Forbes: Lehman and Meritocracy

 

http://www.forbes.com/2009/09/14/lehman-brothers-goldman-sachs-bankruptcy-anniversary-opinions-contributors-andy-kessler.html

Part of the charm of Wall Street, and what scares most reasonable people away, is that it is as close to a meritocracy as exists on this earth. It's dog eat dog. It's sink or swim. You do a trade and it makes money, then you're a hero (for a moment anyway) and deserve a bonus. You bring in a deal, you get paid. You lasso more clients' assets under your firm's roof, you're a hitter. I once discovered some good news on the stocks I followed before the rest of the Street, and mentioned it to the sales force at a morning meeting and moved markets in New York, Tokyo and London. I had the head of global equities pat my head on the elevator ride up the next morning. Pat my head! I was told he never does that.

The flip side, of course, is what makes Wall Street so dangerous. You lose money for the firm and you're a heel. Do it again and you don't get paid that year. Do it a third time and you're out of a job. Just like that. Gone. I've seen it happen to friends and acquaintances at just about every firm up and down Wall Street. There is no tenure on Wall Street, no job security, no long-term guarantees. Ten- and 20-year careers end in a flash. Happens all the time, and everybody who works in the business knows this.

That's one reason why everyone is paid so well. Think of it as combat pay. But the other reason compensation is many, many multiples of the average wage in this country is that trading stocks, doing IPOs, merging companies, managing money is a very lucrative business. Not everyone can do it. It looks easy, football-field-sized trading rooms jammed with adrenalin-rush maniacs sitting in front of huge LCD screens. It might as well be a call center in Mumbai. But it's hard. Really nasty hard. Wall Street hires in that 99 percentile zone. And then they make your life miserable hoping you'll quit before they break you. Or hoping they break you before you lose money for the firm. It's not WalMart or General Motors or even Pfizer or Intel. It's trial by fire.

You would think that would make the entire workforce afraid to do anything for fear of being tossed out on their can, back into the cruel, cruel averagely paid world. But a meritocracy works in the opposite way. You have wicked smart people trying to prove to each other that they are smarter than everyone else. Unlike acing a chemistry final or even nailing your ACT tests, the score is kept with real money--how much your trading desk makes for the firm--how big a chunk of the bonus pool you command for your do-or-die heroics day in and day out.

Another not-so-secret revealed--it ain't fun, that's what Harry of Hanovers or Ben Benson's are for after 4 p.m. Pour a stiff one and recall sticking the guy at the First Bank of Neenah for a teenie (I'm dating myself talking about 16ths of a dollar) or bagging the OpenTable IPO or whatever the next deal is.

I'm reminded of all this because September 15, is the one-year anniversary of Lehman Brothers heading off to the great trading room in the sky. The debate will rage on for decades whether Paulson and the Treasury or Bernanke and the Federal Reserve should have saved them from failing. There is no good answer. Bear Stearns was bailed out six months earlier. Bank of America with the Merrill Lynch anchor around their neck was bailed out maybe four months later.

But the crude reality is that Lehman Brothers is a classic Wall Street story. Inside and outside, it was a meritocracy. They wanted to one up on Goldman Sachs, generate as good a return on equity and earnings growth so they could win the meritocracy game and get paid in spades. How dare Bear Stearns' CEO make more than ours! Let's lever this sucker up with mortgage-backeds and create a trillion-dollar balance sheet. If not us, who? And by the way, very few people at Lehman really understood how upper management was playing this meritocracy game with the rest of Wall Street with the rank and files' careers.

When that trade went south, and their creditors pulled their short-term financing, (OK, Jamie Dimon at JP Morgan was particularly egregious pulling a $5 billion plug), the ugly side of meritocracy reared its head. You lose money, you're out. Goodbye. It was nice knowing you. Every single person working at Lehman knew this personally, or should have known. That's the giant sword hanging over everyone's head, the stench of fear, that keeps the game going and going. I've got to use my 99 percentile smarts and win. If I don't, I'm toast, so I'll work harder, think harder, and of course play harder with my winnings that everyone else. The outside-meritocracy downside became the inside-meritocracy homicide.

Lehman is gone, sure, but Wall Street and the meritocracy lives on.

Comments

[Grier Graham]

My question: is this speculation or innovation? Are the best of Andy's best just better gamblers lining their own pockets or do they truly provide services that improve our economy and society? Because Lehman trying to one up Goldman sure seems a lot more like speculation and a lot less like innovation to me.

[Adrian Ionel]

I wonder what the Wall Street cumulative "profits" are for the past ten years including the past 18 months. And what they would have been without the taxpayer bailout and the massive intervention of the Federal Reserve.

The system sound great as long as 'making money' is for real and not 'produced' by engineering paper profits derived from pushing (or concealing) risks far out into the future. Or off-loading them to the taxpayer.

Curious about your thoughts on that.

[H]

Meritocracy? More like kleptocracy or kakocracy!

http://www.youtube.com/watch?v=6CcAkSE4Pik
http://www.whale.to/b/ruppert1.html
http://www.dunwalke.com/contents.htm

[Gordon Hill]

You post profits now for a mass of sales that will go sour a year or two down the line (such as selling mortgages to NINJAs or trading related derivatives) and you get big money. You then leave (or even stay on!) as a hero and carry on elsewhere before any chickens come home, at a much improved salary etc. Do it again and again as long as the money go round continues. Surely this means that it isn't a meritocracy and that's where it all goes wrong. The merit gets fired for underperforming. Some means needs to be found to ensure that personal rewards match real long term gains. And borrowing short to lend long should be a sacking offence!

[s]

There is nothing meritocratic about privatizing gains and sticking the loss with taxpayers. I actually can't believe how fawning this article is, praising wall street for its smarts and hard work. To think these people are really punished for bad behavior is laughable. Sure some might be unemployed twiddling their thumbs by the pool, meanwhile I'm at work paying my taxes to fund this plundering.

[Kevin Kauer]

Right-on, Dr. K.