Changing Wall Street's Culture(?)

By Doctor Comrade

Writing for The Atlantic, William D. Cohan asks "could Wall Street’s deepest flaws be cultural, promulgated over generations by leaders who have chosen to reward those who cut corners, stab colleagues in the back, and engage in otherwise unethical behavior?" He cites extensively from a study that was recently published in Nature, attempts to quantify how social norms are altered by professional identity. In this case, the researchers were interested in how honesty could be affected by people whose professional identity is banking. What the study's authors and Cohan argue is that bankers or banking culture seem to have a predilection towards dishonesty: "Our results thus suggest that the prevailing business culture in the banking industry weakens and undermines the honesty norm."

Cohan then turns his attention to Mark Carney, former Goldman Sachs managing director and current governor of the Bank of England, who "has been at the forefront of an effort to change banking culture." Carney "described a fundamental change he had noticed in the banking ethos in the years leading up to the crisis. The relationship between bankers and their clients—once the bedrock upon which the industry was built—had been steadily eroding." William Dudley, the president of the Federal Reserve Bank of New York, has also blamed Wall Street culture, saying “ongoing occurrences of serious professional misbehavior, ethical lapses, and compliance failures at financial institutions” has resulted in Wall Street losing the public trust. But where Lloyd Blankfein and Jamie Dimon have failed to significantly change their business interests or strategies, Cohan praises Morgan Stanley CEO James Gorman:

"The centerpiece of Gorman’s strategy has been to double the size of the firm’s business managing people’s money, which generates predictable annual fees, and to deemphasize the swashbuckling, risk-taking bravado that had been the signature style of his predecessor, John Mack. Out went the proprietary traders and in came the wealth managers.... Morgan Stanley scaled back its commodities business and has been shopping its oil-storage-and-trading business. The firm has also reduced the amount of capital that individual traders have at their disposal, attempting to avoid a repeat of the situation that occurred in 2007.... (Many traders in fact have left the firm as a result of lower pay, long-deferred stock compensation, and the threat of bonus clawbacks.)…. Gorman’s efforts may prove more enduring.... While the firm’s reported profit last year was substantially lower than JPMorgan’s ($6.2 billion compared with $21.8 billion), its stock rose nearly 24 percent in 2014, making it one of the best performers among Wall Street banks."

Cohan concludes with an optimistic view toward the future, commenting that "Perhaps we really are nearing the time when Wall Street bankers, traders, and executives will decide they have no choice but to change their behavior. Having worked in banking for 17 years and reported on it for another 11, I certainly detect a slightly humbler and more reflective tone coming from the corner offices of Wall Street skyscrapers these days."

However, Cohan is fundamentally wrong about what is driving Wall Street bankers to change their behavior toward a more socially and economically responsible model. His optimism is misplaced because bankers are not changing their behavior with the best interests of society in mind; they are changing their behavior to ensure steady profits, increased growth of market share, entrenchment of traditional controls over Wall Street, and avoidance of state regulation. Even if we concede that they are changing their business culture to reduce risk and volatility, they are doing so only to maximize returns in the short and long terms.

“The free market core mythology to which both political parties in this country and just about all mainstream commentators are wedded to argues in effect that—and here I’m kind of paraphrasing John Maynard Keynes because he said this too about free market capitalism—the free market mythology argues that the most ruthless, selfish, opportunistic, greedy, calculating plunderers applying the most heartless measures in cold-blooded pursuit of corporate interests and wealth accumulation will produce the best results for all of us through something called the invisible hand.” – Michael Parenti.

"Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone." – John Maynard Keynes.

By changing business culture, Wall Street bankers are seeking only to improve their own positions in the free market. This may encourage growth, as Cohan suggested in his analysis of the expansion of wealth managers, because more businesses will have access to financial services and loans. But more importantly, growth reinforces the crisis of capitalism because it relies on perpetual growth and exploitation. Moreover, less risk means that from year-to-year, these firms will have more consistent profits and safer avenues by which to extract money from the economy. This ensures that these firms of wealth managers will also be increasing their own wealth.

Additionally, as Cohan noted, the bank run by Gorman saw its stock price increase 24%, so even though it wasn't the most profitable, it was one of the best performers. This bodes well for Morgan Stanley's stock holders and investors and customers, surely, but it also means that Morgan Stanley is now better positioned to increase its share of new and existing capital in the market place. Gorman, like Oakland Athletics GM Billy Beane, is certainly exploiting a market vulnerability, something that other risk-taking CEOs haven't embraced. If changing Wall Street culture in a very particular yet still capitalist way results in steadier profits and consistent growth, then it follows that this change in "culture" still reflects capitalist imperatives and prerogatives. If wealth management is the new on-base percentage, then Gorman is simply exploiting a facet of the market for the benefit of his company. This is hardly a surprise, of course, because that is his entire job. So why, then, would Cohan praise him like he's made some kind of groundbreaking discovery about the essence of banking and wealth accumulation?

More importantly, these kinds of "cultural" changes reflect not merely a tool for consistent profits but also a transparent form of "self-regulation" that could ward off efforts by the Securities and Exchange Commission to regulate bankers--a manifestation of the invisible hand at work. Dodd-Frank was possibly the most sweeping change since the Great Depression, and yet the banking system remains relatively unaffected, prompting presidential hopeful Bernie Sanders and Senator Elizabeth Warren to continue trumpeting the progressive calls for further reforms. In essence, the banking sector may have come under closer scrutiny, both in terms of regulation and public attention, but it remains largely free to conduct business any way it can and then write off the measly fines as the costs of doing business. However, if banks can avoid fines and regulatory oversight by reducing their risky activities, then it also follows that they can increase profit margins further. They would avoid not only fines but litigation costs and public opprobrium.

Parenti argued that these are the rational outcomes of an irrational and amoral system. Perhaps we see irrationality differently, but I find these maneuvers to be highly rational, based completely in self-interest, and exploitative of both investors and customers. Their morality is also quite clear: the profit motive remains the centerpiece of their business ethos, while capitalistic sycophants praise them for "cultural shifts" that don't actually change culture but certainly result in shifting profits upward.

Instead, these behavioral changes should be called what they are: profiteering. For that reason, they can't be trusted to take into account the best interests of society. These ruthless, opportunistic, greedy, calculating plunderers have only corporate interests in mind, whether they be growth, market share, or profits. If any non-banker happens to reap the benefits in the short term, they must be wary of the capricious nature of corporate interests which may render that person obsolete when the newest market innovation emerges. We must continue to treat their claims with skepticism. Parenti neatly observed that they believe a rising tide lifts all boats, which is extremely inconvenient for all those who lack the capital to have boats.