Economy

Wall Street Wins Big While Investors Lose Their Shirts

Shareholders are losing their shirts, families are losing their homes, financial industry workers are losing their jobs, but investment bank bonuses have never been higher. Can anyone explain why?
They don't just make deals on Wall Street. They make myths. And last week Wall Street's myth-making machine was roaring at full throttle -- after the news broke that America's five biggest investment banks will this year shell out a record $38 billion in bonus pay.  

To justify the financial industry's annual bonus blitz, friends of Wall Street fortunes usually recycle some variation on that most elemental of investment banker fables, the wealth creation myth. Wall Street's movers and shakers, we are assured, create fabulous wealth. They richly deserve an appreciable share of the wealth they create.

This year, that wealth creation myth rings a bit hollow. Over the last 12 months, the movers and shakers of Wall Street have presided over a colossal loss of wealth. Shareholders at Wall Street's five biggest banks have lost $74 billion off the value of their stock holdings.

The banks themselves have written off over $26 billion in losses, with most of that linked to investments in bonds tied to subprime mortgages. Nearly 2 million of the families holding those mortgages, analysts estimate, will have lost their homes -- their single largest family asset -- by this time next year.

And over 42,000 workers in New York's financial industry, so far this year, have already lost their jobs.

So how, amid this torrential loss of wealth, can Wall Street bonuses be flowing at even higher levels than last year? Trying to answer that question kept the myth-makers hopping last week.

Wall Street giants like Bear Stearns and Merrill Lynch, these mythologists acknowledged, have certainly registered big-time losses this year. But these powerhouses, the new myth goes, can't afford not to shell out big bonuses.

"If Bear and Merrill plead poverty," as Manhattan College's Charles Geisst opined, "they're going to lose all of their good people."

But "good" people don't lose billions betting on risky securities, do they?

True enough, the myth-makers also acknowledge. But not all power suits on Wall Street, they quickly add, have been wheeling and dealing in subprimes. The power suits who spend their time cutting corporate merger deals, underwriting initial public stock offerings, and trading currencies did just fine in 2007.

The bulk of this year's bonuses, Wall Street's cheerleaders are arguing, are going to these “successful” traders and bankers, not those wretches responsible for all that subprime unpleasantness.

And those subprime wretches, newly named Merrill Lynch CEO John Thain resolutely promises, will pay for their recklessness.

"Most of Merrill Lynch's businesses are actually doing well, and so what you have to do in that circumstance is to pay the people who are performing," Thain notes. "Getting that balance right, paying the people who perform well and taking enough money from the people who caused some of the problems, that is going to be one of the first topics I address."

America's financial elite clearly expects a worried world to trust in executives like John Thain, a former co-president at Wall Street's Goldman Sachs, the largest and most profitable securities firm in the world. Should we? That question brings us to the third -- and most novel -- myth that emerged last week.

Some top guns on Wall Street, this myth holds, may indeed have messed up with that unfortunate subprime matter. But we can all rest easy knowing that the Street still hosts -- in Goldman Sachs -- the most brilliant business people on the planet.

Unlike the Wall Street herd, analysts gushed last week, Goldman Sachs didn't "barrel headlong" into subprime markets, didn't keep "packaging and trading complex securities for high fees without protecting themselves against the positions they were buying."

This "hard-nosed, go-it-alone style" has generated a banner bottom line for Goldman Sachs in 2007. The firm's shares have jumped about 13 percent this year, at the same time Merrill Lynch, Bear Stearns, and Citigroup are showing 40 percent tumbles.

One Goldman Sachs director, Stephen Friedman, credits this success to Goldman's "damn good talent pool," a pool wide and deep enough to have produced such world-class financial luminaries as former Clinton Treasury Secretary Robert Rubin and current Treasury Secretary Henry Paulson.

Over half the bonuses Wall Street's big five will hand out this holiday season -- as much as $22 billion -- appear to be going to the big fish in the Goldman Sachs talent pool. Goldman CEO Lloyd Blankfein, who pocketed $54.3 million last year, will likely see his total 2007 take-home reach $75 million.

In effect, the myth-makers are telling us, this year's Wall Street bonuses essentially reflect well-deserved pay for outstanding performance at Goldman Sachs.

So should we all rest easier, secure in the knowledge that Wall Street's rewards are going to the smart and the savvy, not the reckless and the undeserved rich?

Probably not. Those smart and savvy types at Goldman turn out to make plenty of bonehead moves, too. The Global Alpha hedge fund that Goldman Sachs runs, for instance, entered this year with $10 billion in assets. The fund, Bloomberg news said last week, will end the year worth $4 billion.

The Goldman Sachs wisdom on subprimes appears somewhat overblown as well. Goldman may not have invested its own capital in subprime-backed securities, but the bank, the New York Times notes, "continued to package risky mortgages to sell to investors," collecting lucrative fees in the process.

And those penalties for reckless Wall Street subprime security traders that Goldman alums like John Thain are promising? Wall Street managing directors of mortgage-backed securities will indeed see bonus cuts from 33 to 60 percent over last year's bonus totals, the executive search firm Options Group reports, but they'll still be averaging $1 million each in holiday bonus cheer. The average American family should be so penalized.

So what do we have left when we strip away all the myths? Wall Streeters gamble. Like gamblers everywhere, sometimes they win. Unlike gamblers everywhere, they never really seem to lose.