Lately, there has been a fast-growing movement to declare “Wall Street” the enemy of the people. We arrived at this critical point of public rage very simply because the 20th century model of “take the money and run” went off a cliff three years ago resulting in serious unintended consequences and general public outrage and misery. In the high tech super-transparent 21st century there simply is no place to run. Even if you do run, you definitely can’t hide.
The current “rage against the machine” conversation does not separate the good Wall Street from the bad. At the risk of mountains of hate (or love) mail, I must explain there is a “good” Wall Street: one that runs on integrity, honor and old-fashioned ideals like “my word is my bond.” The trouble is that in the decades since iconic “hero-villain,” celluloid Gordon Gekko and the 80s mantra of “Greed is Good” rose to fame, the “bad” Wall Street has outweighed the good. Sort of like a Star Wars movie, where good and evil duke it out. Where is Han Solo when you need him?
One thing we learned from the Oliver Stone movie is to never put an actor as hot as a young Michael Douglas in a pivotal role if you want the public to hate him. Let’s face it, the man even looked good in suspenders. Basically most men wanted to be like him and most women wanted to be with him. His appearance in the film, “Wall Street” made greed glamorous, even gave it sex appeal. We are still fighting that ethos as a culture.
For the purposes of this article let’s start with what’s bad about Wall Street – the issues that the general public are outraged about and that the Occupy Wall Street movement are echoing. Firstly, in the wake of nearly six million homes being foreclosed upon, 25 million children homeless, 42 million Americans on food stamps, and twenty million people unemployed since the banking collapse: there is nothing glamorous about “ripping people’s faces off ”- especially since some of the victims were young children tossed out on the street with their teddy bears by errant lenders who gave out mortgage loans like lollipops at a 1970s dentist. Greed is the new “bad.”
In fact, greed is about as unsexy as it gets in our 21st century world. It’s savage, primitive and brutal. It creates devastating poverty, hunger, homelessness and a society that most of us on the side of good abhor. Sure there are holdouts. They shall remain nameless; but many in the financial industry know who they are.
The fact is there is “good and bad” everywhere. There are plenty of good folks in your hometown and also plenty of people that would just as soon cut you off on the road, pad your car repair bill, lock you into a toxic mortgage loan and shake you down at every chance. This is just a part of life and as ancient as human civilization. The good news is as we evolve as a culture, we become more cognizant of how our behavior affects others and the consequences of our actions.
A senior manager at one of the big investment banks claimed, “It’s not my job to take care of other people. My job is to take care of my family and myself. If somebody else didn’t take care of their finances and finds themselves in an underwater mortgage or out of work…it’s on them. It’s not my problem.” Well, ok. Fair enough. Gordon would be proud. But darlin’, that is so 20th century. The fact is the growing outrage against that kind of indifference makes it your problem, whether you want it to be or not.
The Times are changin’
There is something new going on in this millennium, something really exciting. A shift in the way we think from an exclusive sense of “what’s in it for me?” to an inclusive sense of “what kind of world are we co-creating?”
In the mortgage market mayhem of 2002-2007, all hell broke loose in the world of financial reason. “Risk,” that fine balancing act between smart investment and outright disaster, became the decade’s hot potato. Everyone passed the risk onto the next guy, hoping that when the music stopped, they would not be holding it.
Alan Greenspan, the Federal Reserve Chairman who in his tenure was viewed as a financial genius, supported the “transfer of risk” to counterparties around the globe. His misguided belief was that “dispersing risk” would minimize the damage created by bad bets. None other than Wall Street sage Warren Buffet tried to dissuade him from that view – famously calling some of the most dangerous investment vehicles like Collateralized Debt Obligations (CDOs) “Weapons of Financial Mass Destruction.” We know now there was an inherent “flaw” in Greenspan’s thinking.
The calamity known as the mortgage-backed securities crisis and the subsequent outsized leverage that led to the banking collapse reveals the stark contrast between the 20th century view of mindless money and 21st century mindfulness.
Over forty years ago, the renowned economist Milton Friedman made indifference stylish. He wrote famously, “The social responsibility of business is to pursue profits.” The 1970s icon described a world where money is a means to itself with no meaning or purpose other than to make more. It was a kind-of-brainwashing that catapulted self- interest to a high “moral” ideal. It is no wonder that within two decades, greed became exalted.
So that brings me back to the good Wall Street. Where is it? What is it? And how do we support it?
For far too long, the good Wall Street has been silenced. It has been considered “weak” to speak about social responsibility in finance or the common good co-existing with market share.
In a conversation with a senior managing director at a top investment bank (detailed in my book below, Conversations with Wall Street), he explained the powerful backlash from colleagues, underlings, and superiors he experienced when voicing objections to buying $5billion dollar blocks of 100% Loan-to-Value (100LTV) loan pools. He remarked, “I knew they were bad loans and we shouldn’t be securitizing these. People have to have skin in the game.” His view was that borrowers with zero investment in their homes would have little incentive to pay the loans back. He was out-voted. Why? “Because everyone was doing it,” he said, “So my colleagues thought, why not us?”
The classic Henrik Ibsen play, “An Enemy of the People” revolves around the human struggle between greed and moral rectitude. The story reveals one man’s (Dr. Stockman) struggle to do the right thing in the face of extreme opposition. The good doctor threatens his hometown’s tourist industry by discovering that waste products are contaminating the water system. He brings the issue to his brother, the town’s Mayor, who silences him. The townspeople also ignore his warnings and prefer to risk the health of tourists rather than threaten their livelihood. This powerful drama takes place in 1883 Norway, not contemporary Wall Street. It proves that the conflict between self-interest and world interest is a fundamentally human one.
The investment banker who warned his firm of loan toxicity ultimately gave in to his superiors. He explained, “I look back on it and see the problem. I had hundreds of people in that division. The decision to make was to exit the business. Yet, every other firm was reporting record earnings, which turned out to be fictitious. Here is my boss telling me, figure it out or you’re fired. You do the best you can within the institutional architecture. So what do you do? The CEO is pressuring us to build the mortgage business. He was taking the firm from 12 to 1 to 35 to 1 in leverage. If he hadn’t done that, then we couldn’t have done the business. It was top down pressure. You can look back on this and say that accountability was way too diffuse. There was no one single person who answered for it. That is what has gone wrong with the securitization model in my mind. No accountability. Used to you be you had a loan officer who was accountable – now you don’t.”
The lack of accountability from the top levels of the mortgage markets and government is currently fueling public outrage. Very simply, we are at this place of economic despair from a tragic failure in responsible leadership: one that can be traced to the absence of reasonable risk safeguards in the system. And one that can be traced back to the Gordon Gekko view that “greed was good.” The same can be said for the millions who took out these 100LTV loans. If everyone is doing it, why shouldn’t you?
The answer is simple: following the herd can sometimes destroy the whole system. The fact is we are all accountable, because in the end each of us inevitably pays the price. Perhaps surprisingly, there were many finance professionals in the mortgage markets who objected to the lack of accountability, excessive leverage and irrational risk models: the “good” Wall Street who couldn’t stop the machine.
To put the economy back on its feet, many investors and economists know we have to first fix the housing market. This means drastic and major triage to existing mortgage loans by reducing interest rates, credit terms and loan principals to current market values. The concept is morally reprehensible to lenders and investors alike. After all, borrowers took the loans on – “no one put a gun to their heads.” And that’s the problem: accountability must be across the board – not just on the side of borrowers.
In the face of the extreme moral dilemma faced by many bankers and finance professionals, reason and realism gave way to risk and recklessness. Now it’s time for the good Wall Street to step up to the plate and resolve the problem that their less responsible brethren created. In the face of the growing contempt for the industry, the time to stand on the sidelines and be silent is over.
So the truth is that “Wall Street,” the vast economic engine that stretches across the globe, is not the enemy of the people. The engine provides liquidity, investment in business and employment, long-term income and retirement security and serves a genuine public good. There are many responsible leaders and players involved that ordinary citizens may not be aware of. To resolve the growing negative image of “Wall Street” and finally put the ethos of Gekko-like greed to rest, the industry must create solutions for the current economic dilemma.
How? By showing the world what’s good about Wall Street – that social responsibility, integrity and transparency in our 21st century financial models can generate big profits. And the simple recognition that going for the short-term kill leads to long-term disaster.
Monika Mitchell is a renowned thought leader on socially responsible business and the co-author of a soon-to-be-released book, “Conversations with Wall Street: The Inside Story of the Financial Armageddon and How to Prevent the Next One.”(ebook October, print November) email@example.com