Bankers aren’t optimistic about those gains. Options Group’s Karp said he met last month over tea at the Gramercy Park Hotel in New York with a trader who made $500,000 last year at one of the six largest U.S. banks.
The trader, a 27-year-old Ivy League graduate, complained that he has worked harder this year and will be paid less. The headhunter told him to stay put and collect his bonus.
“This is very demoralizing to people,” Karp said. “Especially young guys who have gone to college and wanted to come onto the Street, having dreams of becoming millionaires.”
The implication seems to be that the trader is demoralized because he's working hard and his pay is down. But his discontent shows just how far off the rails our financial system was in the boom years leading up to 2007, when these kinds of pay packages were common. Short of a brilliant entrepreneur starting his own company, no 27-year-old employee creates a half-million worth of value in a year. Pay packages on Wall Street were certainly huge, but they were huge for a reason: banks could make directional bets with their capital, and use extreme leverage to magnify their returns. The result was huge profits... but also huge risks that were borne not just by the banks, but by the entire economy. Think of it this way. If a 27-year-old trader makes a huge trading profit, he takes a significant chunk of the upside. If he loses that much, his bonus may be cut, but he'll still get a salary. And if the trade is complex enough that it doesn't go sour for 5 years, well, he'll pocket big gains, then leave his firm holding the bag. But with financial firms as big as they were, it wasn't really the firms holding the bag-- it was taxpayers. Because banks do provide valuable services to businesses that can't be replaced on a whim. But it's not those activities that were earning traders monster bonuses in the good years.
What we've seen over the last couple of years is a realization that the outsize pay in the banking sector didn't in any way reflect social value-- banks certainly play a valuable role in helping companies streamline operations, go public, merge, make acquisitions, go public, and hedge their risks and exposures. Heck, Goldman Sachs has done an aggressive ad campaign over the last few years emphasizing its role in financing public projects. And those services are truly valuable. But what they don't mention is that those services made up something like 10% of their profits during the boom years (I may be remembering the exact number wrong, but it was certainly at most 25%). But in boom times, it was proprietary trading and investments that were driving monster profits, as well as securitization fees from their disastrous mortgage operations. The Dodd-Frank bill cut back on a lot of those extremely profitable but not particularly socially useful activities... and a lot of monster paychecks went by the wayside (though finance still pays a LOT more than just about any other industry). So what we're seeing, I think, is these 27 year olds who think they're entitled to monster paychecks because they "work hard", who don't realize that those monster paychecks came about in large part because of a system that was rife with moral hazard (government picking up the tab for losses while banks took all the gains). If reduced paychecks in finance meant companies had a harder time raising capital, or made going public more difficult, it would be a cause for concern. But there's no evidence of that: I hope that what we're seeing instead is a useful readjustment of Wall Street's proper role in helping businesses raise capital.
Good thing... if it leads to more financial stability. These people are colorblind to the fact that their risk-taking in "good times" helped wreck the economy. But it also says that the solution isn't more railing on Wall Street-- Wall Street's been reined in to some extent already. The solutions need to be macro in scope.
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