “rip the faces off” of corporate counterparties and investors which were once trusted clients.
These young traders are simply doing what America has told them to do. They are allowed to earn obscene amounts of money using the advantageous information, technology and capital of their employers. Making money from less powerful counterparties is like shooting fish in a barrel. The banks make so much money that they have no problem shoveling it out to the traders.
The alternative careers for these talented young people offer upside which is modest by comparison. Besides, the trading world, in which the law of the jungle prevails, appeals to youthful aggressiveness. Michael Lewis expected that college students would be appalled by the amoral environment he described in “Liar’s Poker.” Instead, the overwhelming response he received from students was a desire to get in on the action. The draining of talented and energetic young professionals away from corporate America where they could help create jobs by the millions may be as damaging as the new allocation of wealth.
The government’s flaccid approach to Wall Street compensation, embodied in the Feinberg report, is appalling. Geithner and Bernake appear intimidated by Wall Street, yet intent on its approval. Why do they guilelessly buy into the notion that giant, multi-purpose banks dominated by trading are essential to America’s competitiveness in the world? Smaller, less risky institutions aligned with economic growth would seem to be a better idea for the vast majority of Americans.
Greenspan and his progeny, including Geithner and Bernake, are enthralled by financial innovation. Innovation, by itself, can be good or bad. Innovation does not fall into the “good” category if it corrupts the home mortgage market, siphons off business productivity and the jobs and wages of employees and unfairly enriches the few at the expense of the many. It is good if it creates jobs and enriches the public as a whole.
Trader compensation is at the heart of the problem. It encourages behavior that is inconsistent with Wall Street’s most important function: raising capital for industry and commerce. The banks and the government are afraid that the traders will desert the banks and move to hedge funds if their compensation is reduced. If they do jump ship, it is all the better for America. At least hedge funds can blow themselves up without crippling the US economy in the process.
Former traders now run most of the financial sector. They believe that the traders somehow deserve compensation at the prevailing levels. The system will not change unless it is forced to do so. The restrictions in the financial reform legislation only inhibit specific abuses. The banks will concoct new ways to trade risk. It is the only way to maintain their unconscionable profits (that is, until the next bubble bursts and we are in an even worse predicament). The only way to really change the system is to reduce short term incentives, that is to say limit bonuses. The government needs the kind of resolve it uses when fighting terrorism. After all, the stakes are actually higher.
Wallace C. Turbeville is the former CEO of VMAC LLC and a former Vice President of Goldman, Sachs & Co.
Wall Street has done more damage to America than Osama bin Laden. Though until it recognises that fact they will be continue to do disservice to the nation as a whole.
Reforms need to ban certain business practices for commercial banks. That will drive down profits and end the bonus culture. Until that is acknowledged the US will be held to ransom by bankers not terrorists.
Posted by David Lazarus | July 26th, 2010 at 4:36 pm
Mr. Turbeville has done a remarkable job illuminating the insidious influence of trader-culture. Keep these posts coming.
Posted by Nellie | July 27th, 2010 at 1:58 am
Economic terrorism is the biggest threat of the world today.
Posted by Lynn Matthews | July 27th, 2010 at 7:08 am
You could also effect change by letting businesses fail no matter how much they would scream and withhold bribes, I mean contributions, from politicians including Barack (you know, the guy who appointed Geithner and re-appointed Bernanke).
The trillions that the last two immoral Presidents have lavished on saving Wall Street and bankers could have been used to cover depositors instead of propping up failed institutions.
America has survived bank failures and shattered millionaires availing themselves of the window exit before. By not allowing business to be cleansed by capitalism placing the bony finger of death upon them, our politicians have now ingrained within the feckless be-damned souls of Wall Street that any amount of the American people’s wealth necessary to preserve their whorish presence will be used.
Note also hedge fund executives are big contributors to politicians. They will not be allowed to fail.
Posted by chris cunningham | July 27th, 2010 at 10:35 am
Wallace, This is a terrific piece; but what, specifically, do you propose the Government do? That is, what is the policy option you’re suggesting?
Posted by Joe Firestone | July 27th, 2010 at 7:40 pm
This is absolutely the dumbest thing I have ever read. Excuse me but if I lose a small fortune in stocks or if my company goes out of business due to an extended recession, I can still rebuild and get back on my feet. Now, if an Islamic fundamentalists shouts “Allahu Akbar” then blows me and everyone around me to Heaven, there is nothing I can do because I am DEAD!
Economies rise and economies fall, and they do this constantly from boom to bust and back again. Americans have pulled themselves out of a slew of deep recessions and one Great Depression, and there is very little Wall Street can do to bring about permanent damage. Terrorists, however, can end lives, destroy families, cause untold misery which can’t be fixed with a loan reevaluation or government handout.
It is mind-boggling to see what you and your ilk worry about at night… Pathetic…
Posted by Northern Thoughts | July 28th, 2010 at 1:59 am
It’s true that terrorism can end lives and clearly has a huge impact on many American families. But the point I think Wallace is making here is that many more lives are ruined by economic factors — in fact this new study http://www.newdeal20.org/2010/07/28/one-in-five-americans-experience-economic-insecurity-15886/ shows that one in five Americans feel economic insecurity, which doesn’t even take into account the many more who worry constantly about it. While the economy is cyclical, it’s hard to tell that to a family that has been forced into bankruptcy by health care costs or job loss. I don’t think the point here is to downplay the threat of terrorism and its devastation. Those are very real. But it is to remind us that it is easy to ignore some of the more insidious and long-lasting forces that destroy American lives. As a society, we should be able to face multiple issues.
Posted by Bryce | July 28th, 2010 at 11:49 am
Two responses.
First, the policy would be a franchise tax on financial institutions based on excessive bonuses justified by incentives to take on imprudent risks.
I am sorry that Northern Lights didn’t get the point. An economy that spirals down because of declining productivity and disparity of income is an existential threat. A deep, deflationary decline of the economy could threaten our fundamental political philosophy. In the extreme, it is even a national security threat which is more serious than terrorism by far. You maybe killed by a terrorist or a drunk driver and both are bad. But many more lives are at risk if the economy is fundamentally and permanently damaged.
Posted by Wallace Turbeville | July 28th, 2010 at 2:00 pm
The wild fluctuation in the Dow Jones from day to day demonstrates clearly that the stock market has become a gambling casino for the super rich!
Posted by D. Schultz | August 2nd, 2010 at 7:17 pm
Great Article!
I am humble person with a humble job and may not be as well educated as many of the people who have commented on your article…but what I do believe is that I am more afraid of what has happened to this economy than any terrorist out there….I am more afraid of not being able to provide my family the food/shelter/education that is needed for them to grow than of getting on that train everyday and thinking “..maybe today a bomb might go off.”…yes I am afraid that I will loose my job in a few months…and I’m not worried that maybe tomorrow I might not be here because of a terrorist…
Posted by JMartinez | August 3rd, 2010 at 3:20 pm
It’s Northern Thoughts and Reflections Mr. Turbeville, and I got exactly what you were saying it and why you were saying it…
Just who decides what is risky Wallace? What government institution gets to dictate bank policy? What government institution gets to override the will of a CEO and share holders because of perceived risk? You would advocate a “nanny state” solution for such a small problem. Don’t think we have forgotten who you are as well, a former Wall Street employee looking for political acceptance through a misguided smear on your old colleagues. And don’t think we don’t see this article advocating for the recently pass Financial Reform bill, the same one which dictates ethnic quotes for major banks.
As for declining productivity and income disparity, you have given yourself away. It isn’t the job of government to redistribute the wealth of Wall Street, nor is it the job of government to plan and coordinate economic activities. Government acts as a guiding hand, and it is the Adam Smith’s “Invisible Hand” which truly balances the market. You cannot prevent every recession, even those brought about by GOVERNMENT MISMANAGEMENT (Community Reinvestment Act, Fannie Mae, Freddie Mac, etc), so don’t even think of trying. Yes, recessions affect everyone, but blaming this all on Wall Street bonuses would be the same as blaming the smoot-hawley tariff for the Great Depression.
This entire article is fear mongering at its finest, and it can easily be seen with the comparison between Wall Street Bonuses and Terrorism. Instead of really comparing these two things, instead of a side by side account of the damage done by each, you over exaggerate the issues brought on by Wall Street bonuses. This is the same old meme that has been thrown around the last year, how evil business are worse than Islamic jihadists. Once again, the dead don’t get to rebuild their financial portfolio, nor do the get the chance to move to another city, find a new job and start again. That is just counting the dead, as we have forgotten the survivors. What about the misery they live in? What about the fear millions lived under even now? I am sure Israelis don’t go to sleep at night worrying Hamas is going to devalue their stock portfolio…
If you want to compare, why not the assassination of Arch-Duke Ferdinand and the 1929 crash. I am sure the world would rather have another Great Depression than another Great War… Pitiful…
Posted by Northern Thoughts | August 3rd, 2010 at 3:41 pm
We don’t reward productivity. I, and many others actually PRODUCE goods and services only to be deemed redundant in order to increase the, “value, ” of a company.
Indeed, we are redundant. In an economy which only values the manipulation of currency and debt we are more valuable as debtors than producers. Welcome to the Company Store, circa 2010.
Yes, I can find another job, but only at wages equal to what I was making 20 years ago. And, each new position is a completely new start, no seniority, no company loyalty, no reward for previous experience.
The government charters all banks. It can, should, and in past has regulated how risky a bank’s investments are allowed to be. It can also regulate the amount of real capital necessary to cover a bank’s investments.
The government seems to have forgotten the lessons of The Great Depression and the recent reminder of the savings and loan crisis. We can only allow financial, “innovation,” by totally separate investment houses. They can, and will, fail without catastrophic effect for the innocent among us. Let them play Monopoly in a closed game, and NOT with my money.
Your WWI analogy would work better comparing why the US entered the war: Europe was too big to fail.
Also remember, The Great Depression was in no small part responsible for the next world war.
I’ll take my chances with those who would kill me simply for being an American. Living out life in perpetual debt for simple sustenance: THAT terrifies me.
Posted by David Patterson | August 3rd, 2010 at 8:45 pm
Close but no cigar David… Matter of fact, you get the point and then miss it at the same time…
It was the Treaty of Versailles that set the stage for the next World War. The Great Depression merely accelerated the process, allowing Adolf Hitler to rise to power faster than he would have otherwise. As for the United States entering the war, what of it? Even if the United States didn’t enter the war, my point still stands. Millions dead and millions more without homes, left in poverty, and maimed, if not crippled. A financial burden is better than a physical one, especially as life-altering injuries prevent people from obtaining work, let alone working their way out from under debt. On that point, since when is everyone in debt? Last time I checked, I haven’t taken out loans I can’t repay and I haven’t purchases anything I can’t afford.
You want to discuss government forgetting the Great Depression, why not discuss the repealing of the Glass Steagall Act and the expanding of the Community Reinvestment Act. It wasn’t that the banks were playing with risk, investment is all about risk, they had risk forced upon them by government regulation in the form of subprime loans. New York Times had a great article on this, discussing Citigroups holdings in subprime loans which Fannie Mae and Freddie Mac sold into the market with the promise of guaranteed returns. It was politicians and those with political connections that walked away with millions after the collapse, as the recent Goldman-Sachs fiasco pointed out.
As for this nonsense on wages, you and Turbeville have checked the U.S. Census Bureau numbers on income right? More specifically Table F-6 pointing out that family income, both median and mean income, has GONE UP, over the last 15 years in both current dollars and dollars adjusted for inflation, dropping off only after the financial crisis…
http://www.census.gov/hhes/www/income/data/historical/families/index.html
It would be nice if you guys could stick to the facts. I know, they aren’t convenient, but it would be a great change of pace. As for this nonsense about Wall Street greed, how is government greed better? How is government management of banks better?
http://www.washingtonpost.com/wp-dyn/content/article/2010/06/23/AR2010062304024.html
Give it a read, actually educate yourself on the banking system in America and why it is in shambles. It isn’t because the government doesn’t intervene, it is because they intervene too much… Mind-boggling…
Posted by Northern Thoughts | August 3rd, 2010 at 9:48 pm
Excuse me, repealing Glass Steagall is exactly the sort of mistake I mentioned. Separate chartered banks from other investment firms.
In the first place, I don’t remember being asked about my income on the Census form I turned in.
Second point: look again, all mean incomes have gone down since 2000.
I can only speak from experience, not statistics.
The skilled, technical jobs which we were assured were our future are gone, as is the quality of the products we produced.
Once more, our government does not manage banks, it charters barks. Just as my driver’s license comes with regulations, a bank’s charter comes with restrictions in the interest of public safety.
Remove these restrictions and the bank is free to play with money it doesn’t have.
The Washington Post article only shows that the Canadians have a better handle on the public good than our collection of profit-driven, “public servants.”
Perhaps it’s just that Canadians have more sense and of a sense of being Canadian instead of being an individual American. You know, little things like health care, clean cities, and lending a hand to others.
Most of us here are being strangled by the invisible hand.
Posted by David Patterson | August 4th, 2010 at 1:00 am
It would have been nice if you mentioned Glass-Steagall since I don’t read minds. What about the Community Reinvestment Act then? What about that risk forced onto the banking sector through that? Subprime loans which were supposed to be guaranteed by the government?
You are looking at mean and median income in 2008 adjusted dollars (in current dollars, both go up). It dips in 2001 (financial crash following the IT collapse), stays lows for a three years, then goes back up. 63,430 to 63,712, and 82,236 to 82,563, this is following the IT collapse, 9/11, two wars and Hurricane Katrina. Many people like to forget that Bush’s terms in office were rough financially. I would like you to prove Turbeville’s hypothesis that Wall Street’s greed is doing this, not the string of financial problems that hit during that time. As for your exact income, employers have to report that data for tax reasons. Didn’t think of that?
As for banks, the Canadian banking system, as discussed in the article, isn’t regulated to turn out subprime loans or encourage risky lending through tax incentives. Look at what they said about the subprime loan market in Canada versus United States…
“Subprime mortgages in Canada accounted for only about 5 percent of the loans originated by local banks during the housing boom, compared with more than 20 percent in the United States.”
That is thank to the CRA, tax incentives, promises that loans would be guaranteed and Wall Street’s desire for expansion. The first three is all government run, and the last is a constant factor in all business, the desire to expand, hire more workers and create new business. How is that a bad thing? It is all about proper regulation, not the loose application of certain regulations, the harsh application of others and a number of politicians and politically connected individuals cheating the system. Franklin Raines, as well as a few others come to mind…
Experience is a good indicator, but not all the time. Production goes down, not because of greed in the financial sector, but because of hostility towards business in all forms. Have you looked at the tax burden lately? Was it any wonder that Ireland benefited greatly when it dropped its corporate taxes? If it isn’t efficient to produce in America with all the taxes, why not produce elsewhere? The hand of government is strangling the economy with one tax after another, and with all these taxes that will come in thanks to ObamaCare, and the expiration of the Bush Tax Cuts, you will see more a further drop in production. As for the quality of the product, you could say the same about many domestic goods, but yes, Chinese made products usually aren’t known for quality. Once again, companies wouldn’t have to move there for the cheap labour and tax incentives if they had it here.
As for Canadians, do you not know WHAT I am? Why I call my blog Norther Thoughts and Reflections, emphasis on NORTHERN? The truth is that you have more of a sense of being American than we could have of being Canadian. A nation divided by language, by ethnicity and now by immigrants looking to balkanize our country (you should see the Somali ghettos in Ottawa, almost like a completely different city). Turn on CBC, sit down and watch the taxpayer funded fiction, the “We’re not American” programing that is BEYOND underfunded and proud of it (though you wouldn’t know it by the taxes we pay). Health care is imploding (one CMA report after another can’t lie), our cities are far from “clean” (aside from the ghettos of Ottawa and Toronto, the occasional union strikes lead to garbage LITERALLY piling up in the streets) and as for lending hands to others, that is Christian nature, not Canadian.
The “invisible hand” can’t strangle you when you are part of it. When you are one of those contributing to balancing market forces, it is your actions which help balance the market through your purchases and investments. Educate yourself on the terms before you go and misuse them…
Posted by Northern Thoughts | August 4th, 2010 at 3:12 pm
A rebuttal for anyone who is interested…
http://clancop.wordpress.com/2010/08/04/new-deal-2-0-stupidity-terrorism-is-more-dangerous-than-wall-street-bonuses/
Note the emphasis on Turbeville’s inability to back up any of his points…
Posted by Northern Thoughts | August 4th, 2010 at 11:44 pm
The ,”IT collapse, ” as if it was destined to happen?
No, we had a crisis, a “crisis” of technical people actually being paid as much as, “managers.” Can’t have that.
Didn’t think I needed to point out Glass -Steagall to you geniuses: I assumed that you read the papers. My point still stands.\
Bush’s terms in office were rough by design. Another rich cock sucker who believed that his failures were due to others. I grew up with too many of these lazy bastards to cut them any slack: partying frat boys who think the world owes them something because their family ended up on top. My record cannot be expunged because my family owns Texas.
Don’t get me started on this WORTHLESS BASTARD!
Yes, that’s right, anything which makes money for the top shelf is guaranteed by the government. We call that., “the Free Market,” and expect folks like you to applaud. It’s nothing but socialism for the rich. I would expect you to join me in condemning this, but you persist in defending it.
“employers have to report that data for tax reasons. Didn’t think of that?”
Employer? I have no employer but myself. Thank Clinton for this. Business people who can’t seem to make enough money to employ people can use, “independent contractors.” We pay EVERYTHING, and these people call themselves, “successful businessmen.”
Yes, employers must report this, but not all businesses are employers. The folks for whom I work certainly aren’t.
“Once again, companies wouldn’t have to move there for the cheap labour and tax incentives if they had it here.”
Oh, so if we just hired farm boys and gave them five minutes’ training with a soldering iron and $5/hr we could be “competitive”? Is this all the Capitalist system has to offer?
I THOUGHT SO.
Taxes are the least of the reasons for not producing goods in the USA. We have very, “competitive,” tax rates for businesses. And, if these aren’t low enough, you can move your corporate, “headquarters,” to any of our conveniently located colonies to avoid taxes altogether. What a deal! Enjoy all the benefits of living in the USA with none of the cost, all you need is to be big enough to enjoy it. Your competition must bear the cost of not being rich enough to compete. The “free market” at it’s best.
The invisible hand can, and does, strangle you when your only part is to produce real goods in an economy which only rewards manipulation of, “value.” Always has, always will.
Tell you what, you move to the USA, I move to Canada. We’ll both be more satisfied. Especially when it’s 100 degrees here.
Posted by David Patterson | August 6th, 2010 at 3:08 am