Schadenfreude

Dodging bullets before congress on Feb 11th 2009, Vikram Pandit had to justify Citigroup's $42 million private jet order after taking billions of taxpayer bailout money. Since he couldn't, he conceded, "I get the new reality and I will make sure Citi gets it as well."--And that's the closest you will ever get to the CEO of a Wall Street firm ever coming close to saying sorry for breaking the global economy.

For once, it became a joy to watch C-SPAN, mostly a sense of Schadenfreude watching Henry Waxman and the rest of Congress tag team the Wall Street executives. You almost felt sorry for Dick Fuld. The Swiss are taking it even further and are talking about the idea of banking clawbacks and performance maluses. Imagine that, bankers actually penalized for poor performance, how novel! But why does the general populace feel this way? Are bankers overpaid? Are they to blame? Or is everyone else just jealous of them?

To begin with, people are angry because the financial industry has figured out a way to privatize gains and to socialize losses. The financial industry has profitted immensely but taxpayers bear the brunt of the burden when things go wrong. That's justified outraged in my opinion, you can only call it jealousy if taxpayers didn't have to bail out Wall Street.

Fueling that rage is Wall Street's brain drain defense. “Because if you don't, the best of us will leave the industry.” Two things spring two mind. First, what has the "best of Wall Street" given us? Toxic assets, subprime mortgages, extreme risk-taking and complicated derivatives they themselves don't understand. Two, where would you go? You would leave banking and get hired by whom, and what would they pay you? You would leave banking and start your own company doing what? Yes, Wall Street is guilty of some hubris.

So this is the new reality--for the next 5 years at least.

When I graduated from college in 2000, Investment Banking (IB), Management Consulting (MC), and Silicon Valley related jobs (Venture Capital and Start-ups) were percieved to be the top jobs for a young ambitious person. Roughly 40% of my class marched into IB and MC alone. And this was a liberal arts school where kids were almost indoctrinated to do what they love and follow their passions. By the time I graduated from business school in 2003, the freshly minted MBA seemingly filed into just one job--finance. Be it IB, hedge funds, private equity or real estate, it was all finance related. The dot.coms were by now dot.gones and even the Mckinsey and Bain jobs were looking like ugly step-sisters when all-in salaries were compared.

That's when you sensed something was awry but you couldn't quite put your finger on it. Doctors found themselves sitting for the CFA, reinventing themselves as "Healthcare Sector Stock-Pickers". Science geeks started getting MBAs and still did engineering but it was the financial kind, electrical and mechanical were suddenly so uncool. Aggressive lawyers found matching personalities in their banking counterparts and crossed-over to finance as well. I've even met a Buddhist monk reincarnated as a private banker within the same life cycle! That's when you know everything is crawling out the woodwork. Finance has outpaid every other industry for decades and that’s why it attracted people from all other industries. The cliche says that no one goes to business school for reasons other than to make money, apparently that increasingly applicable to medical, law and engineering schools also. They just decide that money is more important to them at a different stage in their life. Surely these "cross-overs to finance" must, at some level, find it hard to reconcile their new lives on Wall Street. I cringe when I think of the same person talking about wanting to go to med school to alleviate human suffering. Likewise when I think of the lawyer who was supposedly attracted to law school because he enjoyed the challenge of resolving legal problems.

So when did finance start remunerating itself to the point where people from other well-compensated professions decided to drop their careers in exchange for? Doctors and lawyers have never really starved. There are some clues in this research article written by an NYU academic, Thomas Philippon. It seems like deregulation, not simply financial genius as you might have thought, is a major reason bankers get paid so much. Bankers get wealthy, increasingly influential and they in turn are able to exert influence on the legislators leading to more deregulation. The regulators, unable to attract and retain the talent needed to match the private sector, begins deregulating and undoing the safeguards put in place after the 1930's depression. We see a huge spike in deregulation and and corresponding banking salaries in the 1980's, the wonders of Reaganomics! This continues unabated throughout the nineties and noughties until today's financial collapse.

If there is a silver lining in any of this, we might at least take some comfort that regulators are now able to sift through the ranks of the unemployed and hire highly skilled financial workers on the cheap and even the playing field with the private sector.

But just as surely as we have forgotten the dangers of deregulation in the 1980's some would argue, we'll forget them again fifty years from now and deregulate until we realize it's a mistake once again. Trust me, I can go on about this but it's easy to miss the forest for the trees. I'd rather spend my energy on understanding what went wrong, what needs to be fixed, how it will be fixed and if possible, how to prevent it from ever happening again.

There's plenty of blame to go around. Who's to blame for this? I can think of four sets of people: the insitutions that invented and perpetuated the toxic assets; the regulators; the predatory lenders; and the irresponsible borrowers. That's pretty much everyone. The only thing you can do is to forgive and move on, afterall resentment is like drinking poison and waiting for the other person to die.