Why is wall street bad

Instead of occurring in seconds, the process could take hours or days. Pricing the security would also be difficult. Why You Should Care: If investing was less efficient, then it would be more costly. This would mean that investors wouldn't be able to afford to dedicate as much capital to investing.

Firms would receive less of that capital and growth would be slower. This means a slower economy, fewer new jobs, and less innovation.

How They Do It: Wall Street firms provide advice to businesses and individuals with capital who want to invest it. Why It's Important: If these parties didn't have the expertise of investment managers to rely on, then they would have to do the work themselves.

In many cases, these firms and individuals wouldn't invest at all, because they would fear that their lack of expertise would make the likelihood of losing their money very high.

In other cases, investment would occur, but it wouldn't as effectively be ushered towards investments that will benefit the economy the most. Good investment managers will put their clients' money in the securities of firms that have the most potential, which means the money should benefit everyone. Why You Should Care: Through investment advisors, growth is maximized because wealthy firms and individuals are comfortable putting their money at risk, and it is provided as funding to investments with the most potential.

Again, everyone benefits. So maybe by now, you're convinced that Wall Street actually does serve a number of very important functions in our economy. But maybe you don't think that's the point. It's not that the work they do isn't important: it's that they're overpaid for it. This is certainly a valid opinion: you can always feel free to believe that one worker is paid too much and another is paid too little.

But opinion has nothing to do with it: the market dictates outcomes. Investment banking isn't a new profession -- it's been around for decades. So if there was some way that competition could reduce the cost of investment banking services, then it would have done so. According to the market, the expertise they provide is worth the fees that they are paid. Of course, many in the OWS crowd would say that the market is wrong and that these individuals should be taxed at a higher rate to remedy an injustice.

That's fine as a subjective view. But objectively, if you tax a certain profession at a higher rate, then it would result in fewer people pursuing that profession. The OWS crowd would probably be perfectly fine with that outcome. But as the above analysis explained, the services that Wall Street provides are actually essential and very beneficial to the economy. So reducing Wall Street's presence will also reduce the effectiveness of the important work that it does. Even if you're convinced that Wall Street serves a legitimate purpose and that its pay is a result of its importance to the market, you might still hate it.

What about all the destruction that the financial crisis caused? This question gets complicated, and entire books have been written on it. So I'll leave this one alone for now I am actually finalizing a 10, word article on what caused the financial crisis to be published later this year.

Instead, I'll just end with a question. The classic justification for market-making and other types of trading is that they endow the market with liquidity, and throughout the financial industry I heard the same argument over and over. Banks provide liquidity. But liquidity, or at least the perception of it, has a downside.

The liquidity of Internet stocks persuaded investors to buy them in the belief they would be able to sell out in time. The liquidity of subprime-mortgage securities was at the heart of the credit crisis. Home lenders, thinking they would always be able to sell the loans they made to Wall Street firms for bundling together into mortgage bonds, extended credit to just about anybody. But liquidity is quick to disappear when you need it most.

Everybody tries to sell at the same time, and the market seizes up. The recent crisis cost about ten per cent of G. It made tackling climate change look cheap. In the upper reaches of Wall Street, talk of another financial crisis is dismissed as alarmism. Now that Morgan Stanley and Goldman Sachs, the last two remaining big independent Wall Street firms, have converted to bank holding companies, a legal switch that placed them under the regulatory authority of the Federal Reserve, Mack insists that proper supervision is in place.

Since the middle of , Morgan Stanley has raised about twenty billion dollars in new capital and cut in half its leverage ratio—the total value of its assets divided by its capital. In addition, it now holds much more of its assets in forms that can be readily converted to cash. Other firms, including Goldman Sachs, have taken similar measures. But the history of Wall Street is a series of booms and busts. After each blowup, the firms that survive temporarily shy away from risky ventures and cut back on leverage.

Over time, the markets recover their losses, memories fade, spirits revive, and the action starts up again, until, eventually, it goes too far. Perhaps the most shocking thing about recent events was not how rapidly the big Wall Street firms got into trouble but how quickly they returned to profitability and lavished big rewards on themselves.

Last year, Goldman Sachs paid more than sixteen billion dollars in compensation, and Morgan Stanley paid out more than fourteen billion dollars. Neither came up with any spectacular new investments or produced anything of tangible value, which leads to the question: When it comes to pay, is there something unique about the financial industry? Thomas Philippon, an economist at N. After studying the large pay differential between financial-sector employees and people in other industries with similar levels of education and experience, he and a colleague, Ariell Reshef of the University of Virginia, concluded that some of it could be explained by growing demand for financial services from technology companies and baby boomers.

But Philippon and Reshef determined that up to half of the pay premium was due to something much simpler: people in the financial sector are overpaid. That is the finance industry. A trader can borrow money and place a leveraged bet on a certain market. As long as the market goes up, he will appear to be making a steady profit.

But if the market eventually turns against him his capital may be wiped out. The closer you get to financial markets the easier it is to book funny profits. During the credit boom of to , profits and pay reached unprecedented highs. It is now evident that the bankers were being rewarded largely for taking on unacknowledged risks: after the subprime market collapsed, bank shareholders and taxpayers were left to pick up the losses.

From an economy-wide perspective, this experience suggests that at least some of the profits that Wall Street bankers claim to generate, and that they use to justify their big pay packages, are illusory. Such a subversive notion has recently received the endorsement of senior figures at the Bank of England.

If the firm gets into trouble as a result of decisions taken years earlier, and its stock price declines, those responsible will suffer. If during this period the investment that generated the bonus turns into a loss, the firm has the right to take back some or all of the cash.

The spread of clawback provisions shows that there has been some change on Wall Street. On Wall Street and elsewhere in corporate America, insiders generally learn quickly how to game new systems and turn them to their advantage. A key question about clawbacks is how long they remain in effect. At Morgan Stanley the answer is three years, which may not be long enough for hidden risks to materialize. Given the code of silence that Wall Street firms impose on their employees, it is difficult to get mid-level bankers to speak openly about what they do.

There is, however, a blog, The Epicurean Dealmaker, written by an anonymous investment banker who has for several years been providing caustic commentary on his profession. Let tens of thousands of financial workers lose their jobs and their personal wealth. The financial sector has had a really, really good run for a lot of years. It is time to pay the piper, and I, for one, have little interest in using my taxpayer dollars to cushion the blow.

After all, I am just another heartless Wall Street bastard myself. He looked like an investment banker: middle-aged, clean-cut, wearing an expensive-looking gray suit.

Our conversation started out with some banter about the rivalry between bankers and traders at many Wall Street firms. An elementary school teacher? A combat infantryman in Afghanistan?

A priest? Good luck with that. Investment bankers get paid a lot of money because that is what the market will bear.

While not inaccurate, this explanation raises questions about how competition works in the financial industry. If Hertz sees much of its rental fleet lying idle, it will cut its prices to better compete with Avis and Enterprise.

Chances are that Avis and Enterprise will respond in kind, and the result will be lower profits all around. On Wall Street, the price of various services has been fixed for decades. If Morgan Stanley issues stock in a new company, it charges the company a commission of around seven per cent. If Evercore or JPMorgan advises a corporation on making an acquisition, the standard fee is about two per cent of the purchase price.

I asked TED why there is so little price competition. He concluded it was something of a mystery. You can do what I can do. Nobody has a proprietary edge. After thinking it over, the best explanation TED could come up with was based on a theory of relativity: investment-banking fees are small compared with the size of the over-all transaction.

Are you really going to fight about whether a certain fee is 2. I asked him how he and his co-workers felt about making loads of money when much of the country was struggling. We bring together two sides of a deal. The Epicurean Dealmaker is right: Wall Street bankers create some economic value.

But do they create enough of it to justify the rewards they reap? In the first nine months of , the big six banks cleared more than thirty-five billion dollars in profits.

Despite all the criticism that President Obama has received lately from Wall Street, the Administration has largely left the great money-making machine intact.

A couple of years ago, firms such as Citigroup, JPMorgan Chase, and Goldman Sachs faced the danger that the government would break them up, drive them out of some of their most lucrative business lines—such as dealing in derivatives—or force them to maintain so much capital that their profits would be greatly diminished.

They placed limits on interest rates, prohibited deposit-taking institutions from issuing securities, and, by preventing financial institutions from merging with one another, kept most of them relatively small. Subscription failed. Thank you for subscribing! Delivered daily to your inbox by Dan Primack and Kia Kokalitcheva. Sports news worthy of your time Binge on the stats and stories that drive the sports world with Axios Sports. Sign up for free.

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Want a daily digest of the top DC news? Get a daily digest of the most important stories affecting your hometown with the Axios DC newsletter. Felix Salmon , author of Capital.