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University of Minnesota

Up against the Wall Street

August 27, 2009

Karen Ho.

In her new book, University anthropologist Karen Ho describes the Wall Street mentality.

Photo: Patrick O’Leary

An anthropologist's view of the investment banking mentality

By Deane Morrison

A world where the job market for highly skilled workers is a revolving door, firms get sliced or spliced every day, and bonuses depend on the quantity—not the quality—of deals a banker can swing.

That’s Wall Street, a Wonderland of insecurity. And to those in the swim of it, it’s normal.

So claims University of Minnesota researcher Karen Ho in Liquidated: An Ethnography of Wall Street, a new book that reveals the elements of the financier psyche that helped generate the recent financial crisis.

An associate professor of anthropology, Ho says a “culture of liquidity” has arisen on Wall Street over the last three decades. In that culture, no institution or job is sacred and the only goals are to increase short-term stock prices and generate a record flow of deals by encouraging corporate clients to restructure.

However, says Ho, “it’s not how financial markets always must behave.”  

Ascendance of the shareholder

One root of the current trouble lies in the philosophy that corporations should put increasing short-term value to shareholders above all other considerations. But it was not always so.

“In the mid-20th century and into the 1980s, if [corporations] contributed to communities, stability, and long-term employee careers, they could rationalize that these practices would, in the long term, increase shareholder value,” Ho explains.

“With the takeover movement, suddenly a corporation had to be very concerned about its stock price, because if it wasn’t high and continually rising, it could be bought.”

“But the reinterpretation of shareholder value says, ‘If you are not constantly—and only—making the stock price jump, you are betraying shareholder value.’”

Ho argues that this is likely to decrease shareholder value in the long run.

Splice and dice

In Wall Street’s view, corporations must, at all cost, get more money for their shares “now,” says Ho. Short-term gain for shareholders trumps employment, and profits can’t be shared with employees because they belong to shareholders. No matter that a merger or a selloff would wreak havoc with a corporation and its employees; if it will increase stock prices, it must be done.

The ‘80s takeover craze sparked a massive shift from regarding a corporation as a long-term social institution to thinking of it as a fungible site for constant shareholder value appreciation, Ho says. No longer are corporations parts of the societal infrastructure, but mere collections of shares in temporary portfolios.

“With the takeover movement, suddenly a corporation had to be very concerned about its stock price, because if it wasn’t high and continually rising, it could be bought,” Ho explains. Bought, merged, or sold off in pieces—any transaction that would make work for financiers and raise stock prices.

Broken wheel and deal

If that weren’t enough, investment bankers who swing these kinds of deals reap bonuses based not on the quality of the deals but on the sheer number.  

“Deals aren’t tied to long-term stability or productivity,” Ho notes.  

The record bonuses posted by many investment banks before the last few financial crashes correlate tightly with the number of unsustainable deals marketed to corporate America, she says. Also, new financial instruments like junk bonds, derivatives, and policy deregulation made Wall Street deal-making and over-leveraging, especially in the mortgage market, easier than ever.

It may be fine for financiers making $300,000 a year plus $500,000 in bonuses to be fired with shifts in investment banks; most can easily survive until the next shift lands them another job in the same neighborhood: New York’s financial district.

But not so on Main Street.

“The ‘culture of liquidity’ bankers used to thrive on is based on a relatively privileged model,” says Ho. “The culture, especially the [big] bonuses, allows a cushioned and challenging revolving door.“ But applied to the average worker, this model causes “social violence,” including downward mobility and unemployment.

Off the treadmill

Breaking this culture won’t be easy, Ho says. With mutual funds, 401k’s, and other pension funds tied up in the stock market, change must be cautious.

“We need to first rethink the social safety net,” she says. “What other opportunities are available for retirement savings? Unless you … begin to build a social safety net that’s not tied to the stock market, radically restructuring American dependence on bubble culture being the norm—which I think needs to happen—will upset the apple cart."

For one thing, the nation should rebuild the firewall between the securities markets and other markets, such as commercial banking and insurance, Ho says. Reinstituting the Glass-Steagall Act, which was repealed in 1999, would keep regular banks from playing the stock market and would have prevented AIG from going under because “an insurance company couldn’t have engaged in financial derivatives.”

But Ho sees rough sledding ahead.

“I think these changes will be very difficult to make,” she says.

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