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Book review: Sharp analysis lays Wall Street bare

Is Wall Street something to be celebrated or admonished? According to Wall Street Matters by William D Cohan it should be celebrated.
A handout book cover image of Why Wall Street Matters by William D Cohan (Courtesy: Allen Lane)
A handout book cover image of Why Wall Street Matters by William D Cohan (Courtesy: Allen Lane)

Wall Street – a cause for celebration or denigration? Investment banker turned writer William D Cohan argues vehemently in his latest book, Why Wall Street Matters, that it is to be celebrated.

What Wall Street does, Cohan explains, is actually very simple: it matches capital with those who need it at a fair price, allowing them to establish and grow businesses, create jobs and wealth and generate tax revenues.

Through this alchemy, Wall Street has lifted billions out of poverty, provided us with retirement pensions, and has financed the companies that have created the products we love from iPhones to Google.

“We wouldn’t much like to live in a world without Wall Street,” Cohan writes.

But in the wake of the 2008 global financial crisis Wall Street has been unjustly vilified, the author says. Regular people cannot shake their fear that the banking system is “designed to benefit the rich at the expense of the poor”. That most powerful politicians are “woefully undereducated” about how Wall Street works and the vast majority of the American population “has virtually no clue” compounds the problem. There is also Wall Street’s lack of transparency. In what is surely the book’s best line, Cohan condemns “the opaque gobbledygook that slithers out of the mouths of the Federal Reserve governors and of our leading economists”.

Cohan is not saying that Wall Street is beyond reproach. Far from it. He argues that there should be a zero-tolerance approach to bad behaviour among bankers (the justice department failed miserably in this regard following the 2008 crisis) and the incentive system must be recalibrated: bankers must not be allowed to earn huge bonuses for taking risks with other people’s money.

However, the solutions that have been put forward by US politicians are wrong-headed and harmful, Cohan argues. He puts forth his case for “intelligent reform” rather than “a massive overreaction to an entirely fixable problem”.

This is a short book – easy to finish in a two-hour sitting. Cohan does a first-class job of demystifying Wall Street and suggesting reforms. Whether America’s top politicians take heed is an entirely different matter.

q&a take away reward for risk

Lianne Gutcher expands on William D Cohan’s Why Wall Street Matters:

What can make people feel better about Wall Street?

Many Americans struggle to see the value of the 2008 bank bailouts. But, Cohan argues, the Troubled Asset Relief Program (or Tarp) saved the financial system from catastrophe. And what people forget or don’t know is that the banks paid back the loans with interest, allowing the federal government to massively profit.

What has been done to prevent another crisis?

The Dodd-Frank Act was passed into law in 2010. This aimed to increase scrutiny over banks and to prevent them from taking risks with their capital.

Will this work?

The 2008 financial crisis was not caused by banks taking risks with their capital but because of excesses in the mortgage securitisation market, Cohan says. The act therefore fixes a problem that did not exist. He adds that it also “condemns the banking sector to intense scrutiny, higher capital requirements, and an absolute aversion to risk-taking”. Cohan’s advice? Junk it.

What’s his solution then?

Fix the incentive system. Bankers should not be rewarded for taking huge risks with other people’s money. In Wall Street’s early days, partners in investment banks risked losing everything if something went wrong. This made them prudent. Top executives once again need to have their full net worth on the line if something starts to go wrong at their firms.

business@thenational.ae

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Updated: April 25, 2017 04:00 AM

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