Capitalists, Socialists, and OPM

03/07/2009 05:12 am ET | Updated May 25, 2011
  • Bob Rice Managing Partner, Tangent Capital

The indignant screams still echo on Wall Street: Obama's a Socialist! As its own hometown paper puts it, the President's pronouncement that its collective $18 billion year-end tip was "outrageous" amounted to "targeting what capitalists we have left for abuse" (WSJ, Feb 2).

This is all helpful clarification, because I was getting confused. I had this fuzzy, but obviously incorrect, recollection from college that in a capitalist society it was the owners of the "means of production" who got the value created by their use.

But now I've got it: at least on Wall Street, it's the workers using those means of production (their firms' money) who are entitled to any profits they make. And, apparently, small groups of those workers are entitled to their profits even if other parts of their firms have catastrophic losses that require the owners of the enterprise to put in more money (or new owners, like taxpayers, have to be brought in) to keep the cooperative afloat. So that's capitalism. Wow, did I have it backwards!

Maybe you can understand my confusion, though. For example, I thought I heard many of these same Wall Street guys excoriating the UAW as "socialist" because its workers were making a cushy living while their employers were crashing and burning. The machinists might've been doing their jobs perfectly, but since GM made countless macro mistakes, the line guys needed to take a haircut.

Seemed right to me when I heard it, and still does... it's just that, to my uneducated eye, the situation on Wall Street looks much the same. The only real difference is that, with the agreed elimination of the jobs bank, the car industry is doing something about its entitlement culture, whereas the boys downtown are in histrionics over the idea that they shouldn't make big money unless their employer does.

Sure, I get it: this was part of the deal. Rather than earning a set number of dollars per hour, you have to generate your own business opportunities. Most bankers agree to a very modest salary, but fight like dogs to generate profits from which they'll get most of their take-home pay. So, yes, much of the $18 billion was really part of what people thought of as their salaries. And it's not the fault of the guys who did their jobs well, grinding out business without taking ridiculous risks, that their cohorts were busy playing Sky Masterson.

But like a baseball team where every batter tries to hit a home run, the Street's current compensation system generated tons of losses, even though some individual stats look good. The result, just like in the bigs, was a lot of grossly overpaid superstars on a bunch of really bad teams. No one should be shocked that the paying customers are booing everybody at the same time.

Look, there's nothing wrong with the Street's "eat what you kill" mentality. Except the bankers must remember that, in the wild, if the Tribe doesn't survive, no one eats at all (except the other tribe).

Why did Lehman survive for 150 years, through other financial crises as bad as this one, but go down just now? Because, for most of its history, its bankers were playing with their own, and their partners', money. When everyone had a lot to lose, amazingly enough, the farm just didn't get bet. More to the point, nobody had any complaint with the size of the bonuses paid out at year-end.

But the game slowly changed into one of making absurdly leveraged bets with other people's money...first, from shareholders, and now, even from taxpayers. And that's when the bankers' compensation arguments started falling out of bed.

What we have to remember is that this OPM is the means of production... just as surely as the factories are for the car companies. And that, in turn, means that workers can't have a "right" to profits generated in one corner of the enterprise when the money providers, overall, are losing.

What we need is a return to a system of very smart people working very hard and making lots of money... while helping ensure that the overall enterprise also does well. We simply must head back towards the days of collaborative risk management, the absence of which has been a primary factor in the current debacle. And certainly we have to begin to institute changes to head off more drastic remedies, like government-mandated pay caps, which would simply drive talent out of the industry.

Regardless, what we cannot have is a system that pays out huge sums to individuals because isolated areas of an enterprise do well while the overall business stinks and the shareholders (willing an unwilling) suffer. Because that would be socialism. I think.