People complain that the Occupy Wall Street movement has no goals, even though the General Assembly has posted a clear statement of principles. I consider myself a part of this movement, and I’d like to state what I think this important protest needs to achieve.
I know a little bit about finance. No, actually, I know a whole lot about finance. I worked two years directly on Wall Street, and another two years before that for a banking research boutique, Loan Pricing Corporation (now known as Thompson Reuters LPC). In 1999 I made a personal profit of over $100,000 on a dot-com IPO (as I wrote about in my memoir of the Silicon Alley boom). I have gained and lost money on other stock market investments as well, and I’ve read many books about high finance, from The House of Morgan by Ron Chernow to Too Big to Fail by Andrew Ross Sorkin.
The American banking industry crashed in 2007 and 2008. Unfortunately, the dishonest practices that led to this crash have not been changed. Neither, largely, has the cast of characters siphoning money from the financial marketplace. Some people think we need a revolution, and they may be right — but before that, we need five concrete changes to take place before the American people can believe in the integrity of the banking industry again. Here are the five changes:
1. End inflated salaries
Inflated executive salaries aren’t just a symptom of the problem — they are the problem. If a bank executive is earning 10 million dollars a year, he is expected to produce more than 10 million dollars a year in value to that bank. How can he possibly do that? Honest investing won’t do the trick. Therefore, an executive earning $10,000,000 a year will inevitably begin engaging in shady practices to earn his keep.
Bonus-based pay on Wall Street began as an honest tradition. If a bank has an exceptionally profitable year and delivers great value for its stockholders and customers, it’s fair for the executives to get big bonuses. But honest banking is a hard, slow grind, and it’s not always very profitable. After a few good years in the 1980s, it became customary for banking executives to expect big bonus payments every year. This is where the problem began. What happened when the banks didn’t do well one year? Then the executives started spending all their time finding ways to ensure that, on the books at least, the numbers appeared to be exceptional even when they weren’t. So this became the main activity that has kept most of our Wall Street executives busy for the last few decades — at the expense of honest business.
I saw it with my own eyes in 1999 when I watched my dot-com company go public, underwritten by Goldman Sachs. Everything about that IPO was fishy, but it was a rollicking success. A year later, our stock was worthless. However, the executives who collected the fees got to keep their money.
American workers shouldn’t have to put their savings and investments into banks whose leaders earn more than ten times what the lowest paid employees of their banks earn. Let’s assume (optimistically) that a janitor employed by a bank earns $30,000 a year. I’d like to see that bank president earning $300,000 a year.
Does that mean that high finance will lose its Harvard rocket scientists, its analytic “geniuses”? I don’t think so — $300,000 a year is a nice wage for a smart person to earn. But any “genius” who thinks he needs to earn more than $300,000 a year may not be cut out for an honest career on Wall Street anyway. Good riddance.
2. Outlaw short selling
Short selling is a form of gambling, exactly like Texas Hold’em Poker. It should be made illegal, because it does a lot of damage. To short a company’s stock is to bet directly against that company’s success. It’s a vile concept, and the fact that short selling was a gigantic, lucrative market in the years leading up to the 2007/2008 crash should have been a crazy gigantic red flag to overseers that something was wrong. But the oversight agencies saw nothing wrong, and short selling is still legal, and still generating large profits, today! Why?
3. End hedge funds
The brokers will really cry if they have to let go of hedge funds and other so-called risk management derivatives. These instruments are extremely lucrative (though they do nothing to fund business or generate items of value). The credit default swap market was the single biggest cause of the crash of 2007 and 2008.
And yet, because they are extremely lucrative, hedge funds and credit default swaps and other risk management (hah!) instruments remain legal today. Why? They do not serve to help the growth of honest business in any way. They are simply profit-guarantee devices. In good years, they help to produce real profits. In bad years, they produce fake profits (to keep the $10,000,000/year executives looking good). This is what our executives spend their time working on, when they should be funding and investing in successful growing businesses.
4. Keep savings banks, investment banks and insurance companies separate
The purpose of a savings bank should be to guarantee depositor investments. The purpose of an investment bank should be to fund promising companies and bring them to success. The purpose of an insurance company should be to make sure that its customers are taken care of when hardships occur. These three businesses used to be honest businesses, and they need to become honest businesses again.
We used to have oversight laws, like the Glass-Steagall Act. Then these laws were gradually repealed during the 1980s and 1990s, as part of the bad idea (still inexplicably popular among Republicans today) known as Reaganomics. Our savings banks starting morphing into investment banks, and these conglomerates started morphing into insurance companies. These morphed entities (what’s a Citigroup? what’s a JP Morgan Chase?) still rule Wall Street today. Of course, all this morphing has done nothing to help the economy.
5. End bank merger mania
I can’t tell you how many freaking times the bank that holds my personal checking account has changed hands in the past ten years, and how many times the bank that holds my home mortgage has changed hands too. North Fork Bank becomes Capital One, Bowery Savings becomes Greenpoint Bank, Wachovia becomes Well Fargo. Who’s zooming who? How is this game of musical chairs helping to serve the customers of these banks, or helping the American economy?
Oh, that’s right — it’s not. Bank executives merge with each other when they run out of other ways to conjure up fake profits, other ways to explain their $10,000,000 salaries. Merger merry-go-round is taking place to this very day.
This is why we are occupying Wall Street.
The movement does not stand against capitalism, and it certainly doesn’t stand for communism. It’s a movement for honest capitalism. Honest capitalism in America — funding good emerging businesses so that they succeed — what a concept! Our bankers should try it sometime.
Some in the Occupy Wall Street movement thinks our financial system is too rotten, too corrupt to be saved. Indeed, this is the radical belief that the Occupy movement shares with the Tea Party movement.
I also believe our financial system is rotten as hell. I know it is, and Congress is rotten with Wall Street money too. This is why they won’t pass legislation to fix anything.
But, I think the American banking industry can be cured. I wish the Obama administration were doing much more about this, but I do appreciate that they have passed regulation that moves things in the right direction.
The Obamacare health care reform bill of 2010 was a small but an important step forward (no matter how much mud the Koch brothers sling at it). The Dodd-Frank finance reform bill of 2010 was also a step forward, though there is evidence that it is barely being enforced. Neither the Obamacare nor the Dodd-Frank regulations go anywhere near far enough.
But I do hope honest capitalism is possible in America. It sure is a far cry from the way business has been conducted on Wall Street since Ronald Reagan became President, though. Tough changes are required. This is why we’re occupying Wall Street, and (at last count) 900 other cities around the world today.