William D. Cohan | Commentary Imagine if you could hear directly, albeit anonymously, from the normally secretive bankers and traders who manufactured and sold the trillions of dollars in toxic debt securities that pushed the world’s financial system to the
William D. Cohan | Commentary
Imagine if you could hear directly, albeit anonymously, from the normally secretive bankers and traders who manufactured and sold the trillions of dollars in toxic debt securities that pushed the world’s financial system to the brink of disaster in 2008.
Would they defend themselves and their actions, or show a degree of remorse for what they caused and have not been held accountable for?
Well, you can find the answer to that question in “Conversations With Wall Street,” a compact — and largely overlooked — book by Peter Ressler and Monika Mitchell published last year by FastPencil Premiere, in Campbell, Calif.
Ressler and Mitchell worked together at a Wall Street executive search firm that specialized in finding senior people for fixed-income trading departments. They placed in their positions of leadership many of the bankers and traders who ended up causing the financial crisis we are still trying to recover from.
“In the beginning of the crisis, we were as horrified as anyone else,” Mitchell wrote in the book’s preface. “Just like the general public, we along with many others in the finance world, were outraged and furious at colleagues who had damaged, if not destroyed, our livelihoods.”
The pair set about interviewing some of the people they had recruited and placed in positions of power to “bring a deeper understanding” of how Wall Street works “stripped of its glamour.”
It ain’t pretty. For instance, there is “Stan,” one of “those guys Main Street loves to hate,” whose job was to trade mortgage-backed securities. He did that for 10 years until his firm imploded. He got paid more than $1 million a year. “I’m just a moving man,” he told the authors. “My job is to move bonds off my books as fast as possible.” He gave little thought to whether the underlying value of the homes — the mortgages from which he traded — had risen beyond realistic levels, making the securities he sold terribly overvalued.
“The whole game was about price appreciation,” he explained. “We weren’t concerned about the value of the housing markets, just the products offered. We are in the moving business. We buy loans and securities and move them within two months.” He continued: “We sold them to money managers, pension funds, insurance companies and hedge funds. This was a seller’s market. We got paid fifty cents for each hundred dollars sold. If we sold $1 billion, we made $5 million. … We didn’t care.”
Another interviewee, “Sean,” was the co-head of the fixed-income division of a major Wall Street firm, where he was on the management and executive committees. In his late 40s, his net worth was more than $100 million. He said he saw some risks coming in the mortgage market, but he could not persuade his colleagues to slow down.
“There are a lot of people on and off Wall Street who are responsible for this crisis,” he explained. “One of the main reasons it happened is because the Street got velocitized.” By this, he meant as risk ratcheted up and became the norm, greater risks needed to be taken to get the same adrenaline rush bankers and traders felt originally. He likened it to driving a car, first going from zero to 60 miles per hour — “you can feel the speed as it increases,” he said — but then 60 feels normal so you have to start driving 90 or more for the same feeling of acceleration. “But now you are cruising at a very dangerous speed,” he said. “The level of control you have over the vehicle you’re driving is substantially reduced. When the car crashes, there are usually no survivors.”
Then there was “Greg,” a senior executive of a Wall Street group that manufactured and sold billions of dollars of mortgage-backed securities crammed full of mortgages made to subprime borrowers. Ressler spoke with him in early 2008 as the crisis was reaching a peak. Greg’s boss had been fired, and he was left alone to manage the portfolio. “I haven’t slept in months,” he told Ressler. “I toss and turn all night. I know this stuff is going to implode.”
Ressler wanted to know how Greg could keep selling the securities to investors at par knowing how lousy they were. “I had no choice,” he said. “If I don’t do it, somebody else will. There are at least 10 guys that would give their right arm for my seat. Besides, if we let up for one second, the competition would take the business in the blink of an eye.”
What Ressler and Mitchell have elicited from these bankers and traders rings true to me. During my 17 years on Wall Street, no one ever got rewarded for questioning whether what we were all selling — I was selling merger advice — was right, wrong or indifferent. Our only rewards came from selling our services, day in, day out. We hoped what we were doing was ethical — and legal — but there was no upside in questioning authority or what we sold or how we sold it.
What is painfully clear from Ressler and Mitchell’s transcripts is the incentive system on Wall Street that 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.
Now, four years after the crisis started — and despite the Dodd-Frank law intended to reduce the risks on Wall Street — not 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.
William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist.
