Recent criticisms of Wall Street bonuses and bailouts—whether they express incredulous disbelief, hopeless resignation, or unfortunate necessity—somehow leave us unsatisfied. Most explanations fail to satisfy us precisely because they accept the “common-sense” understanding of Wall Street risk—an “understanding” that itself fundamentally misapprehends the culture and practice of financial risk in the United States, especially as it pertains to the most powerful members of the financial elite.
The central “common-sense” logic undergirding these accounts of “financial risk” is that high risk and reward necessarily go together with high uncertainty and loss. Actors, from small-business entrepreneurs to Wall Street investment bankers, make the rational calculation that “those who can make an opportunity from risk can quickly fall prey to uncertainty’s blows” (Martin 2007, 41). Wall Streeters represent themselves as risk takers par excellence, constantly embracing risk and not clinging to security, stability, and by extension, stagnancy. Risk takers are defined as having a future orientation, an anticipation of loss, which “must be built into any calculation of risk, rendering contentment a particularly scarce commodity” (Martin 2007, 47).
Of course, this time, as the consensus goes, Wall Street went too far, took too much risk, engaged in too much leverage, and thereby instigated worldwide crises. The pervasiveness of these assumptions explains why many of us are at a loss to understand why Wall Street investment banks were bailed out. If the risk/reward/loss bargain holds true, then shouldn’t Wall Street, the exemplary risk takers, have accepted the consequences? Similarly, consider the public’s confusion over Wall Street’s ritual of the bonus, which focuses on this quandary: how can investment bankers command such high bonuses when their practices so often generate crisis and massive socioeconomic volatility, even decline? It is only a quandary, however, if we presume the connection between reward/risk and loss/uncertainty where Wall Streeters get “paid for performance” and thus should not get paid when they do not “perform.” The fact that despite depression, they still get paid brings to light the central contradictions underlying dominant assumptions of financial risk and the unequal effects of a finance-capital dominated social economy.
Yet could it be precisely our too easy acceptance of this bargain that prevents a more serious challenge to these powerful financial ideologies? Through a brief exploration of investment banks’ bonuses and Wall Street’s bailout, I attempt to chart another approach.
A Peculiar Culture: Bonuses, Measuring Performance, and Performing Smartness
I begin with Wall Street’s bonus and compensation practices, since they are perhaps the keenest expressions of their central ethos, before I turn to a discussion of their culture of risk in particular. I ask readers to turn their attention first to this press release from the New York State Comptroller’s Office, where in January 2009, the Office of the State Deputy Comptroller compiled a table of New York City securities industry bonuses from 1985 to 2008 (see table below). Although, admittedly, there are multiple ways to interpret and contextualize these numbers, I read them as indicative of the growing influence of financial values and practices. With a cursory glance, it is striking how Wall Street bonuses have been increasing exponentially in the past two decades: in the 1980s, the “decade of greed,” bonuses hovered around a “mere” $2 billion; in the mid-1990s, around $5 billion; in 1999, around $9 billion; in 2003, around $16 billion; and in 2007, almost $33 billion! Not surprisingly, the massive rise of the total bonus pool (which is based on the number and size of financial deals generated by Wall Street investment banks) is indicative of “the financialization of everyday life,” where corporations, institutions, and even individuals went from being separated and protected from, avoiding, and/or faddishly dabbling in the financial markets to nearly conflating all their hopes and labors for growth with constant financial transactions. Financial deal making has become the routine path for corporations to “demonstrate” growth, responsibility, and success, despite the fact that such narrow strategies often led to long-term decline in corporate productivity, not to mention shareholder value volatility. Simply comparing 2007 with 1987— 32.9 with 2.6 billion—gives a sense of Wall Street’s stakes and interests in restructuring the global economy, not to mention the acceleration and intensification of the widereaching effects of financial crises.
Upon further examination, another interesting pattern and possible correlation emerges: notice how the bonuses peak and trough within the general upward climb. Reflecting on the multiple moments of crises and heightened financial market volatility that have characterized the past two decades, pay attention to how bonuses “peak” at precisely the moment of financial crisis. In 1987, bonuses culminate at $2.6 billion with the stock market crash of 1987 and the impending junk bond collapse. In 1993, bonuses rise to $5.8 billion, right before the Mexican peso crisis of 1994. In 1997, bonuses crest at $11.2 billion, at the moment of the Asian and Russian financial crises. In 2000, bonuses top out at $19.5 billion, right at the dot-com bust. And in 2006 and 2007, bonuses are at a record $34.1 billion and $32.9 billion, as the current subprime debacle implodes. Could bonuses, then, index crises; that is, could bonuses be used as an approximate predictor and indicator of impending financial disaster? In other words, to the extent that stratospheric bonus numbers demonstrate the frenzy of deal making that helps to constitute bubbles in the first place, they also set the stage for the impending crash.
Contrary to the dominant representation that Wall Streeters are masters of risk, their compensation culture indicates that they produce crises and pass on risk. Moreover, at issue here is a fundamental misapprehension of Wall Street’s practices of compensation, which is largely represented as “pay for performance.” I would argue that there is not so much a contradiction between Wall Street bonuses and the larger performance of our social economy as there is a misplaced understanding of what actually constitutes financial “performance.” Investment bankers and traders measure performance according to the number of deals executed, regardless of their impact on the corporation or society at large. Even in a recession, transactions such as selling off toxic assets or bankruptcy advice count toward the bonus.
As I argue in my 2009 ethnography, Liquidated, many of my Wall Street informants actually sensed the impending bubble burst. Through their daily practices, they often recognized that they had pushed through as many financial transactions as the markets could bear. And, yet, this knowledge did not so much curtail their deal making as it hastened their efforts to eke out even more deals that would count toward their year-end bonus. After all, investment bankers and traders themselves have jobs that are on the line, rife with insecurity. For them, a sacred cultural value is to “be one” with the market, to work simultaneously and in “real-time” with it as their cultural embodiment. They are culturally conditioned to mortgage the future through their bonuses. Of course, Wall Streeters’ experiences of financial crises and job insecurities have historically been much more cushioned than those of the average worker; they are amply resourced, highly networked and pedigreed, exorbitantly compensated, and valued as “the smartest.” As such, their understandings of what it takes to be a successful worker in the new economy, to act simultaneously with the market that they have had a strong hand in constructing, are internalized as challenges and sources of empowerment, however unstable and disruptive such standards are for most people. The dominance of short-term, transaction-led compensation schemes, the understanding that Wall Street investment bankers, as the smartest investors in the world, are deserving, and the taken-for-granted divorce of executive pay (and stock prices) from the livelihood of most workers in the service of quick shareholder value are all at work here.
Recently, we see the way bankers’ smartness is mystified and then marshaled to defend their bonuses. Despite their roles in failed deals and financial crises, bankers are depicted as indispensible, and bonuses are the crucial vehicle for retaining talent. And, precisely because bonuses are a core part of Wall Streeters’ sense of themselves, totally eliminating bonuses for still-employed bankers would be all but culturally unthinkable. Of course, the persistence of high bonuses despite Wall Street’s instigation of the global financial meltdown raises the question of who bears the brunt of high-risk practices, a question to which I now turn.
In the wake of the Russian and Asian financial crises in the late 1990s, veteran Wall Street observer Michael Lewis wondered why hedge funds didn’t lose credibility after the collapse of Long-Term Capital Management, the world’s leading hedge fund. After all, this fund had been blamed for exacerbating these crises. He wrote, “But the panic—like all panics—did nothing but strengthen the booming hedge-fund industry.” Today, almost a decade later, with Wall Street at the helm of the subprime debacle and global financial crises, it is hard to believe that Goldman Sachs just posted astronomical profits and bonuses. Goldman Sachs was itself on the brink of elimination in 2008. To the extent that Wall Street’s continual regeneration seems mystifying, I offer two explanations: one is that mainstream economic and governmental structures accept Wall Street’s key cultural values that maintain and legitimate its success; the other is that, in practice, their confidence, survival, and extraordinary risk taking are only possible through subsidy.
Surely, the smartest in the world could be trusted with risk. In fact, Wall Streeters pride themselves in going beyond the simple risk/reward/loss bargain. For themselves and investors writ large, risk is marketed as mitigated by smartness. In one sense, their investments in subprime mortgages (and hedges against it) demonstrated for my informants their smartness in inventing new sources of profit taking that circumvented and outwitted both governmental regulators and risk managers in their own firm, while seeming to address the concerns of those they had circumvented and outwitted. As many investment bankers told me, “We are so much smarter than the folks in risk management and audit.” It is important to recall that at most investment banks risk management is a middle-office function, not part of the prestigious, revenue-generating front office. As such, until the meltdown, traders and bankers in structured finance and mortgage backed securities were lionized for profiting on both sides of the trade. Unlike the conventional risk managers, who were seen as dampening profitability, front-office bankers and traders were able sell their version of risk management as products, such as credit-default swaps that would allow buyers to recoup some of their investment in case they bought loans or bonds that defaulted. (Of course, since these swaps were not actual insurance policies, Wall Street did not set aside capital reserves as collateral for these products; therefore, such risk-hedging products actually exacerbated risk globally.)
Many Wall Streeters came to believe that they had in fact “mastered” risk. An informant from Lehman Brothers told me he did not believe that Lehman would go under precisely because the firm’s exposure to subprime was offset, “hedged,” by purchases of credit-default swaps and other derivatives. A few weeks before Lehman declared bankruptcy, he continued to claim, or perhaps hope, that Lehman was “market-neutral,” that its “value at risk” balance was effectively “zero.” The firm was, in his view, smart enough to control its exposure to risk even as it plunged as deeply into the market as possible. Wall Street leveraged claims of its own smartness and in the end also fell victim to its own self-representations.
Another core Wall Street value is the privileging of market identification and simultaneity, where the creation of constant, often short-term, transactions and products are the measures of corporate success. For Wall Street and evaluators of the financial markets, the commonsense understanding is that financial architects and innovators have demonstrated the ability to create entirely new market opportunities characterized by immediate exploitation and high growth. As such, according to this culture of expediency, even those implicated in the worst excesses of hedge funds, derivatives, junk bonds, and subprime mortgages are understood to have excelled in “making markets happen,” that is, generating a market and being “in it” as of yesterday. In this ethos, market simultaneity, not wisdom, is a central goal. The very structure of Wall Street encouraged the milking of the present and thus created exactly the conditions that rendered Wall Street’s financial modeling, “protection,” and predictions obsolete. Full speed expansion into subprime mortgages and buying and selling credit-default swaps without capital reserves, more for the purpose of generating profit than protecting against risk, might be called a strategy of no strategy.
In addition to smartness and the culture of market simultaneity, Wall Street risk-taking, I argue, is produced through government subsidy and the Wall Street–Washington consensus of “too big to fail.” Let me recount a conversation with Peter Felsenthal, a bond trader at Salomon Smith Barney, in the wake of the Russian and Asian financial crises in the late 1990s. When I asked him about how the emerging market crises affected his work, he replied that his trading desk “knew” that Russia “was not sustainable.” Feeling confused, I asked why they continued to trade the foreign debt of Russia, and he replied “We didn’t get burned” because “you have all of the upside when things go well,” and “if you do poorly, you don’t owe anybody any money, so you might as well take as much risk as possible.” Thrown off-balance, I further inquired how they knew that they wouldn’t fail, and how they guaranteed “only the upside” despite their massive risks. Felsenthal calmly explained that for five years, they happily rode the bull market, knowing that in the worst case scenario, the U.S. government or the IMF would bail them out because they could not let a major country fail. “Russia is in this sort of too-big-to-fail category. So, that’s what people say at U.S. banks. With Russia’s nuclear weapons, there is no way we are going to let them fail, not a chance.”
Throughout my fieldwork on Wall Street, I would hear of Wall Street banks and their trading partners being “too big to fail.” In their worldviews, countries (or, rather, Western “investors” in these countries) and global financial institutions were too global or powerful to fail. Before Lehman Brothers (where one could argue, the “free market” worked for one day—the day they went out of business), their predictions were correct: Long-Term Capital Management, Bear Stearns, Merrill Lynch, and AIG were all subsidized. From the third world debt crisis in the 1980s to the Asian and financial crises of the 1990s, the IMF and U.S. Treasury stepped in during emerging market crises to demand policies that enhanced repayment for western creditors, and compromised economic sovereignty.
Simultaneously, as I suggested earlier, my informants often anticipated when the bubble would burst; they could sense from their own practices that they had committed as many transactions as their clients could bear. As Paul Flanagan, an M&A associate at Goldman Sachs, articulated, bankers are so worried for their own jobs and so plagued with job insecurity that their goals are to “get what you [can] out of it for a short term,” rushing to complete as many deals as possible to increase their bonus compensation. (It is important to note that what is understood to be at risk is mainly their own jobs, not the systemic risk they inflict on the financial markets.)
What I want to stress in this discussion of risk is that many of my informants anticipated not only a crash, but also an eventual bailout, on the grounds that Wall Street investment banks were “too big to fail.” Such an assumption demonstrates that, contrary to their free market discourses, investment banks embraced risk not because they had successfully hedged their bets or managed their exposure. Rather, they depend on the state to underwrite their risk and profit taking. A key question then becomes, to what extent, in the past fifteen years, did Wall Street models, expectations, and risk practices presume an eventual bailout? In my current research I entertain the provocative possibility that from Wall Street’s point of view, default no longer became a concern over the past fifteen years, allowing investment banks to reframe its risk culture and aspire to work “only on complete leverage.”
Of course, increasing the complexity of their product offerings, even to the point where they did not know what was on their own books, as well as the global spread and interconnection of their products helped to construct, enable, and codify “too big to fail.” In other worlds, financial hyper-specialization and intricacy as well as “the global” became insurance policies against their own leveraged practices and strategies to avoid regulation. It was precisely Wall Street investment banks’ involvement in and construction of global interconnection, their global spreading of risk, that both generated the crisis and assured its rescue: the more the world bought into Wall Street (from American investors to entire governments), the more leverage Wall Street had to hold the globe hostage. The complicity of our retirement funds, for example, the extent to which middle-class Americans’ security has been outsourced to the global capital markets, deters our ability to critique and reform Wall Street. What cushions Wall Street’s hard landing is not the bankers’ much-touted future orientation and risk management skills (which have largely been exposed as hype in any case) but the deliberate tethering of their fortunes to those of the global economy so that they can command state support and bailouts. It is in this light that the much-talked-about privatized gains and socialized losses make sense. It is through these subsidies that Wall Street financiers and economists believed that they had moved beyond boom and bust, that they had outsmarted crisis.
Further research on when and how “too big to fail” began is crucial to contextualize and fully analyze how Wall Street’s approach to risk in practice operates according to a no-default worldview. To the extent that the risk bargain was not a cost-benefit analysis and that losses were cushioned by definition, common cultural assumptions about risk are turned on their head. The unearthing and unpacking of such cultural assumptions would reframe the very foundations of the professed identities, skills, and even the cultural and economic legitimacy of both financial economics and finance capital.
Martin, Randy. 2007. An Empire of Indifference: American War and the Financial Logic of Risk Management. Durham, NC: Duke University Press.
Karen Z. Ho is associate professor of anthropology at the University of Minnesota. Her recent book is Liquidated: An Ethnography of Wall Street (Duke University Press 2009).