What do Somali pirates and American investment bankers have in common? (Hint: It’s not lipstick.)
This coming week, America and the world will grapple with two hostage crises. The first involves pirates. If we don’t hand $20 million over to the small band of Somali fishermen who seized the Ukrainian ship the MS Faina, we risk an explosion of the armament stocks and valuable battle tanks that lie in its hold. When asked if he feared death, the pirate spokesman replied, “you have but one life to live.”
The second group of extortionists lack speed boats, RPGs and scaling ladders but compensate with their clout in Washington and the media. If we don’t pay up, the global economy could very well tank. And despite a demand 3,500 times larger, they got their ransom because, for better or for worse, the marines cannot storm the citadels of Wall Street and force the hedge fund managers to re-open the lines of credit.
In his 2005 letter to the shareholders, Warren Buffet tells a story about a hypothetical family, the Gotrocks, who own every American corporation. For years, as they sat and re-invested their gains, the value of their holdings increases. All is good. One day, however, they are approached by some fast-talking “helpers.” These agents offer individual members the opportunity increase their relative wealth by buying parts of their holdings and selling them to other members of the Gotrock family.
The Gotrocks follow their advice, but see no change in their actual returns, except the helper fees. The helpers quickly multiply. Their ranks grow to include “Manager Helpers” to help them pick stocks, “Consultant Helpers” to help them pick their helper and, finally, “Hyper-Helpers” who promise that, if paid sufficient quantities, their special status of “Hedge-Fund” or “Private Equity” will make them money.
The Gotrocks returns do not increase. In fact, in 2005, the Gotrocks, or in our not-so-hypothetical world, investors in the American economy, were losing 20 percent of their total returns for, well, nothing.
The lesson follows: If you’re lucky or if you’re really smart, your stocks can outperform your neighbor, but, for America as a whole, the financial district does not make wealth, it manages it, and their fees constitute frictional costs, not investments.
I won’t contest his wisdom, but the Sage of Omaha may have been a little harsh. Somebody needs to crunch numbers and decide which companies merit investment and which do not. But do they merit a full fifth of our GDP and $300 million salaries for the service?
Ironically, there’s no concrete way to know. As our pre-eminent analysts, Wall Street decides what Wall Street is worth. Furthermore, their control of America’s finances means that their panic over the future of their banks allows them to shut down lines of credit to all those businesses which actually do build factories, provide services or invest in new technologies.
There’s a catastrophe right now in America, but it’s not the death of the American economy; it’s the collapse of the financial industry.
It might be time for a fall. A society and economy under stress cannot afford to spend such a large proportion of its resources on a sector that does not add any value. In a gross mismanagement of resources, high salaries suck countless undergraduate students of the highest caliber into the i-banking world of number crunching and 90 hour work weeks.
The finance bubble needs to pop. With Wall Street as their ship, I-bankers, like the pirates, are the only ones who can restore the confidence in the American economy that they have taken hostage. And after the bailout, we ought to let the financial industry downsize. Otherwise, we’ll be putting off — rather than confronting — Wall Street’s Day of Reckoning.
Nicolas Kemper is a sophomore in Pierson College. He is a staff designer for the News. Contact him at firstname.lastname@example.org.