Mainstreet and Wall Street - the divide

PureAdvisory · February 24, 2009, 1:01am

I’m curious to hear both sides of this issue. I was asked the following question in an interview for an investment banking internship this summer. The question was posed with a very “us against the world” tone:

I want to get to the root of these ideological differences, so please no simplistic and overarching answers like “greed” (although that could very well be the case).

My answer came down to two main points:

1) Transparency - Maybe I am alone in this, but I feel as if very few people actually know what an “investment bank” is and how it’s different from a “hedge fund” or a “private equity” firm. My own mother doesn’t know what I’ll be doing this summer. Wall Street needs to do a better job of explaining what it is bankers and fund managers and partners do to the government and the general public. We can no longer rely on an outdated metonymy.

2) Accountability - Simple: Wall Street needs to own up to and actively seek to resolve the issues of its own creation. Packaging debt and syndicating it across the capital markets? Stupid, fix it. Shorting banks purely because of speculation on capitalization? Dumb. I think accountability is the biggest reason why the general public has an axe to grind. It’s counterintuitive for Wall Street to mess up and then use taxpayer money for equity injections.

Thanks and apologies if this has been posted before.

Mr_Payne · February 24, 2009, 1:06am

I honestly think it’s neither of what you said.

The issue, to me, is the monetary compensation. I think people make mistakes - in all industries, all the time. Simply put though, the ones who do make mistakes generally don’t pull in 1MM+ bonuses. They get paid like most average schlubs (generally maxing out at ~300k). I’m just not really seeing the value that is being generated by high end financial products.

fendrock · February 24, 2009, 6:22am

Wall Street is about making profits.

Main Street is about putting food on the table, staying employed, paying a mortgage, taking care of kids.

The profits of Wall Street take away from Main Street’s being able to make a living.

BCEagle91 · February 24, 2009, 7:15am

I agree with fendrock - Wall St is like armed invaders that raid a village for its food and money that they’ve built up over a long period of time - and then move onto the next village.

Main St is about making things and providing services. Wall St is about inserting themselves to push paper around to suck the richest parts from the labors of Main St.

oldfort · February 24, 2009, 8:30am

I think you just got your answer right there. BCEagle91’s view of WS is why there is such a wedge. It is lack of understanding and Main Street’s unwillingness to take ANY responsibility for its own economic problem. WS in general is viewed as a bully, and we’ve see many feel good movies when a bully is finally beaten down by kids smaller than him.

I don’t think there will ever be transparency in WS. To be competitive, each firm has its own trade secret. Employees are required to sign all kinds of non-disclosure and are required to go on garden leaves before they could go to another firm. IT professions are forbidden to take any programs when they leave, and many have been sued for doing so. Most phone conversations are recorded to protect the firm.

Rule of thumb for WS firms is never to take on Main Street - orphans and elderly - you will always lose. The firm I worked for many years ago (it is still around) did not want to do any mortgage securitization because of fear being sued by moms and pops in case of fraud. Those mortgages were originated by a third party, once you became the issuer you took on all the liabilities. Back in the eighties there were a lot of frauds - multiple loans on a property or on a non existing property. But many other firms were making a lot of money in securitization and this firm finally took the plunge. It limited its exposure and did start getting out of it a few years back.

I don’t think there is a simple answer. Americans are very angry right now, feel very much out of control. We like to know if we work hard, do what we were suppose to do, then we should be entitled to have a nice family, a house, good education for our kids. When our dream is ripped apart then it must be someone or something’s fault. In this case it is the WS fault - not the government, not the general public. It is no different when we have a fatal disease or couldn’t have a perfect birth, we must sue the doctors because someone must be at fault(doctors are a mystery to most of us too).

I don’t think anyone has clean hands in our current situation, there is enough greed and blame to go around.

BCEagle91 · February 24, 2009, 8:57am

“I don’t think there is a simple answer. Americans are very angry right now, feel very much out of control. We like to know if we work hard, do what we were suppose to do, then we should be entitled to have a nice family, a house, good education for our kids. When our dream is ripped apart then it must be someone or something’s fault. In this case it is the WS fault - not the government, not the general public.”

Somewhat of a strawman argument here. One can see the anger at government in the politics and elections sub-board. It’s harder to be angry at the fairly small percentage of individuals that caused the problems. I don’t know that I’d blame the general public as statistics indicate that large numbers of the general public played by the rules. It’s hard to label that 27% of the public that own their homes free and clear as part of the problem.

Or the 32% of renters that didn’t take out HELOCs.

The problem with Wall St is that what they do is inherently evil. And every few generations, we learn that when they take down the financial system. Another problem is people trying to justify the behavior of Wall St by using strawman arguments to blame others. Sometimes some of that blame is justified but it doesn’t absolve Wall St for without Wall St, we wouldn’t have these problems.

“It is no different when we have a fatal disease or couldn’t have a perfect birth, we must sue the doctors because someone must be at fault(doctors are a mystery to most of us too).”

I don’t know anyone in the categories that you’re talking about. The people that I know accept life and deal with it.

Then again I’m not a big fan of lawyers either.

NewHope33 · February 24, 2009, 9:00am

When I was growing up, back when Moses was meandering in the desert (well maybe not QUITE that long ago), people saved a portion of their income because they knew it was HARD to get a loan. Breeze forward a few decades and Americans are again saving for basically the same reason. And it’s killing world economies. Wall Street financial concoctions have brought us to this point, and some anger (and change) is certainly justified.

kayf · February 24, 2009, 9:01am

I think there is also a problem with government. Fannie and Freddie are govt agencies and they were at the heart of the subprime problem. Also the Comm Reinvestment Act. I think we need serious campaign reform. People, inlcuding wall street, should not be able to “buy” political favors.

Vderon · February 24, 2009, 9:07am

"Breeze forward a few decades and Americans are again saving for basically the same reason. And it’s killing world economies. "

Strongly agree with this. America’s economoy is fueled on consumer spending, and right now we are not cooperating.

fendrock · February 24, 2009, 9:11am

Consider the example of the auto-makers.

It was once possible to work “on the line” making cars in Detroit or Flint and make a good living. A family could buy a house, medical benefits were covered. The deal even included a pension.

Flash forward a generation. Detroit can no longer afford to pay those benefits, because it makes them noncompetitive on the global market. On “Main Street,” layoffs occur. Salaries drop. Medical costs skyrocket.

In the same generation, the wage gap increases between the richest and the poorest to record levels.

“Main Street” is just looking to make a living. They are finding it harder and harder to do.

BCEagle91 · February 24, 2009, 9:40am

In the past, the Fed turned off the spigot when the party was going too strong. The Fed arguably didn’t do that to the degree done in the past. The job turned into a popularity contest. Wall St does have the ear of the Fed. Wall St has the ears and wallets of Congress and the Executive Branch. It shouldn’t be that way but that’s the way that power flows and it is very hard to stop.

PureAdvisory · February 24, 2009, 9:42am

See, here is my problem:

You can’t just put a label on “Wall Street” and say that it’s evil. Who exactly on WS is evil? The sales people who sell illiquid securities? The traders who short equities? The M&A bankers who helped Pfizer-Wyeth merge? The corp fin bankers who raise debt capital by issuing bonds on the capital markets? Surely, the janitor at Goldman Sachs isn’t evil, right? That’s like saying everyone from the Middle East is a terrorist – which is certainly NOT the case. Please clarify.

oldfort · February 24, 2009, 9:46am

BCEagle - My expertise (if you could call it) was MBS and ABS, so this is the only area I could speak with any sort of expertise.

I think I could be very proud to tell my kids that back in the 80s to 90s, I and many of my colleagues made housing a lot more affordable for the Americans by making mortgages cheaper for them. We made the market more efficient - by cutting costs in loan servicing (from 2.5% to less than 1% of mortgage rate), by streamline underwriting procedure, better pricing and more loan products to meet different needs. Without the ability to access the capital market, there would have been a lot less money to loan to the general public, hence less home ownership. When it works properly, everyone benefits from it - Main Street gets cheaper mortgage and WS makes money. When people get greedy or when there isn’t the right check and balance then we run into the problem we have today. To say WS is inherently evil is really lack of understanding of how the whole financial system suppose to work.

BCEagle91 · February 24, 2009, 9:47am

I threw that in there to stir the pot. If oldfort can state that the American Public is to blame, then I can likewise state that Wall St is inherently evil.

Though it wasn’t entirely just fun and games. Wall St siphons the cream off of Main St - that’s their purpose. It’s like a leech on the country - yes they provide services but their goal is to take everything that they can take now and into the future.

BCEagle91 · February 24, 2009, 9:49am

I don’t think that higher home ownership is necessarily a good thing and I don’t like the things that artificially prop up home prices. I would prefer that mortgage interest not be deductible and that mortgages were all non-recourse. This would make everyone more cautious.

BCEagle91 · February 24, 2009, 9:56am

“To say WS is inherently evil is really lack of understanding of how the whole financial system suppose to work.”

Would you say that there has ever been a time when Wall St has worked the way it is supposed to work? If you look at the culture of bright high-school seniors interested in working in Wall St, is their desire to reduce transaction costs to the average person or make banking more convenient and less costly? Or is it to make six-figures right out of college? I find that my credit union (that class of institution that banks frequently try to legislate out of existence) does a far better job of providing convenience and reduced transaction costs than any of the bankers doing the death spiral thing.

NewHope33 · February 24, 2009, 9:59am

Not meaning to insult anyone, but I wonder how many people have thought through the implications of Wall Street’s abrogation of fiscal responsibility. With pensions being replaced with 401(k)s and the like, there’s a huge opportunity to, um, do for retirement funds what’s been done for mortgages. While unpleasant, a mortgage problem can be dealt with in bankruptsy – house gone, live in apartment. What does one do when when the retirement funds disappear?

OperaDad · February 24, 2009, 10:30am

Close. The issue is: Personal Responsibility, Integrity, doing what is right not what is most profitable, etc.

In old movies, the loan officer at the bank was maligned for not giving the loan to the small guy that wanted it. Well, guess what? A lot of the time the banker was protecting the small guy from his own irresponsibility.

Just because on Wall Street all things are permissible, all things are not necessarily in the person’s/company’s best interest. I use to be a quant jock on Wall Street. I would figure out ways to help a company do things better. Now I am on the other side of the table, and I am constantly being pitched deals. My standard response is: What’s the benefit? What’s the Risk? - Basically, What’s the Point? Most of the time the “point” was just a way for us to make a bet for the sake of making a bet. However, we are not in the business of making those bets. There was no “need” being met, or not worth the cost (risk) of meeting that “need”.

The issues you raised about Transparency and Accountabliilty are just dancing around the issue of Honesty and Integrity. If the Bankers were honest and had integrity, they would meet the need of the person/company in a responsibly way. With that, you don’t need transparency and accountability, because no one is doing anything that would fear being exposed.

Investment Bankers are nothing but glorified salesmen. They sell the products their company has to offer. Most are honest and decent people. But it only takes a few used car salesmen to create a catastrophy when large $$$'s are involved.

hmom5 · February 24, 2009, 11:22am

The problem, as this thread brilliantly lays out, is that Main Street truly doesn’t understand Wall Street and never will. And WS has no idea why Main Street has only negative perceptions, after all, in no other generation has Main Street so benefited from WS prior to the bust. Cheap loans, stock market gains, it was all good until the day it went bust.

WS firms, like all public companies, should be, and are, responsible to their shareholders. The buck should, and does, stop with them. If jobs are not being done, shareholders should demand no bonuses and anything else appropriate.

The problem is, of course, the bailout funds. The govt gave these funds not to keep ibankers employed, but to keep credit markets from totally failing which would tank the economy. Without them, many banks would have abandoned that part of their businesses and moved on with the sustainable parts of the businesses they had.

So now we’ll bail out the auto industry, the insurance industry and any other industry whose demise would serious effect employment.

Many would argue that none of these bailouts should happen. That we should let the economy take it’s natural course. But the folks in Washington who invented Fannie and Freddie choose to prop the economy, so be it.

So all of America feels we have the right to dictate to all companies we’re bailing out, and they certainly have a point. But in reality, do we really want to create a socialist country? As other countries have found out, the best and the brightest will just move offshore to do what they’re want to do. Banks will stop taking bailout money and move to what’s profitable leaving the average consumer to go begging for a loan.

What this country needs is to encourage the best and the brightest to innovate, to make sure we become/stay a global powerhouse, to create companies and new industries and thus jobs that are sustainable. If history repeats itself, WS will be at the center of making this happen.

So, IMO, the answer to your interview question is that Main Street will never understand Wall Street. WS did not start the class divide and won’t end it. Whether it’s the tech execs after the dot com boom or the auto industry execs on their private planes flying to ask for bailout money, Main Street will resent the appearance of living well even when it’s not perceived as being at their expense.

The problem as it turns out, IS transparency. WS execs and top execs in general have lived far beyond anything Main Street imagined forever, the media was just not out there reporting it. There have always been jobs that paid beyond the average person’s imagination and there always will be.

All WS can do is keep it’s hand clean and report into shareholders having done a good, honest job.

BCEagle91 · February 24, 2009, 11:34am

“in no other generation has Main Street so benefited from WS prior to
the bust. Cheap loans,”

The precursor to bubbles and the collapse of bubbles.

“stock market gains,”

Gravity is a b*tch.

“it was all good until the day it went bust.”

It will always go bust too with easy money.

“So all of America feels we have the right to dictate to all companies
we’re bailing out, and they certainly have a point. But in reality, do
we really want to create a socialist country?”

It doesn’t follow.

“As other countries have found out, the best and the brightest will
just move offshore to do what they’re want to do.”

Good riddence.

“Banks will stop taking bailout money and move to what’s profitable
leaving the average consumer to go begging for a loan.”

Fine with me. Maybe the average consumer should go begging for a loan.
Then prices would be lower. And consumers wouldn’t have to go into
indentured servitude for their needs and wants.

“The problem as it turns out, IS transparency. WS execs and top execs
in general have lived far beyond anything Main Street imagined
forever, the media was just not out there reporting it. There have
always been jobs that paid beyond the average person’s imagination and
there always will be.”

When you’re doing well, shut up about it. The problem is that they
weren’t doing well but getting paid a lot for it. And then there are
the bailout funds.

“All WS can do is keep it’s hand clean and report into shareholders
having done a good, honest job.”

The nature of Wall St makes this impossible.

Mainstreet and Wall Street - the divide

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