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Occupy Main Street

Since the financial crisis of 2008 I, along with every other financial professional, have been made to feel like some sort of villain from a James Bond movie. People have this image in their head of us sitting in our volcano lair, eating caviar, drinking champagne and thinking of evil ways to screw the common citizen. I suppose ignorance is bliss.
 
Although Occupy Wall Street protestors’ angst is well-justified, it is also extremely misplaced.  I believe this comes from a thorough misunderstanding of what exactly it is that financiers do in combination with a bogus witch hunt lead by politicians and the media. In extremely broad generalities, we do one thing: we connect those with money looking to make investments to those who don’t have money and need investment (while taking a fee, of course). If two parties want to get a deal done, it is our job to make sure it happens. Is it our concern if it is a bad deal? No. If I won’t facilitate the deal because of some unreasonable moral standard, then someone else will and take what would have been my commission. Making a bad investment is exercising your free will, why should I deny you that right? As long as both parties understand the risks, my responsibility ends there. There is nothing inherently evil about that.
 
You think we do more than connect businesses to investors? Let’s take a look at some finance professions:
 
Investment banking: raising funds by simply taking money from willing investors and giving it to a company looking for capital.
 
Fund managing: taking a pool of money from willing investors and deciding how to allocate it amongst different investments.
 
Brokers: providing clients with investment products by connecting them to the financial markets.
 
Maybe you could argue that something like prop trading is sinister, since they’re not really financing anything but instead shorting and trading derivatives. I would argue they are helping to efficiently price the market by assisting with price discovery. High-frequency quant funds also account for the majority of market liquidity, which is extraordinarily valuable.
 
 I’m not writing to justify the actions of those like Bernie Madoff (who actually DID do something wrong). Being mad at the finance industry as a whole based on the illegal and immoral actions of a few is like being mad at the energy industry because a few Enron executives committed fraud. To say these guys are getting away with it? That’s a lie. The SEC is handing out harsher punishments than ever. Madoff got life in prison and forfeiture of the vast majority of his net worth (not to say he didn’t hide some of it in some bank in Lichtenstein, because he probably did). Raj Rajaratnam got 11 years in prison and had to pay a $98.2 million fine out of his own pocket (not the firm’s pocket) for making a few trades with insider information (by comparison, Martha Stewart only got a few months for insider trading).
 
You may be asking yourself who is to blame for the financial crisis if it wasn’t financial professionals. Although I do think some responsibility lies with the banks for loosening lending standards, the majority of it lies with consumers. That’s right, consumers. Consumers are the ones who committed fraud on their loan applications then overextended themselves on a mortgage they never had any chance of paying back (by some accounts there were cab drivers claiming they made $140k a year to obtain loans there is no way they could afford). Consumers are the ones who ran up credit card debt, not by buying life necessities such as food and clothing because their paycheck isn’t big enough to survive, but by buying items like big screen TVs, iPhones, and jet skis. I understand that some responsible homeowners and borrowers ended up defaulting, but it was caused by a domino effect set off by irresponsible borrowers (for an illustration, please see crisisofcredit.com).
 
I know how you’re going to rebut that argument: “yes, but there were predatory lending practices and no one understood what they were agreeing to”. First off, if you were lied to, you have a legitimate claim, the end. Second, if you truly just didn’t understand what you were agreeing to, then why did you sign a contract? The idea that there were “predatory lenders” is kind of a joke. Do you know what the job of a mortgage broker is? It’s to sell mortgages. The tactics they employ are no different than that of a used car salesman. It’s their job to sell. It’s your responsibility to understand what it is you’re agreeing to. If I tried to sell you a cyanide sandwich, would you eat it? Granted it may have been immoral for me to feed you poison, you made the conscious and informed decision (as an adult exercising your own power of free will that we are extremely fortunate to have in this country) to eat it.
 
What happened to personal accountability? When did we stop being responsible for our own actions? I see that everywhere in today’s society and it isn’t limited to our finances. We need the FCC to censor everything because no one wants the responsibility of controlling what their children watch on TV. Some cities are banning the use of trans fat in food because people don’t want to be responsible for their own eating habits. We have the US government regulating what drugs we can use because we think everyone is incapable of using responsibly (yes, alcohol and nicotine are every bit as much of a drug as meth or heroine is). I’m not saying that I would chose to do meth while eating a jar of trans fat with a spoon, because I wouldn’t. I chose to be responsible for my own actions. I see doing meth and eating excessive amounts of trans fat every bit as irresponsible as taking out a loan I have no intention of ever paying back.
 
Yes, some borrowers did take out loans they never had any intention of paying back. Paul McCulley, former right-hand man to PIMCO’s Bill Gross, outlined 3 types of mortgages that homeowners take out.
 
1) Hedge Units (fixed-rate, prime mortgages). These are taken out by responsible borrowers that put a reasonable amount of equity down.
 
2) Speculation Units (interest-only loans). These are taken out by homeowners that are betting on interest rates falling and will roll into a fixed-rate mortgage once rates fall.
 
3) Ponzi Units (negative-amortization, adjustable rate mortgages). These are loans given to sub-prime borrowers who put zero equity down. These have a negative amortization feature, which means if you miss a payment it is acceptable. That interest you missed now gets rolled into the mortgage as new principal. This means for a homeowner to actually become delinquent they have to miss quite a few payments. After becoming delinquent, it takes about a year to get a homeowner evicted. So if you buy a house and have no skin in the game, you just got 1-2 years of free rent.
 
I know your next argument, too. Your next argument is “we bailed out the banks while they invested in hedge funds and paid themselves bonuses”. Let me break this statement down. First, banks had to be bailed out because irresponsible borrowers defaulted. If banks weren’t bailed out, things would be exponentially worse than they are now. Imagine if there was a global collapse of the financial system. You go to the ATM and it won’t spit out cash, you have no way of accessing any of your money, you can’t pay your bills, and the global economy comes to a dead halt. Imagine what would have happened next. It would have been like something out of the Book of Revelation. Next part of the statement: “investing in hedge funds”. When you have a 2 trillion dollar balance sheet and have $20 billion invested in hedge funds, that wasn’t the root cause of the problem, trust me. Paying huge bonuses? Let’s get one thing straight: if you’re getting a bonus, it’s because you performed. At an investment bank, it is typical for a group to keep half the money it makes. So, if an investment banking group generates $100 million in fees, the group will be paid $50 million. It’s in their contract. Now I can sincerely understand why someone would be upset that bankers are being paid bonuses after their institution was bailed out but we need to think about this. If a banker who is a big producer for the bank is not given a bonus after he generates a ton of money for the firm, he’s going to leave and go to another bank. That will only make the problem worse because now the bank, which needs to repay the bailout money, just lost a big earner.
 
Why do you think congress was leading a witch hunt against banks? They’re doing that because banking executives don’t comprise the majority of voters. Do you really think that a politician would ever point the finger at the vast majority of voters? Of course not. That’s political suicide.
 
In hindsight, yes, banks should have lent more responsibly. In hindsight, maybe they should have performed more due diligence when extending credit and created tougher lending standards. Then there would have been protests for banks not giving loans to people who need it. If you weren’t in the streets in 2005 calling for tougher lending standards and criticizing irresponsible borrowers, then why are you doing it now? Furthermore, why are you only attacking the banks for lending irresponsibly and not the borrowers for borrowing irresponsibly? It’s a two way street and you can’t force someone to borrow.
 
I understand a lot of people fell on hard times in the past few years. A lot of good, responsible homeowners lost their homes, their jobs, their retirement funds, and maybe more. I was part of the unfortunate class of 2009, which meant I was SOL when it came to the job search. I looked for a job for over 2 years before I found one (August 2008-September 2010). The job I found was in San Diego, 3,000 miles away from my home in Massachusetts. After less than 6 months of work, my company went bankrupt and everyone lost their jobs. So, after a 2-year job search and only less than 6 months of employment, I was out of work, 3,000 miles away from anyone who could help me and unable to collect unemployment (because I missed the cutoff for work requirement by a week). I had to draw on my credit cards, blow through my savings, and empty what little I had built in my 401(k) to survive. My credit rating has been damaged, my net worth has been materially affected, and I’m still recovering. I have just as much a right to be upset as anyone. My anger isn’t directed at Wall Street, it’s directed at everyone who exercised material irresponsibility that created this mess.
 
Have you been reading headlines lately? Wall Street is anticipating 200,000 job cuts in 2012. It’s tough being in finance. We have zero job stability and a lot of us are under an insane amount of pressure when we are actually employed. The services we provide are essential to the rest of global commerce. Remember in the Fall of 2008 when all hell broke loose? When, in 1 day, JP Morgan acquired WaMu, Bank of America acquired Merrill Lynch, and Lehman filed bankruptcy. Bankers had to work around the clock for days to get those deals done. When was the last time a construction worker couldn’t sleep for 48 straight hours to get a project done? When was the last time a nurse had to log over 100 hours in a work week to help prevent a global meltdown? I’m not saying no one else’s job is stressful but a life in finance is not the glamorous lifestyle you see romanticized in movies. It’s volatile and extremely stressful. No one would go into finance unless we got paid the way we did. With bigger risks come bigger returns.
 
The services we provide are more important than maybe you realize. Chances are, you work for a company that took some sort of outside funding, whether it is a loan or an equity investment. Chances are, you took out a loan to buy your house. Who do you think services your retirement account? You think you could do a better job than fund managers? Well then manage your own account, but good luck trying to access the capital markets without a broker. Most of the goods you use on a day-to-day basis were created by corporations that wouldn’t have been able to make those goods if we hadn’t raised capital for them to do so. Do your kids attend public schools? Well chances are that school was built with financing obtained through a municipal bond offering. That money doesn’t fall from the sky; it is raised by investment bankers. You need us, whether you like it or not.
 
You want to live in a world without finance? Move to Chad. I’ve heard it is wonderful there. Or maybe you think communism is a better alternative to capitalism? Cool, well, you can always move to Russia. I hear Russia is the bee’s knees and is the land of opportunity, sunshine, happiness, and rainbows.
 
You don’t see out of work bankers occupying Main Street for the irresponsible borrowing that is the root cause of this global mess. You don’t see us pointing the finger at borrowers and calling for them to be stripped of all their worldly possessions in order to repay the mortgage for the house they’re underwater on.
 
Everyone says this depression (yes, we ARE in a depression) was caused by corporate greed. It was caused by greed, I’ll give you that. Whose greed was greedier? The household making under $100k a year that falsified a loan application to get a $500k mortgage or the banker that over-levered his bank? The consumer that bought a 72-inch flat screen on credit or the hedge fund manager that invested on 90% margin? It’s the same greed. We’re all guilty of it. In the words of Gordon Gekko, “we’re all drinking the same Kool-Aide”.
 
Everyone talks about “the economy” like it’s some beast from Greek mythology. “Economy: Zeus’s 2-headed house cat”. The economy is me, you, our output, our consumption, our savings, our investment, and our decisions. You can be mad at the banks for over-levering and not doing a better job of seeing this crisis coming, but where were you in the high-flying times preceding 2008? Were you in Zuccotti Park holding up signs saying “stop borrowing irresponsibly”? I doubt it. You were probably too busy enjoying the ride up. I suppose everyone becomes an expert in hindsight.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.