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Wall Street Occupies Itself

Ripples of panic should be spreading through New York City Hall and the Ivy League as staffers and students pass around photocopies of this story from the always informative FT. Morgan Stanley CEO James Gorman has some thoughts about the financial industry: too many people work in the sector and they are making too much money. People need to be fired all across Wall Street, and the pay of those who remain needs to be cut.

Saying that a new era of tougher management on Wall Street (powered by shareholders tired of watching banksters walk away with most of the profit) has arrived, Gorman told the FT that the financial sector has coddled employees at a time of overcapacity and declining margins. Automation and other changes in the financial sector have reduced the demand for highly skilled financial professionals, but the banks kept raising their pay.

Thousands of jobs are being cut across the industry, many in high cost locations like New York and London. We could now start to see pay cuts and bonus cuts for more of the jobs that remain.

There are lots of reasons for high pay in the financial sector. The best people in it can make a lot of money for their firms — but talent is mobile. The smartest people or the best traders in your shop can easily walk across the street to your competitor. You need to keep them happy, and that doesn’t mean sending them flowers on their birthday or instituting a casual Friday policy.

But while the superstars will always make money, many grunts on the Street are extremely well paid, and it is these folks who are likely to feel the brunt of a new age of (relative) austerity. What seems to be happening is that the world of investment banking is slowly adjusting to the rise of a new force on Wall Street: shareholders. In the old days. the big investment firms were mostly partnerships run by owner-managers. The need for much larger capital pools (and the recognition by many insiders that they could make huge personal profits by taking their firms public) led to the gradual conquest of Wall Street by publicly owned and traded companies.

For a while, the ethos and practice of Wall Street continued to reflect the old partnership culture, but the structural imperatives of stockholder ownership are making themselves felt. Increasingly, CEOs are going to have to think less like partners divvying the loot among key producers and more like Gorman, managing their workers for the sake of their shareholders.

As long as the general level of Wall Street compensation remains elevated, it’s hard to be the first firm to cut pay. The talented employees will bolt and you will have a hard time recruiting the brightest kids. But in spite of this, automation and competition from cheaper locations and, ultimately, from nimbler firms will force Wall Street wages down from the heights.

There’s nothing wrong with bringing what people used to call the green eye shade types to Wall Street; while Via Meadia doesn’t wish anybody a pay cut, the economic justification for Wall Street’s elevated salaries seems weak. And from a social point of view, the country would be better off if more of our brightest kids were working to build something besides complicated investment vehicles. Any transfer of wealth from Wall Street employees to shareholders on balance will help shore up the country’s pension funds and help more Americans make more money on their investments. None of that bothers us very much, and we suspect that the country can survive a sudden cool down in the Southampton real estate market.

But if Morgan Stanley’s CEO is right, and this is where finance is headed, New York city and state could face some lean years. The high cost governance models of both the city and the state are deeply dependent on high income taxes paid by workers in the financial sector. If that sector really starts consolidating and pinching pennies — and it should — then the city and the state will be looking trouble in the eye. Partnership firms might stay in Manhattan despite its high costs because the partners liked living in the city; publicly traded firms may set less store by the preferences of employees.

There will still be many ways for smart people in finance to make a killing, but we could be moving into an era when a job in investment banking is no longer a ticket to über-wealth. Most investment bankers at large used not to be much richer than successful lawyers and top tier doctors; if Gorman is right about the new dynamics we could well see a return to something like that.

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