Stop Griping About Wall Street Compensation

(Bloomberg Opinion) -- Nobody really roots for banks after what happened 10 years ago — except for maybe politicians in New York, who intuitively grasp that banks generate a lot of tax revenue. Bankers and traders aren’t the most sympathetic characters, but a lot of people have lost sight of the fact that a healthy banking system is central to a healthy economy and everyone’s well-being generally. If banks, which are poised to report results that analysts estimate will set a new high for profitability this decade, are doing poorly, it is unlikely everyone else is doing well.

I used to teach a class on the financial markets, and we spent some time talking about the role banks play in modern society. They accept deposits and make loans, which is basically reallocating funds from savers to spenders. Secondarily, they make liquid markets in securities. As such, some people view bankers simply as middlemen or glorified toll-takers, not worthy of the exorbitant pay packages that New York State Comptroller Thomas P. DiNapoli recently said reached $422,500 on average in 2017, the highest in a decade. Those views ignore the risk-taking function of a bank, such as the decision whether to extend credit or the decision whether to take a company public. Remember what a disaster the Facebook Inc. initial public offering was initially? Entrepreneurs aren’t the only ones who take risks.

The thing about banker compensation is that it’s cyclical and roughly corresponds to fluctuations in the financial markets. So before we start vilifying bankers and bringing up old arguments about how they haven’t felt enough pain for contributing to the financial crisis, take a tour of the typical trading floor in Manhattan. What you’ll find is more gallows humor than animal spirits, primarily due to increased regulation and automation that has led to tremendous jobs cuts and downsizing over the last decade. And there’s a big difference between average and median. Pay for a very small number of people has certainly gone parabolic, but for the rank and file it’s generally lower in my experience. 

Still, that doesn’t diminish the fact that Wall Street people are highly compensated at a very young age. I was 27 when I started on Wall Street, and I made what most people would consider a lot of money by the time I was 31. Was I worth it? I could easily articulate that I was when you think of it as a percentage of revenue that I generated for the firm. That’s how most people on Wall Street justify their compensation — and that’s not wrong. People who handle large amounts of money for a living need to be exceptionally trustworthy. Many of them have what I would consider peculiar attitudes towards risk, which goes with being young. I can tell you that at 44 I would be half the market-maker that I was at 31. You get old and you get conservative. 

But the biggest reason that Wall Street jobs pay so much is because they are not very much fun. Most people know about the conditions for junior bankers, from the 80- to 100-hour workweeks to the stultifying work. Traders at least work normal hours, but the stress can be unbelievable knowing that any given bear market can cause multiple waves of layoffs. 

No discussion about Wall Street compensation would be complete without rewinding back to 2009 and the Troubled Asset Relief Program, or TARP. That U.S. government program gave the Treasury Department some $700 billion to buy troubled mortgage bonds from Wall Street banks. That whole situation sparked enough political rage to last two generations. But all the TARP money has been repaid and the banks are theoretically on their own, although deep down most people know that for the biggest firms there is an implicit guarantee the government and Federal Reserve will backstop them if things go bad again.

People are accustomed to associating high banker pay with the type of stuff that went on in the last cycle, like the type of aggressive mortgage lending that creates systemic risks. And there’s evidence that in this cycle, similar systemic risks are being created in corporate credit. We’ll find out soon enough. People predicted in 2010 that Dodd-Frank Act would turn banking into public utilities — a boring business. In some respects, it has succeeded. The economy has expanded, the banking system is healthy and, as a result, bankers are sharing in the rewards. If 2008 hadn’t happened, this wouldn’t even be a topic of discussion.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Jared Dillian is the editor and publisher of The Daily Dirtnap, investment strategist at Mauldin Economics, and the author of "Street Freak" and "All the Evil of This World." He may have a stake in the areas he writes about.

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