Wall Street's black lung disease

The main reason why Institutional Analysis works so well is that it is based on a fundamentally sound idea—if you want to predict how a person or group will act, find out how they make their living.  Not surprisingly, teachers tend to act as teachers, farmers like farmers, bankers like bankers, etc.  The reasons are many but essentially they boil down to—on critical issues, most people shape their opinions to align with those who share similar strategies for survival.  It doesn't much matter how you get off, what name you call your god, or what sort of music makes you tap your toes compared to how well your occupational category is doing in the social order.

The reason that most economists think alike is not that they all got beat with the same stupid stick in college, but that they know that if they want to become disgustingly rich, they better parrot the party lines of the moneychangers.  God help you if you accidentally get interested in the economics of labor uplift or the ramifications of environmental action because you will not get those fat six-figure honorariums.

So Institutional Analysis is highly reliable because it is based on sound operating principles.  In theory, everyone should use it often.  In practice, barely anyone has heard of it.  And there is a good reason for this—while it is easy to say teachers act like teachers, etc. actually determining their core beliefs and action agendas is hard work.

Which is why I almost never miss an opportunity to read Michel Lewis.  If you want to know just what sort of person wants to be a financial player and what hoops such folks are willing to jump through, Lewis will tell you.  Even better, he describes the common beliefs of those who have made it into the brotherhood of credit default swaps and LIBOR rigging.  So even though I have never heard Lewis describe what he does as Institutional Analysis, he is one of the better IA experts to have ever walked planet earth.

Occupational Hazards of Working on Wall Street

By Michael Lewis SEPT 24, 2014

A few times in the past several decades it has sounded as if big Wall Street banks were losing their hold on the graduates of the world’s most selective universities: the early 1990s, the dot-com boom and the immediate aftermath of the global financial crisis (Teach for America!). Each time the graduating class of Harvard and Yale looked as if it might decide, en masse, that it wanted to do something with its life other than work for Morgan Stanley.

Each time it turned out that it didn’t.

Silicon Valley is once again bubbling, and, in response, big Wall Street banks are raising starting salaries, and reducing the work hours of new recruits. But it’s hard to see why this time should be any different from the others.

Technology entrepreneurship will never have the power to displace big Wall Street banks in the central nervous system of America’s youth, in part because tech entrepreneurship requires the practitioner to have an original idea, or at least to know something about computers, but also because entrepreneurship doesn’t offer the sort of people who wind up at elite universities what a lot of them obviously crave: status certainty.

“I’m going to Goldman,” is still about as close as it gets in the real world to “I’m going to Harvard,” at least for the fiercely ambitious young person who is ambitious to do nothing in particular.

The question I’ve always had about this army of young people with seemingly endless career options who wind up in finance is: What happens next to them? People like to think they have a “character,” and that this character of theirs will endure, no matter the situation. It’s not really so. People are vulnerable to the incentives of their environment, and often the best a person can do, if he wants to behave in a certain manner, is to choose carefully the environment that will go to work on their characters.

One moment this herd of graduates of the nation’s best universities are young people -- ambitious yes, but still young people -- with young people’s ideals and hopes to live a meaningful life. The next they are essentially old people, at work gaming ratings companies, and designing securities to fail so they might make a killing off the investors they dupe into buying them, and rigging various markets at the expense of the wider society, and encouraging all sorts of people to do stuff with their capital and their companies that they never should do.

Not everyone on Wall Street does stuff that would have horrified them, had it been described to them in plain English, when they were 20. But enough do that it makes you wonder. What happens between then and now?

All occupations have hazards. An occupational hazard of the Internet columnist, for instance, is that he becomes the sort of person who says whatever he thinks will get him the most attention rather than what he thinks is true, so often that he forgets the difference.

The occupational hazards of Wall Street are more interesting -- and not just because half the graduating class of Harvard still wants to work there. Some are obvious -- for instance, the temptation, when deciding how to behave, to place too much weight on the very short term and not enough on the long term. Or the temptation, if you make a lot of money, to deploy financial success as an excuse for failure in other aspects of your life. But some of the occupational hazards on Wall Street are less obvious.

Here’s a few that seem, just now, particularly relevant:

-- Anyone who works in finance will sense, at least at first, the pressure to pretend to know more than he does.

It’s not just that people who pick stocks, or predict the future price of oil and gold, or select targets for corporate acquisitions, or persuade happy, well-run private companies to go public don’t know what they are talking about: what they pretend to know is unknowable. Much of what Wall Street sells is less like engineering than like a forecasting service for a coin-flipping contest -- except that no one mistakes a coin-flipping contest for a game of skill. To succeed in this environment you must believe, or at least pretend to believe, that you are an expert in matters where no expertise is possible. I’m not sure it’s any easier to be a total fraud on Wall Street than in any other occupation, but on Wall Street you will be paid a lot more to forget your uneasy feelings.

-- Anyone who works in big finance will also find it surprisingly hard to form deep attachments to anything much greater than himself.

You may think you are going to work for Credit Suisse or Barclays, and will there join a team of professionals committed to the success of your bank, but you will soon realize that your employer is mostly just a shell for the individual ambitions of the people who inhabit it. The primary relationship of most people in big finance is not to their employer but to their market. This simple fact resolves many great Wall Street mysteries. An outsider looking in on the big Wall Street banks in late 2008, for instance, might ask, “How could all these incredibly smart and self-interested people have come together and created collective suicide?” More recently the same outsider might wonder, “Why would a trader rig Libor, or foreign exchange rates, or the company’s dark pool, when the rewards for the firm are so trivial compared with the cost, if he is caught? Why, for that matter, wouldn’t some Wall Street bank set out to rat out the bad actors in their market, and set itself as the honest broker?”

The answer is that the people who work inside the big Wall Street firms have no serious stake in the long-term fates of their firms. If the place blows up they can always do what they are doing at some other firm -- so long as they have maintained their stature in their market. The quickest way to lose that stature is to alienate the other people in it. When you see others in your market doing stuff at the expense of the broader society, your first reaction, at least early in your career, might be to call them out, but your considered reaction will be to keep mum about it. And when you see people making money in your market off some broken piece of internal machinery -- say, gameable ratings companies, or riggable stock exchanges, or manipulable benchmarks -- you will feel pressure not to fix the problem, but to exploit it.

-- More generally, anyone who works in big finance will feel enormous pressure to not challenge or question existing arrangements.

One of our financial sector’s most striking traits is how fiercely it resists useful, disruptive entrepreneurship that routinely upends other sectors of our economy. People in finance are paid a lot of money to disrupt every sector of our economy. But when it comes to their own sector, they are deeply wary of market-based change. And they have the resources to prevent it from happening. To take one example: in any other industry, IEX, the new stock market created to eliminate a lot of unnecessary financial intermediation (and the subject of my last book) would have put a lot of existing players out of business. (And it still might.) The people who run IEX have very obviously found a way to make the U.S. stock market -- and other automated financial markets -- more efficient and, in the bargain, reduce, by some vast amount, the take of the financial sector. Because of this they now face what must be one of the best organized and funded smear campaigns outside of U.S. politics: underhanded attacks from anonymous Internet trolls, congressional hearings staged to obfuscate problems in the market, by senators who take money from the obfuscators; op-ed articles from prominent former regulators, now employed by the Wall Street machine, that spread outright lies about the upstarts; error-ridden pieces by prominent journalists too stupid or too lazy or too compromised to do anything but echo what they are told by the very people who make a fortune off the inefficiencies the entrepreneurs seek to eliminate.

The intense pressure to conform, to not make waves, has got to be the most depressing part of all, for a genuinely ambitious young person. It’s pretty clear that the government lacks the power to force serious change upon the financial sector. There’s a big role for Silicon Valley-style scorched-earth entrepreneurship on Wall Street right now, and the people most likely to innovate are newcomers to the industry who have no real stake in the parts of it that need scorching.

As a new employee on Wall Street you might think this has nothing to do with you. You would be wrong. Your new environment’s resistance to market forces, and to the possibility of doing things differently and more efficiently, will soon become your own. When you start your career you might think you are setting out to change the world, but the world is far more likely to change you.

So watch yourself, because no one else will. more