Monday, November 22, 2010

Can Wall Street Justify Its Existence? -

Can Wall Street Justify Its Existence? -

Yes Wall Street does much good, but does it take more money than it earns? That is the question that is asked in this week's New Yorker Magazine and is rehashed in today's DealBook.

"...the question stands: a strange industry exists that mints multimillionaires on the basis of stock movements and bond issues. Can it justify its existence, or will it simply purchase the political favors to continue as before? What does it do for the rest of humanity? And does it cause more harm than good?

John Cassidy, a staff writer for The New Yorker, leads a tour of the uses and abuses of finance, and looks at how Wall Street went from the fund-raiser of corporations to a self-referential trading juggernaut."

One final look-in:

"Thomas Philippon, an economist at N.Y.U.’s Stern School of Business.

“In most industries, when people are paid too much, their firms go bankrupt, and they are no longer paid too much,” Mr. Philippon tells Mr. Cassidy. But recent history shows that people in the finance industry get paid too much, their firms get bailed out, and then they go back to getting paid a lot.

Mr. Philippon says traders, who get evaluated on a quarterly basis, can earn big from short-term bets that ultimately go south. “In most industries, a good idea is rewarded because the company generates profits and real cash flows,” he says. “In finance, it is often just a trading gain. The closer you get to financial markets, the easier it is to book funny profits.”"

Does pay have to be looked at? Yes. Do agency costs play a much larger role than we like to admit? Yes. Is there an easy solution? No.

On idea is to get some semblance of risk symmetry back. Be it via partnerships, or clawbacks, or ???. Short-term orientation is too tempting when win big is good while losing big brings no (or limited) consequences.

For more on this, I recommend going back and watching the middle of the roundtable on executive pay. It focuses directly on Wall Street.

No comments: