The Corner for April 7

In “Why Wall Street Matters” ( Random Houses 2017), writer and former investment banker William D. Cohan takes a hard look at what the two words Wall Street means, what it is and what should happen. The book can be described as a historical primer and a “counterintuitive defense” on and of Wall Street. Cohan’s primary objective in the book is to explain the importance why a world without Wall Street would severely limit the ability of the world (more specifically the U.S.) to allocate capital efficiently in order to grow the economy and protect our standard of living. Secondly, in Cohan’s own words, the book is “meant to serve as starting point for a long-overdue, nonhysterical national debate about how to retain the best of Wall Street while eliminating the incentives that tend to foster the basest instincts of human nature that lead Wall Street bankers, traders, and executives to misbehave on a regular basis.”

As to Cohan, a former investment banker, he has written Money and Power, House of Cards, and The Last Tycoons—stories of the investment banking firms of Goldman Sachs, Bear Stearns and Lazard Frères & Co. respectively. His insights come from years working on “The Street” at Lazard Frères, Merrill Lynch & Co. and as a managing director at JP Morgan Chase. While his other books had some physical heft to them, Why Wall Street Matters is small in size at only 154 pages.

The introduction and second chapter makes an effort to explain what the words “Wall Street” means in today’s vernacular. While in the early days it meant a location, Wall Street from Broadway to the East River in downtown New York, today it is a term that means the worldwide organization of finance and trading. It particularly it refers to investment banking, hedge funds, mutual funds or other asset management firms and the operation of secondary markets like the New York Stock Exchange.

The first chapter is a world-wind history of American finance, starting out with the early days of the development of New York’s financial district and the actual street named Wall. After chapter two, Cohan uses the next three chapters to give the reader lessons on crises, the Central Bank and the importance of what we can learn from Great Crash and Depression. Here he gets into the discussion of the Glass-Steagall Act, officially known as the Banking Act of 1933. This act was responsible for breaking up banks into commercial banks (deposit institutions) and investment banking (capital formation institutions). The Act was repealed in 1999.

We heard much about the Glass-Steagall after the 2008 Crash as many in and out of government mischaracterized the origins of the cause of the crash to the repealing the Act, according to Cohan. In fact, Cohan takes issue with senators such as Warren and Sanders, stating that, “reinstating Glass-Steagall is a boneheaded idea.” He believes that today’s “politicians who should know better…are profoundly wrong to think that what worked in the 1930s, when Wall Street was a collection of undercapitalized private firms, would work again, today, when Wall Street is the supreme force dominating global finance…Despite the relentless rhetoric from clueless politicians, the fact that commercial banks are in the investment banking business and investment banks are in the commercial banking business and investment banks are in the commercial banking business had almost nothing to do with the causes of the financial crisis of 2008.” However, that is where his criticism ends as Cohan strongly believes “intelligent reform” of Wall Street is a must.

Chapter six is particularly strong as Cohan covers the decades long process of Wall Street firms going from being private partnerships in which owners took little chances and operated their firms with discretion to becoming public entities (by selling stock in the firms to outside investors) which this “new culture on Wall Street was one that encouraged swinging for the fences—taking risks with other people’s money—in hope of getting a big annual bonus.” This is a very important concept that these pages have opined about for many years.

“Why Wall Street Matters,” is a book that people who work on Wall Street and those who have never heard of Wall Street, can read and understand very easily; with serious ideas in the last chapter about where the problems are and what should be done in the future. Many have derided Wall Street over the past decade with “cheap shots and ceaseless vitriol directed at Wall Street’s bankers, traders, and executives.” The Observer (London ) puts it this way, “in Cohan’s estimation, that sentiment is not only woefully ill-informed, but dangerously naive. Starting with what Wall Street literally is and what it actually does, Cohan swiftly debunks all of the misinformed arguments against it while acknowledging the problems that fuel those feelings. We can be mad at the greed and excess, but at the end of the day, Wall Street is the capital in capitalism, and when its working right, is the invisible engine that powers the ideas we have and the lives we love.”

That’s it folks, right there on The Corner of Wall & Broad Streets!

Quote of the Week: “The fix for Wall Street should be directed at its compensation system, not the functioning of Wall Street itself. It’s really as simple as that.” — William Cohan, Why Wall Street Matters