Gordian Knot

e ("cutting the Gordian knot"): In 1809, when the bankers were attempting to wrap their greasy tentac es around the nation, !homas "e##erson wrote: $I be ie%e that banking institutions are more dangerous to our iberties than standing armies & I# the 'merican peop e e%er a ow pri%ate banks to contro the issue o# their currency, #irst by in# ation, then by de# ation, the banks and corporations that wi grow up around (the banks) & wi depri%e the peop e o# a property unti their chi dren wake*up home ess on the continent their #athers con+uered & !he issuing power shou d be taken #rom the banks and restored to the peop e, to whom it proper y be ongs,I# .urger /ing went away our economy wou d sti sur%i%e, 0et in the 1,2, #i%e banks ho d 34,8 tri ion o# a banking assets, !ota banking assets amount to 315 tri ion so these #i%e banks manage e%ery 6 do ars out o# 10 in our banking system, 7%en more ama8ing, 44 banks ha%e their hands in 399: tri ion in deri%ati%es, !hat is correct, 399: tri ion or 16 times the tota amount o# annua G;< #or the 1nited 2tates, aIf you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and or military conse!uences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by e"tension, the truth is the greatest enemy of the State.# !he=>ra%en "oseph Goebbe s +uotes

I# congress has the right under the >onstitution to issue paper money, it was gi%en them to use themse %es, not to be de egated to indi%idua s or corporations,* 'ndrew "ackson $!he Go%ernment shou d create, issue, and circu ate a the currency and credits needed to satis#y the spending power o# the Go%ernment and the buying power o# consumers, .y the adoption o# these princip es, the ta?payers wi be sa%ed immense sums o# interest, @oney wi cease to be master and become the ser%ant o# humanity,* 'braham Ainco n "Be are grate#u to the Bashington <ost, !he Cew 0ork !imes, !ime @aga8ine and other great pub ications whose directors ha%e attended our meetings and respected their promises o# discretion #or a most #orty years,,, It wou d ha%e been impossib e #or us to de%e op our p an #or the wor d i# we had been subDected to the ights o# pub icity during those years, .ut, the wor d is now more sophisticated and prepared to march towards a wor d go%ernment, !he supranationa so%ereignty o# an inte ectua e ite and wor d bankers is sure y pre#erab e to the nationa auto* determination practiced in past centuries," * ;a%id Eocke#e er, .i derberg @eeting, "une 1991 .aden, Germany

"!he #ew who understand the system, wi either be so interested #rom itFs pro#its or so dependent on itFs #a%ors, that there wi be no opposition #rom that c ass," * @ayer 'msche .auer Eothschi d $Gi%e me contro o# a nationFs money and I care not who makes itFs aws," * @ayer 'msche .auer Eothschi d $I see in the near #uture a crisis approaching that unner%es me and causes me to tremb e #or the sa#ety o# my country, 's a resu t o# the war, corporations ha%e been enthroned and an era o# corruption in high p aces wi #o ow, and the money power o# the country wi endea%or to pro ong its reign by working upon the preDudices o# the peop e unti a wea th is aggregated in a #ew hands, and the Eepub ic is destroyed, I #ee at this moment more an?iety #or the sa#ety o# my country than e%er be#ore, e%en in the midst o# war,- G 'braham Ainco n * In a etter written to Bi iam 7 kin "In the ne?t century, nations as we know it wi be obso eteH a states wi recogni8e a sing e, g oba authority, Cationa so%ereignty wasnFt such a great idea a#ter a ," * 2trobe !a bot, <resident > intonFs ;eputy 2ecretary o# 2tate, !ime @aga8ine, "u y 90th, 999 $!he money power preys on the nation in times o# peace, and conspires against it in times o# ad%ersity, It is more despotic than monarchy, more inso ent than autocracy, more se #ish than bureaucracy, It denounces, as pub ic enemies, a who +uestion its methods or throw ight upon its crimes,- * 'braham Ainco n $' great industria nation is contro ed by its system o# credit, Iur system o# credit is concentrated, !he growth o# the Cation and a our acti%ities are in the hands o# a #ew men, Be ha%e come to be one o# the worst ru ed, one o# the most comp ete y contro ed and dominated Go%ernments in the wor d * no onger a Go%ernment o# #ree opinion no onger a Go%ernment by con%iction and %ote o# the maDority, but a Go%ernment by the opinion and duress o# sma groups o# dominant men,,,, 2ince I entered po itics, I ha%e chie# y had menFs %iews con#ided to me pri%ate y, 2ome o# the biggest men in the 1,2,, in the #ie d o# commerce and manu#acturing, are a#raid o# somebody, are a#raid o# something, !hey know that there is a power somewhere so organi8ed, so subt e, so watch#u , so inter ocked, so comp ete, so per%asi%e, that they had better not speak abo%e their breath when they speak in condemnation o# it,- G Boodrow Bi son * In !he Cew Jreedom (1915) $!he #act is that there is a serious danger o# this country becoming a < uto*democracyH that is, a sham repub ic with the rea go%ernment in the hands o# a sma c i+ue o# enormous y wea thy men, who speak through their money, and whose in# uence, e%en today, radiates to e%ery corner o# the 1nited 2tates,- * Bi iam @c'doo * <resident Bi sonFs nationa campaign %ice*chairman, wrote in >rowded 0ears $I# the 'merican peop e e%er a ow pri%ate banks to contro the issue o# their money, #irst by in# ation and then by de# ation, the banks and corporations that wi grow up around them, wi depri%e the peop e o# their property unti their chi dren wi wake up home ess on the continent their #athers con+uered,- * !homas "e##erson $!he system o# banking (is) a b ot e#t in a our >onstitutions, which, i# not co%ered, wi end in their destruction,,, I sincere y be ie%e that banking institutions are more dangerous than standing armiesH and that the princip e o# spending money to be paid by posterity,,, is but swind ing #uturity on a arge sca e,* !homas "e##erson

$I be ie%e that banking institutions are more dangerous to our iberties than standing armies, ' ready they ha%e raised up a moneyed aristocracy that has set the Go%ernment at de#iance, !he issuing power shou d be taken #rom the banks and restored to the peop e to whom it proper y be ongs,* !homas "e##erson $,,, !o take a sing e step beyond the boundaries thus specia y drawn around the powers o# >ongress is to take possession o# a bound ess #ie d o# power, no onger susceptib e o# any de#inition, !he incorporation o# a bank, and the powers assumed by this bi (chartering the #irst .ank o# the 1nited 2tates), ha%e not, been de egated to the 1nited 2tates by the >onstitution,* !homas "e##erson * in opposition to the chartering o# the #irst .ank o# the 1nited 2tates (1491), $Be ha%e stricken the (s a%e) shack es #rom #our mi ion human beings and brought a aborers to a common e%e not so much by the e e%ation o# #ormer s a%es as by practica y reducing the who e working popu ation, white and b ack, to a condition o# ser#dom, Bhi e boasting o# our nob e deeds, we are care#u to concea the ug y #act that by an ini+uitous money system we ha%e nationa i8ed a system o# oppression which, though more re#ined, is not ess crue than the o d system o# chatte s a%ery,* Korace Gree ey * (1811*1849) #ounder o# the Cew 0ork !ribune $Bhen p under becomes a way o# i#e #or a group o# men i%ing together in society, they create #or themse %es in the course o# time, a ega system that authori8es it and a mora code that g ori#ies it,* Jrederic .astiat * (1801*18:0) in 7conomic 2ophisms $!he powers o# #inancia capita ism had (a) #ar*reaching aim, nothing ess than to create a wor d system o# #inancia contro in pri%ate hands ab e to dominate the po itica system o# each country and the economy o# the wor d as a who e, !his system was to be contro ed in a #euda ist #ashion by the centra banks o# the wor d acting in concert, by secret agreements arri%ed at in #re+uent meetings and con#erences, !he ape? o# the systems was to be the .ank #or Internationa 2ett ements in .ase , 2wit8er andH a pri%ate bank owned and contro ed by the wor dFs centra banks which were themse %es pri%ate corporations, 7ach centra bank,,,sought to dominate its go%ernment by its abi ity to contro !reasury oans, to manipu ate #oreign e?changes, to in# uence the e%e o# economic acti%ity in the country, and to in# uence cooperati%e po iticians by subse+uent economic rewards in the business wor d,* <ro#, >arro Luig ey in !ragedy and Kope $In a sma 2wiss city sits an internationa organi8ation so obscure and secreti%e,,,,>ontro o# the institution, the .ank #or Internationa 2ett ements, ies with some o# the wor dFs most power#u and east %isib e men: the heads o# 59 centra banks, o##icia s ab e to shi#t bi ions o# do ars and a ter the course o# economies at the stroke o# a pen,* /eith .radsher o# the Cew 0ork !imes, 'ugust :, 199: $!he Jedera Eeser%e .ank o# Cew 0ork is eager to enter into c ose re ationship with the .ank #or Internationa 2ett ements,,,,!he conc usion is impossib e to escape that the 2tate and !reasury ;epartments are wi ing to poo the banking system o# 7urope and 'merica, setting up a wor d #inancia power independent o# and abo%e the Go%ernment o# the 1nited 2tates,,,,!he 1nited 2tates under present conditions wi be trans#ormed #rom the most acti%e o# manu#acturing nations into a consuming and importing nation with a ba ance o# trade against it,* Eep, Aouis @cJadden * >hairman o# the Kouse >ommittee on

.anking and >urrency +uoted in the Cew 0ork !imes ("une 1950) $Cothing did more to spur the boom in stocks than the decision made by the Cew 0ork Jedera Eeser%e bank, in the spring o# 1994, to cut the rediscount rate, .enDamin 2trong, Go%ernor o# the bank, was chie# ad%ocate o# this unwise measure, which was taken arge y at the behest o# @ontagu Corman o# the .ank o# 7ng and,,,,'t the time o# the .anks action I warned o# its conse+uences,,,,I #e t that sooner or ater the market had to break,* @oney baron .ernard .aruch in .aruch: !he <ub ic 0ears (1960) $!he Jedera Eeser%e .ank is nothing but a banking #raud and an un aw#u crime against ci%i i8ation, BhyM .ecause they "create" the money made out o# nothing, and our 1nc e 2ap Go%ernment issues their "Jedera Eeser%e Cotes" and stamps our Go%ernment appro%a with CI ob igation whate%er #rom these Jedera Eeser%e .anks, Indi%idua .anks or Cationa .anks, etc,* K,A, .irum, 2r,, 'merican @ercury, 'ugust 19:4, p, N5 $(!he) abandonment o# the go d standard made it possib e #or the we #are statists to use the banking system as a means to an un imited e?pansion o# credit,,,, In the absence o# the go d standard, there is no way to protect sa%ings #rom con#iscation through in# ation, !here is no sa#e store o# %a ue, I# there were, the go%ernment wou d ha%e to make its ho dings i ega , as was done in the case o# go d,,,, !he #inancia po icy o# the we #are state re+uires that there be no way #or the owners o# wea th to protect themse %es,,,, (!his) is the shabby secret o# the we #are statistFs tirades against go d, ;e#icit spending is simp y a scheme #or the FhiddenF con#iscation o# wea th, Go d stands in the way o# this insidious process, It stands as a protector o# property rights,* ' an Greenspan in an artic e he wrote in 1966, $Kistory records that the money changers ha%e used e%ery #orm o# abuse, intrigue, deceit, and %io ent means possib e to maintain their contro o%er go%ernments by contro ing money and its issuance,- G "ames @adison #ew months ago, I came across an announcement that >itigroup, the parent company o# >itibank, was to be honored, a ong with its chie# e?ecuti%e, Oikram <andit, #or $'d%ancing the Jie d o# 'sset .ui ding in 'merica,- !his seemed akin to, say, sa uting .< #or ser%ices to the en%ironment or praising Jacebook #or its commitment to pri%acy, ;uring the past decade, >iti has become synonymous with #inancia misDudgment, reck ess ending, and gargantuan osses: what might be termed asset denuding rather than asset bui ding, In ate 9008, the spraw ing #irm might we ha%e co apsed but #or a go%ernment bai out, 7%en today the 1,2, ta?payer is >itigroupPs argest shareho der, !he award ceremony took p ace on 2eptember 95rd in Bashington, ;,>,, where the >orporation #or 7nterprise ;e%e opment, a not*#or*pro#it organi8ation dedicated to e?panding economic opportunities #or ow*income #ami ies and communities, was ho ding its biennia con#erence, ' ba room at the @arriott Bardman <ark was #u o# go%ernment o##icia s, awyers, ta? e?perts, and community workers, two o# whom were busy at my tab e amenting the impact o# budget cuts on #inancia *education programs in Oermont, <andit, a s ight, bespectac ed #i#ty*three*year*o d nati%e o# Cagpur, in western India, was seated near the #ront o# the room, Jred Go dberg, a #ormer commissioner o# the Interna Ee%enue 2er%ice who is now a partner at 2kadden, 'rps, introduced him to the crowd, pointing out that, o%er the years, >iti has taken many initiati%es designed to encourage entrepreneurship and thri#t in impo%erished areas, setting up ending programs #or mom*and*pop stores, #or instance, and estab ishing sa%ings accounts #or the chi dren o# ow*income #ami ies, $Bhen the history is

written, >iti wi be sing ed out as one o# the pioneers o# the asset mo%ement,- Go dberg said, $!hey ha%e demonstrated the capacity, the %ision, and the wi ,<andit, who mo%ed to the 1nited 2tates at si?teen, is rare y described as a communitarian, ' #ormer in%estment banker and hedge*#und manager, he so d his in%estment #irm to >itigroup in 9004 #or eight hundred mi ion do ars, earning about a hundred and si?ty*#i%e mi ion do ars #or himse #, 7ight months ater, a#ter >iti announced bi ions o# do ars in writeo##s, <andit became the companyPs new >,7,I, Ke o%ersaw the companyPs near co apse in 9008 and its moderate reco%ery since, > ear y, this wasnPt the occasion #or <andit to dwe on his career, or on the ro e that >itiPs irresponsib e actions p ayed in bringing on the subprime*mortgage crisis, (In ear y 9004, his predecessor, >har es <rince, was wide y condemned #or commenting, $'s ong as the music is p aying, youP%e got to get up and dance,-) Instead, <andit ta ked about how we *#unctioning banks are essentia to any modern society, adding, $'s <resident Ibama has said, u timate y there is no di%iding ine between Ba 2treet and @ain 2treet, Be wi rise or we wi #a together as one nation,- In the past coup e o# years, he went on, >iti had rededicated itse # to $responsib e #inance,- .e#ore he and his co eagues appro%ed any transaction, they now asked themse %es three +uestions: Is it in the best interests o# the customerM Is it systemica y responsib eM 'nd does it create economic %a ueM <andit indicated that other #inancia #irms were doing the same thing, $.anks ha%e earned how to be banks again,- he said,

#rom the issue cartoon bank e*mai this

'bout an hour ater, I spoke with <andit in a sparse y #urnished hote room, >itiPs eadersQ#rom Ba ter Briston, in the nineteen*se%enties, to "ohn Eeed, in the nineteen*eighties, and 2an#ord Bei , in the ate nineteen*ninetiesQha%e tended to be #ormidab e and #orbidding, <andit a##ects a down*to*earth demeanor, Ke o##ered me a cup o# co##ee and insisted that I sit on a com#ortab e upho stered chair whi e he perched on a cheap p astic one, I asked him i# he saw any irony in >iti being commended #or asset bui ding, Kis eyes widened s ight y, $Be ,- he said, $the award we are recei%ing is #or #i#teen years o# work, It was work that was pioneered by >iti to get more #inancia inc usion, 'nd itPs part o# a broader re#orm e##ort we are in%o %ed in under the heading o# responsib e banking,-

2ince <andit took o%er, this e##ort has in%o %ed se ing or c osing down some o# >itiPs riskier trading businesses, inc uding the hedge #und that he used to runH sp itting o## the companyPs most #ou *sme ing assets into a separate entity, >iti Ko dingsH and cutting the pay o# some senior e?ecuti%es, Jor 9009 and 9010, <andit took an annua sa ary o# one do ar and no bonus, (Ke didnPt, howe%er, gi%e back any o# the money #rom the sa e o# his hedge #und,) $!his is an apprenticeship industry,- he said to me, $<eop e earn #rom the peop e abo%e them, and they copy the actions o# the peop e abo%e them, I# you start #rom the top by acting responsib y, peop e wi see and earn,.are y two years a#ter Ba 2treetPs reck essness brought the g oba economy to the brink o# co apse, the sight o# a senior Ba 2treet #igure ta king about responsib e #inance may we strike you as suspicious, .ut on one point <andit cannot be cha enged, 2ince the promu gation o# KammurabiPs >ode, in ancient .aby on, no ad%anced society has sur%i%ed without banks and bankers, .anks enab e peop e to borrow money, and, today, by operating e ectronic*trans#er systems, they a ow commerce to take p ace without notes and coins changing hands, !hey a so p ay a critica ro e in channe ing sa%ings into producti%e in%estments, Bhen a depositor p aces money in a sa%ings account or a >,;,, the bank ends it out to corporations, sma businesses, and #ami ies, !hese days, .ank o# 'merica, >iti, "<@organ >hase, and others a so he p corporations and municipa ities raise money by issuing stocks, bonds, and other securities on their beha #, !he business o# issuing securities used to be the e?c usi%e preser%e o# Ba 2treet #irms, such as @organ 2tan ey and Go dman 2achs, but during the past twenty years many o# the di%iding ines between ordinary banks and in%estment banks ha%e %anished, Bhen the banking system beha%es the way it is supposed toQas <andit says >iti is now beha%ingQit is akin to a power uti ity, distributing money (power) to where it is needed and keeping an account o# how it is used, "ust ike power uti ities, the big banks ha%e a commanding position in the market, which they can use #or the bene#it o# their customers and the economy at arge, .ut when banks seek to e?p oit their position and make a +uick ki ing, they can cause enormous damage, ItPs not c ear now whether the bankers ha%e rea y gi%en up their reck ess practices, as <andit c aims they ha%e, or whether they are mere y ying ow, In the past #ew years, a the sur%i%ing big banks ha%e raised more capita and become pro#itab e again, Kowe%er, the 1,2, go%ernment was indirect y responsib e #or much o# this turnaround, 'nd in the country at arge, where many businesses re y on the banks to #und their day*to*day operations, the power sti isnPt # owing proper y, I%er*a bank ending to #irms and househo ds remains be ow the e%e it reached in 9008, !he other important ro e o# the banking industry, historica y, has been to #inance the growth o# %ita industries, inc uding rai roads, pharmaceutica s, automobi es, and entertainment, $Go back and pick any period in time,- "ohn @ack, the chairman o# @organ 2tan ey, said to me recent y, $AetPs go back to the tech boom, I guess it got on its #eet in the ate eighties, with 'pp e >omputer and @icroso#t, and rea y started to b ossom in the nineteen*nineties, with >isco, Cetscape, 'ma8on,com, and others, !hese are companies that created a ot o# Dobs, a ot o# inte ectua capita , and Ba 2treet he ped #inance that, !he #irst in%estors were ange in%estors, then %enture capita ists, and to rea y grow and bui d they needed Ba 2treet,@ack, who is si?ty*si? years o d, is a p ainspoken nati%e o# Corth >aro ina, Ke attended ;uke on a #ootba scho arship, and he retains the ean bui d o# an ath ete, Be were sitting at a con#erence tab e in his arge, airy o##ice abo%e !imes 2+uare, which #eatures # oor*to*cei ing windows with %iews o# the Kudson, $!oday, itPs not Dust techno ogyQitPs c ean tech,- he went on, $' o# these industries need capita Qwhether it is ethano , so ar, or other a ternati%e*#ue sources, Be can gi%e you a ist o# companies weP%e done, but itPs not Dust @organ 2tan ey, Ba 2treet has been the source o# capita #ormation,-

!here is something in what @ack says, @organ 2tan ey has raised money #or !es a @otors, a producer o# e ectric cars, and it has in%ested in . oom 7nergy, an inno%ator in #ue *ce techno ogy, @organ 2tan eyPs principa ri%a s, Go dman 2achs and "<@organ, are a so can%assing in%estors #or ethano producers, wind #arms, and other a ternati%e*energy #irms, .anks, o# course, raise money #or ess en%ironmenta y #riend y corporations, too, such as Jord, Genera 7 ectric, and 7??on@obi , which need cash to #und their operations, It was e%ident y this business o# raising capita (and creating emp oyment) that A oyd . ank#ein, Go dmanPs chie# e?ecuti%e, was re#erring to ast year, when he to d an inter%iewer #rom a .ritish newspaper that he and his co eagues were $doing GodPs work,0et Ba 2treetPs ro e in #inancing new businesses is a sma portion o# what it does, !he market #or initia pub ic o##erings (I,<,I,s) o# stock by 1,2, companies ne%er #u y reco%ered #rom the tech bust, ;uring the third +uarter o# 9010, Dust thirty*three 1,2, companies went pub ic, and they raised a pa try #i%e bi ion do ars, @ost peop e on Ba 2treet arenPt #inding the ne?t 'pp e or promoting a green ri%a to 7??on, !hey are buying and se ing securities that are tied to e?isting #irms and capita proDects, or to something ess concrete, such as the price o# a stock or the e%e o# an e?change rate, ;uring the past two decades, trading %o umes ha%e risen e?ponentia y across many markets: stocks, bonds, currencies, commodities, and a manner o# deri%ati%e securities, In the #irst nine months o# this year, sa es and trading accounted #or thirty* si? per cent o# @organ 2tan eyPs re%enues and a much higher proportion o# pro#its, !raditiona in%estment bankingQthe business o# raising money #or companies and ad%ising them on dea sQ contributed ess than #i#teen per cent o# the #irmPs re%enue, Go dman 2achs is e%en more re iant on trading, .etween "u y and 2eptember o# this year, trading accounted #or si?ty*three per cent o# its re%enue, and corporate #inance Dust thirteen per cent, In e##ect, many o# the big banks ha%e turned themse %es #rom businesses whose pro#its rose and #e with the capita *raising needs o# their c ients into immense trading houses whose #ortunes depend on their abi ity to e?p oit day*to*day mo%ements in the markets, .ecause trading has become so centra to their business, the big banks are #ore%er trying to in%ent new #inancia products that they can se but that their competitors, at east #or the moment, cannot, 2ome recent inno%ations, such as tradab e po ution rights and catastrophe bonds, ha%e pro%ided a pub ic bene#it, .ut itPs easy to point to other inno%ations that ser%e itt e purpose or that b ew up and caused a ot o# co atera damage, such as auction*rate securities and co atera i8ed debt ob igations, !esti#ying ear ier this year be#ore the Jinancia >risis In+uiry >ommission, .en .ernanke, the chairman o# the Jedera Eeser%e, said that #inancia inno%ation $isnPt a ways a good thing,- adding that some inno%ations amp i#y risk and others are used primari y $to take un#air ad%antage rather than create a more e##icient market,Ither regu ators ha%e gone #urther, Aord 'dair !urner, the chairman o# .ritainPs top #inancia watchdog, the Jinancia 2er%ices 'uthority, has described much o# what happens on Ba 2treet and in other #inancia centers as $socia y use ess acti%ity-Qa comment that suggests it cou d be e iminated without doing any damage to the economy, In a recent artic e tit ed $Bhat ;o .anks ;oM,- which appeared in a co ection o# essays de%oted to the #uture o# #inance, !urner pointed out that a though certain #inancia acti%ities were genuine y %a uab e, others generated re%enues and pro#its without de i%ering anything o# rea worthQpayments that economists re#er to as rents, $It is possib e #or #inancia acti%ity to e?tract rents #rom the rea economy rather than to de i%er economic %a ue,- !urner wrote, $Jinancia inno%ation , , , may in some ways and under some circumstances #oster economic %a ue creation, but that needs to be i ustrated at the e%e o# speci#ic e##ects: it cannot be asserted a priori,!urnerPs %iewpoint caused consternation in the >ity o# Aondon, the wor dPs argest #inancia market, ' c ear imp ication o# his argument is that many peop e in the >ity and on Ba 2treet

are the #inancia e+ui%a ent o# s um ords or to co ectors in pin*striped suits, I# they retired to their beach houses en masse, the rest o# the economy wou d be #ine, or perhaps e%en hea thier, 2ince 1980, according to the .ureau o# Aabor 2tatistics, the number o# peop e emp oyed in #inance, broad y de#ined, has shot up #rom rough y #i%e mi ion to more than se%en and a ha # mi ion, ;uring the same period, the pro#itabi ity o# the #inancia sector has increased great y re ati%e to other industries, !hink o# a the pro#its produced by businesses operating in the 1,2, as a cake, !wenty*#i%e years ago, the s ice taken by #inancia #irms was about a se%enth o# the who e, Aast year, it was more than a +uarter, (In 9006, at the peak o# the boom, it was about a third,) In other words, during a period in which 'merican companies ha%e created i<hones, Kome ;epot, and Aipitor, the best p ace to work has been in an industry that doesnPt design, bui d, or se a sing e tangib e thing, Jrom the end o# the 2econd Bor d Bar unti 1980 or thereabouts, peop e working in #inance earned about the same, on a%erage and taking account o# their +ua i#ications, as peop e in other industries, .y 9006, wages in the #inancia sector were about si?ty per cent higher than wages e sewhere, 'nd in the richest segment o# the #inancia industryQon Ba 2treet, that isQ compensation has gone up e%en more dramatica y, Aast year, whi e many peop e were #acing pay #ree8es or worse, the a%erage pay o# emp oyees at Go dman 2achs, @organ 2tan ey, and "<@organ >hasePs in%estment bank Dumped twenty*se%en per cent, to more than three hundred and #orty thousand do ars, !his #igure inc udes modest y paid workers at reception desks and in mai rooms, and it thus understates what senior bankers earn, 't Go dman, it has been reported, near y a thousand emp oyees recei%ed bonuses o# at east a mi ion do ars in 9009, Cot surprising y, Ba 2treet has become the pre#erred destination #or the bright young peop e who used to want to start up their own companies, work #or C'2', or Doin the <eace >orps, 't Kar%ard this spring, about a third o# the seniors with secure Dobs were heading to work in #inance, .en Jriedman, a pro#essor o# economics at Kar%ard, recent y wrote an artic e amenting $the direction o# such a arge #raction o# our most*ski ed, best*educated, and most high y moti%ated young citi8ens to the #inancia sector,@ost peop e on Ba 2treet, not surprising y, be ie%e that they earn their keep, but at east one in# uentia #inancier %ehement y disagrees: <au Boo ey, a se%enty*one*year*o d 7ng ishman who has set up an institute at the Aondon 2choo o# 7conomics ca ed the Boo ey >entre #or the 2tudy o# >apita @arket ;ys#unctiona ity, $Bhy on earth shou d #inance be the biggest and most high y paid industry when itPs Dust a uti ity, ike sewage or gasM- Boo ey said to me when I met with him in Aondon, $It is ike a cancer that is growing to in#inite si8e, unti it takes o%er the entire body,Jrom 1984 to 9006, Boo ey, who has a doctorate in economics, ran the Aondon a##i iate o# G@I, a .oston*based in%estment #irm, .e#ore that, he was an e?ecuti%e director at .arings, the %enerab e .ritish in%estment bank that co apsed in 199: a#ter a rogue*trader scanda , and at the Internationa @onetary Jund, !a , so#t*spoken, and court y, Boo ey mo%es easi y between the >ity o# Aondon, academia, and po icymaking circ es, Bith a taste #or 2a%i e Eow suits and a keen interest in anti+uarian books, he doesnPt come across as an insurrectionary, .ut, sitting in an o##ice at A,2,7,, he cheer#u y to d me that he regarded himse # as one, $Bhat we are doing is re%o utionary,- he said with a smi e, $Cobody has done anything ike it be#ore,'t G@I, Boo ey ran se%era #unds that in%ested in stocks and bonds #rom many countries, Ke a so he ped to set up one o# the #irst $+uant- #unds, which re y on mathematica a gorithms to #ind pro#itab e in%estments, Jrom his perch in 'nge >ourt, in the heart o# the >ity, he watched the rapid e?pansion a around him, 7stab ished internationa p ayers, such as >iti, Go dman, and

1.2, were getting biggerH new entrants, especia y hedge #unds and buyout (pri%ate e+uity) #irms, were pro i#erating, Boo eyPs #irm did we , too, but a basic economic +uestion nigg ed at him: Bas the #inancia industry doing what it was supposed to be doingM Bas it a ocating capita to its most producti%e usesM 't #irst, ike most economists, he be ie%ed that trading dro%e market prices to e%e s Dusti#ied by economic #undamenta s, I# an energy company struck oi , or an entertainment #irm created a new mo%ie #ranchise, in%estors wou d pour money into its stock, but the price wou d remain tethered to rea ity, !he dotcom bubb e o# the ate nineteen*nineties changed his opinion, G@I is a $%a ue in%estor- that seeks out stocks on the basis o# earnings and cash # ows, Bhen the Casda+ took o##, Boo ey and his co eagues cou dnPt Dusti#y buying high*priced Internet stocks, and their #unds agged behind ri%a s that shi#ted more o# their money into tech, .etween "une, 1998, and @arch, 9000, Boo ey reca ed, the c ients o# G@IQpension #unds and charitab e endowments, most yQwithdrew #orty per cent o# their money, ;uring the ensuing #i%e years, the bubb e burst, %a ue stocks #ared a ot better than tech stocks, and the c ients who had e#t missed more than a si?ty*per*cent gain re ati%e to the market as a who e, '#ter going through that e?perience, Boo ey had an epiphany: #inancia institutions that react to market incenti%es in a competiti%e setting o#ten end up making a mess o# things, $I rea i8ed we were acting rationa y and optima y,- he said, $!he c ients were acting rationa y and optima y, 'nd the outcome was a comp ete Kor icks,- Jinancia markets, #ar #rom being e##icient, as most economists and po icymakers at the time be ie%ed, were gross y ine##icient, $'nd once you recogni8e that markets are ine##icient a ot o# things change,Ine is the ro e o# #inancia intermediaries, such as banks, Eather than seeking the most producti%e out et #or the money that depositors and in%estors entrust to them, they may #o ow trends and sur# bubb es, !hese acti%ities shi#t capita into proDects that ha%e itt e or no ong*term %a ue, such as specu ati%e rea *estate de%e opments in the swamps o# J orida, Eather than acting in their customersP best interests, #inancia institutions may pedd e opa+ue in%estment products, ike co atera i8ed debt ob igations, <ri%y to superior in#ormation, banks can charge he#ty #ees and dri%e up their own pro#its at the e?pense o# c ients who are induced to take on risks they donPt #u y understandQa #orm o# rent seeking, $@ispricing gi%es incorrect signa s #or resource a ocation, and, at worst, causes stock market booms and busts,- Boo ey wrote in a recent paper, $Eent capture causes the misa ocation o# abor and capita , trans#ers substantia wea th to bankers and #inanciers, and, at worst, induces systemic #ai ure, .oth impose socia costs on their own, but in combination they create a per#ect storm o# wea th destruction,Boo ey origina y endowed his institute on dys#unctiona ity with #our mi ion pounds, (.y .ritish standards, that is a signi#icant sum,) !he institute opened in 9004Q@er%yn /ing, the go%ernor o# the .ank o# 7ng and, turned up at its aunch partyQand has pub ished more than a do8en research papers cha enging the bene#its that #inancia markets and #inancia institutions bring to the economy, ;mitri Oayanos, a pro#essor o# #inance at A,2,7, who runs the Boo ey >entre, has presented some o# its research at 2tan#ord, >o umbia, the 1ni%ersity o# >hicago, and other eading uni%ersities, Boo ey has pub ished a ten*point $mani#esto- aimed at the mutua #unds, pension #unds, and charitab e endowments that, through payments o# #ees and commissions, u timate y he p #inance the sa aries o# many peop e on Ba 2treet and in the >ity o# Aondon, 'mong Boo eyPs suggestions: in%estment #unds shou d imit the turno%er in their port#o ios, re#use to pay per#ormance #ees, and a%oid putting money into hedge #unds and pri%ate*e+uity #irms, .e#ore ea%ing #or unch at his c ub, the Ee#orm, Boo ey pointed me to a recent study by the research #irm Ibbotson 'ssociates, which shows that during the past decade in%estors in hedge #unds, o%er a , wou d ha%e done Dust as we putting their money straight into the 2R< :00, $!he

amount o# rent capture has been huge,- Boo ey said, $In%estment banking, prime broking, mergers and ac+uisitions, hedge #unds, pri%ate e+uity, commodity in%estmentQthe who e sca e o# acti%ity is #ar too arge,- I asked Boo ey how big he thought the #inancia sector shou d be, $'bout a ha # or a third o# its current si8e,- he rep ied, Bhen I got back #rom Aondon, I spoke with Ea ph 2ch osstein, the >,7,I, o# 7%ercore, a sma ish in%estment bank o# about si? hundred emp oyees that ad%ises corporations on mergers and ac+uisitions but doesnPt do much in the way o# issuing and trading securities, In the nineteen*se%enties, 2ch osstein worked on >apito Ki as an economist be#ore Doining the >arter 'dministration, in which he ser%ed at the !reasury and the Bhite Kouse, In the eighties, he mo%ed to Ba 2treet and worked #or Aehman with Eoger ' tman, the chairman and #ounder o# 7%ercore, 7%entua y, 2ch osstein e#t to co*#ound the in%estment #irm . ackrock, where he made a #ortune, '#ter retiring #rom . ackrock, in 9004, he cou d ha%e mo%ed to his house on @arthaPs Oineyard, but he ikes Ba 2treet and be ie%es in it, $!here wi a ways be a need #or #unding #rom businesses and househo ds,- he said, $Be saw at the end o# 9008 and in ear y 9009 what happens to an economy when that capita *raising and capita *a ocation mechanism breaks down, <art o# what has distinguished the 1,2, economy #rom the rest o# the wor d is that weP%e a ways had arge, transparent poo s o# capita , 1 timate y, that dri%es down the cost o# capita in the 1,2, re ati%e to our competitors,2ti 2ch osstein agrees with Boo ey that Ba 2treet has prob ems, many o# which deri%e #rom its si8e, In the ear y nineteen*eighties, Go dman and @organ 2tan ey were rough y the si8e o# 7%ercore today, Cow they are many, many times as arge, .ig doesnPt necessari y mean bad, but when the Ba 2treet #irms grew beyond a certain point they #aced a set o# new cha enges, In a pri%ate partnership, the peop e who run the #irm, rather than outside shareho ders, bear the brunt o# ossesQa structure that discourages reck ess risk*taking, In addition, sma banks donPt emp oy %ery much capita , which a ows them to make a decent return by acting in the interests o# their c ients and re ying on commissions, .ig #irms, howe%er, ha%e to take on more risk in order to generate the sorts o# pro#its that their stockho ders ha%e come to e?pect, !his ine%itab y in%o %es bui ding up their trading operations, $!he eadership o# these #irms tends to go towards peop e who can dep oy their %ast amounts o# capita and earn a decent return on it,- 2ch osstein said, $!hat tends to be peop e #rom the trading and capita *markets side,2ome kinds o# trading ser%e a use#u economic #unction, Ine is market*making, in which banks accumu ate arge in%entories o# securities in order to #aci itate buying and se ing on the part o# their c ients, .anks a so engage in acti%e trading to meet their c ientsP wishes either to ay o## risk or to take it on, 'merican 'ir ines might pay @organ 2tan ey a #ee to guarantee that the price o# its Det #ue wonPt rise abo%e a certain e%e #or three years, !he bank wou d then make a series o# trades in the oi *#utures markets designed to co%er what it wou d ha%e to pay 'merican i# the price o# #ue rose, Kowe%er, the mere #act that a certain trade is c ient*dri%en doesnPt mean it is socia y use#u , .anks o#ten design comp icated trading strategies that he p a customer, such as a pension #und or a wea thy indi%idua , circum%ent regu atory re+uirements or reduce ta? iabi ities, Jrom the c ientPs %iewpoint, these types o# #inancia products can create %a ue, but #rom societyPs perspecti%e they mere y shi#t money around, $!he usua economistsP argument #or #inancia inno%ation is that it adds to the si8e o# the pie,- Gera d 7pstein, an economist at the 1ni%ersity o# @assachusetts, said, $.ut these types o# things donPt add to the pie, !hey redistribute itQo#ten #rom ta?payers to banks and other #inancia institutions,@eanwhi e, big banks a so uti i8e many kinds o# trading that arenPt in the ser%ice o# their traditiona c ients, Ine is proprietary trading, in which they bet their own capita on mo%ements in the markets, !herePs no socia de#ense #or this practice, e?cept the argument that the banks e?ist to make pro#its #or the shareho ders, !he so*ca ed Oo cker Eu e, an e ement o# this yearPs

;odd*Jrank #inancia *re#orm bi intended to pre%ent banks #rom taking too many risks with their depositorsP money, was supposed to ha%e proscribed banks #rom proprietary trading, Kowe%er, it is not yet c ear how the ru e wi be app ied or how it wi pre%ent some types o# proprietary trading that are di##icu t to distinguish #rom market*making, I# a #irm wants to p ace a bet on #a ing interest rates, #or e?amp e, it can simp y ha%e its market*making unit bui d up its in%entory o# bonds, !he ;odd*Jrank bi a so didnPt e iminate what 2ch osstein describes as $a who e bunch o# acti%ities that #e into the category o# specu ation rather than e##ecti%e y #unctioning capita markets,- Aeading up to the co apse, the banks became hea%i y in%o %ed in #aci itating specu ation by other traders, particu ar y hedge #unds, which buy and se at a #renetic pace, generating big #ees and commissions #or Ba 2treet #irms, 2ch osstein picked out the growth o# credit*de#au t swaps, a type o# deri%ati%e o#ten used pure y #or specu ati%e purposes, Bhen an in%estor or #inancia institution buys this kind o# swap, it doesnPt purchase a bond itse #H it Dust p aces a bet on whether the bond wi de#au t, 't the height o# the boom, #or e%ery do ar banks issued in bonds, they might issue twenty do ars in swaps, $I# they did a hundred*mi ion*do ar bond issue, two bi ion do ars o# swaps wou d be created and traded,- 2ch osstein said, $!hatPs insane,- Jrom the banksP perspecti%e, creating this huge market in side bets was %ery pro#itab e insanity, .y ate 9004, the notiona %a ue o# outstanding credit*de#au t swaps was about si?ty tri ion do arsQmore than #our times the si8e o# the 1,2, gross domestic product, 7ach time a #inancia institution issued a swap, it charged the customer a commission, .ut wagers on credit* de#au t swaps are 8ero*sum games, Jor e%ery winner, there is a oser, In the aggregate, itt e or no economic %a ue is created, 2ince the market co apsed, #ar #ewer credit*de#au t swaps ha%e been issued, .ut the insidious cu ture that a owed Ba 2treet #irms to pedd e securities o# dubious %a ue to pension #unds and charitab e endowments remains arge y in p ace, $!raditiona y, the re ationship between Ba 2treet and its big c ients has been based on the Sbig boyP concept,- 2ch osstein e?p ained, $0ou are dea ing with sophisticated in%estors who can do their own due di igence, Jor e?amp e, i# >'A<7E2-Qthe >a i#ornia <ub ic 7mp oyees Eetirement 2ystemQ$wants to buy something that a maDor bank is se ing short, itPs not the bankPs responsibi ity to te them, In Ba 2treet, this was the accepted way o# doing business,- 7ar ier this year, the 2ecurities and 7?change >ommission appeared to cha enge the big*boy concept, suing Go dman 2achs #or #ai ing to disc ose materia in#ormation about some subprime*mortgage securities that it so d, but the case was reso %ed without Go dmanPs admitting any wrongdoing, $!his issue started to get discussed, then #e to the wayside when Go dman sett ed their case,- 2ch osstein said, !he big banks insist that they ha%e to be big in order to pro%ide the ser%ices that their corporate c ients demand, $Be are in one hundred and #i#ty*nine countries,- Oikram <andit to d me, $>ompanies need us because they are going g oba , too, !hey ha%e cash*management needs a around the wor d, !hey ha%e capita *market needs a around the wor d, Be can meet those needs,- @ore than two*thirds o# >itiPs two hundred and si?ty thousand emp oyees work outside the 1nited 2tates, In the #irst nine months o# this year, near y three*+uarters o# the #irmPs pro#its emanated #rom 7urope, 'sia, and Aatin 'merica, In .ra8i , >iti he ped <etrobras, the state*run oi company, to issue stock to the pub icH in the 1nited /ingdom, it he ped raise money #or a e%eraged buyout o# !omkins, an engineering company, $ItPs a about c ients,- <andit went on, !he biggest mistake >iti and other banks made during the boom, he said, was coming to be ie%e that in%esting and trading on their own account, rather than on beha # o# their c ients, was a basic aspect o# banking, 7%en be#ore the ;odd*Jrank bi was passed, <andit was c osing down some o# >itiPs proprietary businesses and trying to se others, $<roprietary trading is not the core o# what banking is about,- he said, In p ace o# a business

mode that was arge y dependent on making +uick gains, he is trying to re%i%e a banking cu ture based on cu ti%ating ong*term re ationships with >itiPs customers, $Ince you make your business a about re ationships, con# icts o# interest are not an issue,- he said, ;espite <anditPs e##orts to remake >itiPs cu ture, the #irm remains hea%i y in%o %ed in trading o# %arious kinds, Its in%estment*banking arm, which has grown rapid y o%er the past decade, sti accounts #or about three*tenths o# its re%enues (c ose to twenty bi ion do ars in the #irst nine months o# this year) and more than two*thirds o# its net pro#its (upward o# si? bi ion do ars in the same period), 'nd within the in%estment bank about eighty cents o# e%ery do ar in re%enues came #rom buying and se ing securities, whi e Dust #ourteen cents o# e%ery do ar came #rom raising capita #or companies and ad%ising them on dea s, .etween "anuary and 2eptember, >itigroupPs bond traders a one generated more than twe %e and a ha # bi ion do ars in re%enues Qmore than the bankPs entire branch network in Corth 'merica, @any banks be ie%e that trading is too ucrati%e a business to stop, and they are trying to persuade go%ernment o##icia s to en#orce the ;odd*Jrank bi in the oosest possib e way, @organ 2tan ey and other big #irms are a so starting to rebui d their securiti8ation business, which poo s together auto oans, credit*card recei%ab es, and other #orms o# credit, and then issues bonds backed by them, !here ha%e e%en been some securiti8ations o# prime*mortgage oans, I asked "ohn @ack i# he cou d see subprime*mortgage bonds making a comeback, $I think in time they wi ,- he rep ied, $I hope they do, I say that because it gi%es tremendous i+uidity to the markets,$Ai+uidity- re#ers to how easy or di##icu t it is to buy and se , ' share o# stock in a company on the Casda+ is a %ery i+uid asset: using a discount brokerage such as Jide ity, you can se it in seconds #or ess than ten do ars, ' choco ate #actory is an i i+uid asset: disposing o# it is time* consuming and cost y, !he c assic Dusti#ication #or market*making and other types o# trading is that they endow the market with i+uidity, and throughout the #inancia industry I heard the same argument o%er and o%er, $0ou canPt not ha%e banks, and you canPt not ha%e trading,- an e?ecuti%e at a big pri%ate*e+uity #irm said to me, $<art o# the %a ue in a stock is the know edge that you can se it this a#ternoon, .anks pro%ide i+uidity,.ut i+uidity, or at east the perception o# it, has a downside, !he i+uidity o# Internet stocks persuaded in%estors to buy them in the be ie# they wou d be ab e to se out in time, !he i+uidity o# subprime*mortgage securities was at the heart o# the credit crisis, Kome enders, thinking they wou d a ways be ab e to se the oans they made to Ba 2treet #irms #or bund ing together into mortgage bonds, e?tended credit to Dust about anybody, .ut i+uidity is +uick to disappear when you need it most, 7%erybody tries to se at the same time, and the market sei8es up, !he prob em with modern #inance $isnPt Dust about e?cessi%e rents and a misa ocation o# capita ,- <au Boo ey said, $It is a so crashes and bad macroeconomic outcomes, !he recent crisis cost about ten per cent o# G,;,<, It made tack ing c imate change ook cheap,In the upper reaches o# Ba 2treet, ta k o# another #inancia crisis is dismissed as a armism, Aast #a , "ohn @ack, to his credit, was one o# the #irst Ba 2treet >,7,I,s to say pub ic y that his industry needed stricter regu ation, Cow that @organ 2tan ey and Go dman 2achs, the ast two remaining big independent Ba 2treet #irms, ha%e con%erted to bank ho ding companies, a ega switch that p aced them under the regu atory authority o# the Jedera Eeser%e, @ack insists that proper super%ision is in p ace, Jed regu ators $ha%e more e?pertise, and they cha enge us,@ack to d me, 2ince the midd e o# 9004, @organ 2tan ey has raised about twenty bi ion do ars in new capita and cut in ha # its e%erage ratioQthe tota %a ue o# its assets di%ided by its capita , In addition, it now ho ds much more o# its assets in #orms that can be readi y con%erted to cash,

Ither #irms, inc uding Go dman 2achs, ha%e taken simi ar measures, $ItPs a much sa#er system now,- @ack insisted, $!herePs no +uestion,!hatPs true, .ut the history o# Ba 2treet is a series o# booms and busts, '#ter each b owup, the #irms that sur%i%e temporari y shy away #rom risky %entures and cut back on e%erage, I%er time, the markets reco%er their osses, memories #ade, spirits re%i%e, and the action starts up again, unti , e%entua y, it goes too #ar, !he mere #act that Ba 2treet poses ess o# an immediate threat to the rest o# us doesnPt mean it has permanent y mended its ways, <erhaps the most shocking thing about recent e%ents was not how rapid y the big Ba 2treet #irms got into troub e but how +uick y they returned to pro#itabi ity and a%ished big rewards on themse %es, Aast year, Go dman 2achs paid more than si?teen bi ion do ars in compensation, and @organ 2tan ey paid out more than #ourteen bi ion do ars, Ceither came up with any spectacu ar new in%estments or produced anything o# tangib e %a ue, which eads to the +uestion: Bhen it comes to pay, is there something uni+ue about the #inancia industryM !homas <hi ippon, an economist at C,0,1,Ps 2tern 2choo o# .usiness, thinks there is, '#ter studying the arge pay di##erentia between #inancia *sector emp oyees and peop e in other industries with simi ar e%e s o# education and e?perience, he and a co eague, 'rie Eeshe# o# the 1ni%ersity o# Oirginia, conc uded that some o# it cou d be e?p ained by growing demand #or #inancia ser%ices #rom techno ogy companies and baby boomers, .ut <hi ippon and Eeshe# determined that up to ha # o# the pay premium was due to something much simp er: peop e in the #inancia sector are o%erpaid, $In most industries, when peop e are paid too much their #irms go bankrupt, and they are no onger paid too much,- he to d me, $!he e?ception is when peop e are paid too much and their #irms donPt go broke, !hat is the #inance industry,In Ba 2treet dea ing desks, pro#its and osses are e%a uated e%ery a#ternoon when trading ends, and the #irmsP positions are $marked to market-Q%a ued on the basis o# the c osing prices, ' trader can borrow money and p ace a e%eraged bet on a certain market, 's ong as the market goes up, he wi appear to be making a steady pro#it, .ut i# the market e%entua y turns against him his capita may be wiped out, $0ou can create a trading strategy that o%ernight makes ots o# money, and it can take months or years to #ind out whether it is rea money or uck or e?cessi%e risk*taking,- <hi ippon e?p ained, $2ometimes, e%en then it is hard,- 2ince traders (and their managers) get e%a uated on a +uarter y basis, they can be paid handsome y #or p acing bets that u timate y bankrupt their companies, $In most industries, a good idea is rewarded because the company generates pro#its and rea cash # ows,- <hi ippon said, $In #inance, it is o#ten Dust a trading gain, !he c oser you get to #inancia markets the easier it is to book #unny pro#its,;uring the credit boom o# 900: to 9004, pro#its and pay reached unprecedented highs, It is now e%ident that the bankers were being rewarded arge y #or taking on unacknow edged risks: a#ter the subprime market co apsed, bank shareho ders and ta?payers were e#t to pick up the osses, Jrom an economy*wide perspecti%e, this e?perience suggests that at east some o# the pro#its that Ba 2treet bankers c aim to generate, and that they use to Dusti#y their big pay packages, are i usory, 2uch a sub%ersi%e notion has recent y recei%ed the endorsement o# senior #igures at the .ank o# 7ng and, 'ndrew Ka dane, the e?ecuti%e director o# #inancia stabi ity at the .ank, ga%e a speech in "u y tit ed $!he >ontribution o# the Jinancia 2ector: @irac e or @irageM- It conc uded, $.ecause banks are in the risk business, it shou d be no surprise that the run*up to the crisis was ha marked by imaginati%e ways o# manu#acturing this commodity, with a %iew to boosting returns to abour and capita , , , , It is in bank managersP interest to make mirages ook ike mirac es,-

1nder pressure #rom the regu ators, the big Ba 2treet banks ha%e responded to criticisms o%er e?ecuti%e compensation with something ca ed $c awback,- Eather than paying he#ty bonuses in cash e%ery "anuary or Jebruary, a bank gi%es its most high y paid emp oyees some sort o# de#erred compensation designed to dec ine in %a ue i# $pro#its- turn into osses, !he simp est way o# doing this is to issue bonuses in the #orm o# restricted stock that canPt be so d #or a ong period o# time, I# the #irm gets into troub e as a resu t o# decisions taken years ear ier, and its stock price dec ines, those responsib e wi su##er, @organ 2tan ey pays bonuses in cash, but p aces the cash in a restricted account where it canPt be used #or a certain number o# years, I# during this period the in%estment that generated the bonus turns into a oss, the #irm has the right to take back some or a o# the cash, !he spread o# c awback pro%isions shows that there has been some change on Ba 2treet, .ut itPs unc ear i# the schemes wi ho d up when ine%itab y cha enged in courtQor i# theyP deter traders #rom taking unwarranted risks, In Ba 2treet and e sewhere in corporate 'merica, insiders genera y earn +uick y how to game new systems and turn them to their ad%antage, ' key +uestion about c awbacks is how ong they remain in e##ect, 't @organ 2tan ey the answer is three years, which may not be ong enough #or hidden risks to materia i8e, $ItPs Dust %ery easy to create trading strategies that make money #or si? years and ose money in the se%enth,<hi ippon said, $!hatPs e?act y what Aehman did #or si? years be#ore its co apse,Gi%en the code o# si ence that Ba 2treet #irms impose on their emp oyees, it is di##icu t to get mid* e%e bankers to speak open y about what they do, !here is, howe%er, a b og, !he 7picurean ;ea maker, written by an anonymous in%estment banker who has #or se%era years been pro%iding caustic commentary on his pro#ession, !he biography on his site notes, $I #aci itate, Dusti#y, and ad%ise parties to @R' transactions, when I am not ad%ising against them,- In @arch, 9008, when some ana ysts were suggesting that the demise o# .ear 2tearns wou d ead to a change o# attitudes on Ba 2treet, !7;Qthe shorthand appe ation the author usesQwrote, $I, #or one, think these bankers wi be e%en more moti%ated to rape and pi age the #inancia system in order to rebui d their i *gotten gains,- 2e%en months ater, on the e%e o# the bank bai out, !7; opined, $Aet hundreds o# banks #ai , Aet tens o# thousands o# #inancia workers ose their Dobs and their persona wea th, , , , !he #inancia sector has had a rea y, rea y good run #or a ot o# years, It is time to pay the piper, and I, #or one, ha%e itt e interest in using my ta?payer do ars to cushion the b ow, '#ter a , I am Dust another heart ess Ba 2treet bastard myse #,In 2eptember, !7; and I met at a diner near my o##ice, Ke ooked ike an in%estment banker: midd e*aged, c ean*cut, wearing an e?pensi%e* ooking gray suit, Iur con%ersation started out with some banter about the ri%a ry between bankers and traders at many Ba 2treet #irms, 's the traders came out on top in recent years, !7; reca ed, $they wou d say, S0ou guys are the rea parasites, going to e?pensi%e unches and doing dea s on the back o# our trading operations,P - Ke pro#essed to be una##ected by this ribbing, but he said, $In my e?perience, the proprietary traders are a ways the c owns who make twenty mi ion do ars a year unti they ose a hundred mi ion,In 2eptember, 9009, addressing the popu ar anger about bankersP pay, !7; wrote that he wou dnPt $attempt to rationa i8e stratospheric pay in the industry on the basis o# some sort o# se #*aggrandi8ing c aim to the particu ar socioeconomic uti ity or %irtue o# what I and my peers do,- and he cautioned his co eagues against making any such c aim: $0ou mean to te me your work as a (#i in the b ank here) is worth more to society than a #ire#ighterM 'n e ementary schoo teacherM ' combat in#antryman in '#ghanistanM ' priestM Good uck with that,- !he #act was, !7; went on, $my pay is set according to one thing and one thing on y: the demand in the marketp ace #or my ser%ices, , , , In%estment bankers get paid a ot o# money because that is what the market wi bear,-

Bhi e not inaccurate, this e?p anation raises +uestions about how competition works in the #inancia industry, I# Kert8 sees much o# its renta # eet ying id e, it wi cut its prices to better compete with '%is and 7nterprise, >hances are that '%is and 7nterprise wi respond in kind, and the resu t wi be ower pro#its a around, In Ba 2treet, the price o# %arious ser%ices has been #i?ed #or decades, I# @organ 2tan ey issues stock in a new company, it charges the company a commission o# around se%en per cent, I# 7%ercore or "<@organ ad%ises a corporation on making an ac+uisition, the standard #ee is about two per cent o# the purchase price, I asked !7; why there is so itt e price competition, Ke conc uded it was something o# a mystery, $ItPs a commodity business,- he said, $I can do what Go dman 2achs does, 0ou can do what I can do, Cobody has a proprietary edge, 'nd i# you do ha%e a proprietary edge youP on y ha%e it #or a #ew weeks be#ore somebody re%erse engineers it,'#ter thinking it o%er, the best e?p anation !7; cou d come up with was based on a theory o# re ati%ity: in%estment*banking #ees are sma compared with the si8e o# the o%er*a transaction, $0ou are a c ient, and you are going to do a #i%e*bi ion*do ar dea ,- he said, $ItPs the biggest dea youP%e e%er done, ItPs going to determine your #uture, and the #uture o# your #irm, 're you rea y going to #ight about whether a certain #ee is 9,: per cent or 5,5 per centM Co, !he o d c ichT we re y on is this: Bhen you need surgery, do you go to the discount surgeon or to the one you trust and know, who charges moreMI asked him how he and his co*workers #e t about making oads o# money when much o# the country was strugg ing, $' ot o# peop e donPt care about it or think about it,- he rep ied, $!hey say, itPs a market, itPs sti open, and IP se my abor #or as much as I can unti nobody wants to buy it,- .ut you, I asked, what do you thinkM $I tend to think we do create %a ue,- he said, $ItPs not a producti%e %a ue in a %ery %isib e sense, ike #inding a cure #or cancer, BePre midd emen, Be bring together two sides o# a dea , !hatPs not a %ery e e%ated thing, but I canPt think o# any e e%ated economy that doesnPt need midd emen,!he 7picurean ;ea maker is right: Ba 2treet bankers create some economic %a ue, .ut do they create enough o# it to Dusti#y the rewards they reapM In the #irst nine months o# 9010, the big si? banks c eared more than thirty*#i%e bi ion do ars in pro#its, $!he catac ysmic e%ents took p ace in the #a o# 9008 and the ear y months o# 9009,- Eoger ' tman, the chairman o# 7%ercore, said to me, $In this industry, thatPs a ong time ago,;espite a the criticism that <resident Ibama has recei%ed ate y #rom Ba 2treet, the 'dministration has arge y e#t the great money*making machine intact, ' coup e o# years ago, #irms such as >itigroup, "<@organ >hase, and Go dman 2achs #aced the danger that the go%ernment wou d break them up, dri%e them out o# some o# their most ucrati%e business ines Qsuch as dea ing in deri%ati%esQor #orce them to maintain so much capita that their pro#its wou d be great y diminished, $Cone o# these things materia i8ed,- ' tman noted, $Ee#orms and changes came in, but they did not ha%e a trans#ormati%e e##ect,In 19N0, a #ormer Ba 2treet trader named Jred 2chwed, "r,, wrote a charming itt e book tit ed $Bhere 're the >ustomersP 0achtsM,- in which he noted that many members o# the pub ic be ie%ed that Ba 2treet was inhabited primari y by $crooks and scoundre s, and %ery c e%er ones at thatH that they se #or mi ions what they know is worth essH in short, that they are %i ains,- It was an e?treme %iew, but pub ic antagonism toward bankers and other #inanciers kept them in check #or #orty years, 7conomic historians re#er to a period o# $#inancia repression,- during which regu ators and po icymakers, re# ecting pub ic suspicion o# Ba 2treet, restrained the growth o# the banking sector, !hey p aced imits on interest rates, prohibited deposit*taking institutions #rom issuing securities, and, by pre%enting #inancia institutions #rom merging with one another, kept most o# them re ati%e y sma , ;uring this

period, maDor #inancia crises were conspicuous y absent, whi e capita in%estment, producti%ity, and wages grew at rates that i#ted tens o# mi ions o# working 'mericans into the midd e c ass, 2ince the ear y nineteen*eighties, by contrast, #inancia b owups ha%e pro i#erated and i%ing standards ha%e stagnated, Is this coincidenceM Jor a ong time, economists and po icymakers ha%e accepted the #inancia industryPs appraisa o# its own worth, ignoring the market #ai ures and other patho ogies that p ague it, 7%en a#ter a that has happened, there is a tendency in >ongress and the Bhite Kouse to de#er to Ba 2treet because what happens there, be#udd ing as it may be to outsiders, is essentia to the countryPs prosperity, Jina y, dissidents ike <au Boo ey are +uestioning this narrati%e, $!here was a presumption that #inancia inno%ation is socia y %a uab e,- Boo ey said to me, $!he #irst thing I disco%ered was that it wasnPt backed by any empirica e%idence, !herePs a most none,- U
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