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Shadow Elite: Wall Street Culture - They Still Don't Get It (Except Their Bonuses)

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By Linda Keenan and Janine R. Wedel

Have the overpaid, tin-eared members of the financial elite been humbled in the past 2 years, or fearful of coming reform? Hardly. Here's a bit of an angry email floating around Wall Street this spring.

Go ahead and continue to take us down..What's going to happen when we can't find jobs on the Street anymore? Guess what: We're going to take yours. We get up at 5am & work till 10pm or later. We aren't dinosaurs. We are smarter and more vicious than that, and we are going to survive.

Now Wall Street is "popping Champagne" over the gaps in the bill, says one reporter, and maybe not just metaphorical Champagne, either. Arianna Huffington this week noted the resurgence of luxury spending and CEO perks even as the economy staggers. The perks include country club dues, chauffeured drivers, and even "personal financial planning". Why would top players need financial planning? They seem to succeed and thrive no matter their track record, one of the disturbing trends Janine tackles in her book Shadow Elite.

Tales of excess spark outrage, and justifiably so, but the way executives and Wall Street managers are paid is as dangerous as it is garish. As President Obama put it in his Wall Street reform speech, "perverse incentives" encourage players "to take reckless risks". Where did these incentives, values, the attitude seen in that email come from, and will financial reform change anything? Those who study the issue have far more dramatic reform ideas than Washington does, proposals Wall Street would call draconian and the rest of us would call common sense.

One intriguing voice on Wall Street compensation culture is, like Janine, an anthropologist: Karen Ho, author of Liquidated - An Ethnography of Wall Street. She worked on Wall Street herself, and was struck by something that Janine also finds in Shadow Elite: for today's power brokers, the only constant is change, and ultra-flexibility is now imperative for success. A high-powered think tanker put it this way in Shadow Elite:

I tend to operate in a 'just in time' mode, sort of like Toyota, because I realize that busy, important people tend not to plan ahead much. They tend to pivot this way and that in a high- flex mode given constantly changing priorities.

Ho sees similar attitudes among Wall Street traders and bankers, whom she calls "liquid" workers. Layoffs are common even during boom times, and Wall Street has accepted, embraced the idea that jobs might change fast or disappear. (Until 2008 at least, there was almost always a new banking job to be had.) That "here-today-somewhere-else-tomorrow" mentality has led to the cult of the annual bonus, and the focus on making as many deals as possible in the moment, regardless of the deal's actual long-term merits, its effect on the parties to the deal, the firm, or on the broader society or economy.

That focus on the short-term comes along with what Ho terms, in May's Anthropology Now:

a sacred cultural value....to 'be one' with the market. Even those implicated in the worst excesses [of risk] are understood to have excelled in 'making markets happen'. In this ethos, market simultaneity, not wisdom, is a central goal.

For Janine, who spent decades studying eastern Europe, this recalls behavior she saw in the chaotic scramble for power and resources just after the fall of communism: power brokers operated in the moment, taking what they could, because tomorrow their standing and opportunities very well might change.

These opportunities might open up for weeks or months, only to close as someone else cornered them, laws or other circumstances changed, or better openings came along. The ambitions and activities of the players of eastern Europe were frequently unfettered by rules and regulations because such restraints did not exist. Bending the rules that did exist was the norm, not the exception, and those who got away with it often were not thought by their peers or themselves to be unethical, but savvy. Loyalty was to oneself and one's allies, not to any institution.

In Shadow Elite, Janine argues that top players in the West today have a similar modus operandi. And Ho zeroes in on that rule-busting attitude on Wall Street: that deal-makers valued "their smartness in inventing new sources of profit taking that circumvented and outwitted both governmental regulators and [internal] risk managers." Indeed, a banker who didn't push the limits of risk would be considered dead wood. He wouldn't benefit in pay or stature by being prudent. And with the perception of job insecurity, bankers feel they have a perfectly rational reason to focus singlemindedly on that bonus, with myopic decisions that would soon prove dangerous.

Has the worst crash since the Great Depression upended that culture? Ho has seen no substantial shift. She says "because bonuses are a core part of Wall Streeters' sense of themselves, totally eliminating [them] would be all but culturally unthinkable." Unthinkable, but perhaps necessary. Ho thinks to prevent the next crisis, bonuses need to be linked to long- term corporate productivity or shareholder value.

Raghuram Rajan, finance professor at University of Chicago's Booth business school, a bastion of free marketeering no less - goes even further. He's won praise for his dead-on assessment, years before the crash, that Wall Street pay practices were inviting disaster. And he surprised some by arguing in the Financial Times that "significant portions" of bonuses be held in escrow until the full effect of a manager's risk-taking decision can play out. If they play out badly, a manager should pay, their compensation should be "clawed back".

And what about compensation culture among CEOs in corporate America? Back in 2002, John Cassidy in the New Yorker recalled a time that is almost hard to fathom at this point: when, instead of a laser-like focus on the stock price, "many chief executives saw their main task as overseeing the welfare of their employees and customers."

That changed in part because companies started paying CEOs with stock options, which was supposed to align the interest of shareholders with that of the chief executive. In practice, top managers were tempted to mislead investors, and boards could play with option dates and prices to give senior management maximum personal gain. And, like their peers on Wall Street, CEOs took on a more short-term focus: they sought to keep the stock price high at the right times, at the expense of long-term wisdom.

Former Federal Reserve Chairman Paul Volcker summed up the new CEO value system to Cassidy:

...corporate greed exploded beyond anything that could have been imagined in 1990...traditional norms didn't exist.

That's a staggering culture shift in just more than a decade, and shifted even further in the decade that followed.

[One can see this disconnect from "traditional norms", and perhaps even common decency, in a damning Wall Street Journal report: that in the month after 9/11, many companies rushed to exploit the downturn - doling out lower-priced options to managers, 2.6 times as many as the year before. Had these execs instead chose to actually buy stock rather than take options to buy later, this might have been a powerful vote of confidence for a deeply shaken market, and nation.]

CEOs also seemed intent on appearing "bold", as Linda saw working in TV business news in the mid to late '90's, presumably to impress the board and warrant bigger raises. This became a central animating force in a CEO's identity, and core identity is not easily changed. That attitude brought a shift in how managers both treated and viewed their employees. CEOs who slash payrolls might get called "dynamic"; ones that do not might be viewed as "lumbering" (Ho makes this point as well.) Those "dynamic" CEO's might be (personally) rewarded with a pop in the stock price, even if that layoff wasn't a good long-term decision.

Ho believes the ideal of constant change permeated from Wall Street, through its advisory role to corporate America, and that consequently managers now think of all workers as "liquid". This also fits in with Janine's findings: that today flexibility is everything, employees are expected to constantly reinvent themselves, take job insecurity as a given, go where the wind takes them. Easy, perhaps, for well-heeled Wall Streeters. Not so easy for middle America.

The bankers may like to show they prize flexibility, but try telling them they should change bonus culture. On that score, they will not bend. But they needn't worry - the Champagne will still flow; Washington isn't going after bonuses. Financial reform doesn't clamp down executive pay, not much more than giving shareholders more of a "say in pay", in the form of non- binding votes on compensation packages. Hard to see how that will disrupt a culture of self-interested players who, as Ho says, seem to "produce crises and pass on risk."

Indeed, many on Wall Street expressed shock that the board of Goldman Sachs gave CEO Lloyd Blankfein what Wall Street viewed as an extremely modest bonus in 2009. How modest? Just 9 million dollars.

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