Could Wall Street’s role in creating the recent financial crisis boil down to something as simple as a conditioned reflex? Apparently so, according to William D. Cohan, a former investment banker. Cohen writes: Wall Street “rewards bankers and traders for the revenue they generate by constantly selling whatever comes across their desks, regardless of its quality, is terribly, terribly broken. People are simple: They do what they are rewarded to do, and they will continue to do that over and over again until they are rewarded to do something else.” “Cohan: Wall Street Confesses to Bonus Culture Ills.”
Cohen’s blog features a book written by two high-dollar Wall Street recruiters called “Conversations with Wall Street.” The conversations in the book “ring true” to Mr. Cohen and he has been there. They interviewed a number of their prior placements in fixed-income trading departments. One of them said: “I’m just a moving man. My job is to move bonds off my books as fast as possible.” In other words, he sold mortgage bonds as fast as he could, regardless of quality, because that is what he was paid to do. They were very well-paid: “If we sold $1 billion, we made $5 million. ‘ We didn’t care’. We sold them to money managers, pension funds, insurance companies and hedge funds.”
Incentives like that are very powerful ? more powerful than the Dodd-Frank financial reform laws. It’s like driving at 60 mph another bond trader said. Pretty soon that feels like 30 mph and you have to go 90 mph to feel like 60 mph.
They knew the toxic bonds that imploded were going to implode. But “[a]fter they paid my bonus, they asked if I could double that and get the number up to two billion. That was what the competition was doing.” Ten guys were waiting to take his job and do it if he didn’t, and the competition would do it in the blink of an eye if they didn’t.
As Cohen warns: “[N]ot one thing has changed in what bankers and traders are rewarded to do. Until that happens, you can forget about preventing another crisis on Wall Street.
Page Perry, LLC is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.