Lagging Indicators
New York magazine is an odd duck: its main obsessions seem to be the Hamptons scene and the trashy TV show "Gossip Girl" (seriously: go to nymag.com ten days in a row, and I guarantee you'll see those two words on the home page seven or eight of them at least), but they also frequently offer truly interesting features on politics, culture, and the economy. The current issue includes a story that touches upon all three: The Wail of the 1%.

In a witch hunt, the witches have feelings, too. As populist rage has erupted around the country, stoked by canny politicians, an opposite rage has built on Wall Street and other arenas where the wealthy hold sway. Its expression is more furtive and it’s often mixed with a kind of sublimated shame, but it can be every bit as vitriolic.
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Their anger takes many forms: There is rage at Obama for pushing to raise taxes (“The government wants me to be a slave!” says one hedge-fund analyst); rage at the masses who don’t understand that Wall Street’s high salaries fund New York’s budget (“We’re fucked,” says a former Lehman equities analyst, referring to the city); rage at the people who don’t “get” that Wall Street enables much of the rest of the economy to function (“JPMorgan and all these guys should go on strike—see what happens to the country without Wall Street,” says another hedge-funder).

A few weeks ago, I had drinks with a friend who used to work at Lehman Brothers. She had come to Wall Street in the mid-eighties, when the junk-bond boom spawned a new class of globe-trotting financiers. Over two decades, she had done stints at all the major banks—Chase, Goldman, Lehman—and had a thriving career directing giant streams of capital around the world and extracting a substantial percentage for herself. To her mind, extreme compensation is a fair trade for the compromises of such a career. “People just don’t get it,” she says. “I’m attached to my BlackBerry. I was at my doctor the other day, and my doctor said to me, ‘You know, I like that when I leave the office, I leave.’ I get calls at two in the morning, when the market moves. That costs money. If they keep compensation capped, I don’t know how the deals get done. They’re taking Wall Street and throwing it in the East River.”

Now, a lot of people in New York have BlackBerrys, and few of them expect to be paid $2 million to check their e-mail in the middle of the night. But embedded in her comment is the belief shared on Wall Street but which few have dared to articulate until now: Those who select careers in finance play an exceptional role in our society. They distribute capital to where it’s most effective, and by some Ayn Rand–ian logic, the virtue of efficient markets distributing capital to where it is most needed justifies extreme salaries—these are the wages of the meritocracy. They see themselves as the fighter pilots of capitalism.

"Fighter pilots of capitalism" is a great phrase for it, implying a taste for danger, an esprit de corps, and a frank realization that sometimes you get splattered all over the sky. It also captures the grandiosity of the traders' pretensions: after all, they aren't facing off with the fate of western civilization at stake--they're moving money around. And when they get shot down for making a mistake, others bleed for it.

I don't have tremendous sympathy for the complaints of the Wall Streeters. (Does anyone?) But one point any honest observer must acknowledge is that these people operated under a set of rules and assumptions that, while things were going well, relatively few people took issue with. (Take it from a New Yorker who does understand, painfully, how much our city budget has come to rely upon Wall Street bonuses.) It would be only a slight exaggeration to say that society at large mirrored and cheered on the bankers. We now despise them for doing pretty much the same things for which three years ago they were lionized.

As Washington denuded the regulations that had constrained finance, the banks themselves encouraged their employees to pursue maximum risk. Bonuses were paid based largely on short-term profits. “It was the culture of what some called IBG-YBG: I’ll be gone, you’ll be gone,” says Jonathan Knee, a senior managing director at Evercore Partners. Wall Street championed the ethos of “Eat what you kill.” The most aggressive employees, those who took the greatest risks, thought of themselves less as members of a firm and more as independent contractors entitled to their share of the profits. In this system, institutions tended to be hostage to their best employees. “The feeling is, if people don’t get compensated adequately, they’re going to go out and do this on their own,” says Alan Patricof, who founded the private-equity firm Apax Partners.
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I asked [an industry veteran] what will happen if Congress succeeds in regulating compensation. “These guys will not work on Wall Street,” he says flatly. “People go to Wall Street out of greed. When I was interviewing for jobs, frequently some form of the question came up: How much do you want to make money? If my answer was something like—and it wasn’t—but if my answer was, ‘I’m here for intellectual betterment,’ their response might have been, ‘University is a great place for you.’ They want people who think ‘I’m greedy, I want to be a billionaire.’ That was viewed as a really good thing.”

I would like to think that the trauma of this recession will lead to some degree of cultural change in the financial sector. But this doesn't seem particularly likely, given the ongoing prominence of industry leaders and sympathizers among top policymakers, and maybe it's not even entirely desirable. Capitalism runs on, if not greed, then certainly self-interest; the whole idea of the invisible hand is that we collectively do better as each of us attempts to better ourselves individually. Perhaps the answer isn't to reform Wall Street, but to more effectively circumscribe its activities and the risks we allow it to run on the collective behalf.