Why Wall Street Matters by William D. Cohan
A funny thing happened whilst I was reading WHY WALL STREET MATTERS. I was partway through a chapter, when I suddenly realized, “Hmm, this guy seems to know what he’s talking about.” I stopped reading, and read the author’s bio. At that point, I realized why the story seemed so vivid—it’s because the author has played a “hands-on” role in the industry.
As I read more, it became clear that William D. Cohan is an expert in this field. (And of course, a best-selling author, as well.) Of course, that doesn’t mean that the reader will agree with everything he writes—but the man knows what he is talking about, and writes with authority.
This book theme is the big bank bailout--why it happened, and what we should do to fix it. Here’s the essence of Cohan’s argument: The meltdown was due to a problem in INCENTIVES. In years past, investment bankers had a personal stake in their firm’s investments. So, if the firm made a dumb bet, they would personally pay the price: “The risk taking was designed by its partners to be prudent.”
In recent years, investment banks drastically changed. This has led to perverse incentives and risk-taking that would never have occurred before. Now, the bankers began to take huge risks with OTHER PEOPLE’S MONEY. The author likens this to “Swinging for the fences.” As one nefarious example, “in 2015 alone— thanks to Milken— nearly $372 billion was raised globally for companies with less-than-stellar credit ratings.”
So, yes, Cohan argues, we need to make changes in banking regulations, but not just more rules—we need to change the INCENTIVES so that bankers have more “skin in the game.” Here’s how Cohan sums it up: “The overarching necessity is to regulate Wall Street in such a way that preserves the things that it does right while also making sure that the people who work there have the correct incentives. . . “
A really interesting part of the book is the history of New York banking, and even the “Wall.” I had no idea that Wall Street came from a real wall, “composed of twelve-foot-high wooden logs— that the Dutch inhabitants started building in April 1653, with the help of African slaves.” It was a massive wall-almost half a mile.
To my dismay, I also learned that the New Amsterdam (later renamed New York) colony was “the largest ‘slave-holding city’ in the northern colonies. For fifty-one years, between 1711 and 1762, Wall Street housed the colony’s well-established slave market. . . At any one time, fifty slaves could be found being bought and sold in the structure.”
Alas, what a tragic part of New York history that we should know about. I wish it wasn’t true, but it is.
The author spends much time explaining how and why the “bailouts” of 2008 happened. Cohan reminds us that the government made money out of the bailout—to the tune of $15.3 billion. I confess I didn’t know that.
“The banks that received the billions of dollars in cash infusions from the government not only paid the loans back with interest but also paid billions more to the government. ."
We should be careful, the author argues, before wrecking the world’s most envied banking system, by applying a “fix” that has nothing to do with the crisis. Here’s another key point—albeit a little bit on the technical side.
“The causes of the 2008 financial crisis had nothing to do with the fact that there wasn’t a wall separating commercial banking from investment banking, so why in the world would the right answer be to erect a new one now?”
WHY WALL STREET MATTERS is a well-organized book, and a fairly easy read. You don’t have to be an economist to appreciate this book. My favorite parts are the history of Wall Street—especially the infamous “Wall.” I learned a lot about the history of our stock exchange, the U.S. banking system—and even the history of slave trading.
I think Mr. Cohan makes a lot of good points. The author writes very clearly, and makes a strong case for changing the incentives for Wall Street investment banks, to remove the crazy incentives to “swing for the fences.” I’m afraid, however, that the public animus against Wall Street is currently so strong, that the author’s arguments might well be overlooked.
I thought this one sentence summed up the author’s theme:
“The fix for Wall Street should be directed at its compensation system, not at the functioning of Wall Street itself. It’s really as simple as that.”
Advance Review Copy courtesy of the publisher. Photos courtesy of Pexels.