Wall Street versus Main Street. Us versus Them. The 99% versus the 1%. The "entitled" 47% and the wealthy refusing to pay their "fair share." The 2012 election is about class warfare. Far from trying to bring the two sides together the media and politicians on both sides are fanning the flames, hoping to get another vote with every angry soundbite.
The propaganda battle lines are clear, but the reality isn't. Is Wall Street really a predatory body of evil doers feasting on the weakness and ignorance of average shareholders? The answer sort of depends on what you mean by the firm in question and how you define "evil".
"You have to understand that on the trading floor we incentivize these people to take risk," says Terri Duhon, author of the book How the Trading Floor Really Works. What she means is that traders get paid to take risk with other people's money. That's how banks work. When the risk goes right the client makes money and shareholders cheer. When the risk goes south, it's an entirely different matter.
Traders have access to other people's money and it's there for the taking. The reality is that's not different than you giving your car to a valet. If he wants to take it for a joyride there's not much to stop him except his morality and the culture of his company.
The people who set the standard aren't the gunslingers on the floor. "On the whole most people that work in finance aren't anywhere near the trading floor," Duhon points out. For most Wall Street employees their job is miles away from the headline meltdowns. Those people are the ones who set the standard for risk management and culture.
Employees do what's in their economic self-interest. If risk management standards are low and the spoils go to the trader willing to make the biggest bets, it's a recipe for disaster. Duhon doesn't deny that some banks are "a bunch of cowboys" but it doesn't have to be that way and isn't at most firms. Some of the people are scumbag criminals which is pretty much the case at anywhere you go.
What's an Individual Investor to Do?
Wall Street and life are caveat emptor propositions. If you want to invest in stocks, bonds or even get a mortgage, step one is understanding what you're getting into. Under the best of circumstances the professional on the other end of the phone has the advantage of knowing more than his customer about the financial product.
It's a matter of information asymmetry. The guy making the product knows more than the person doing the buying. That's how capitalism, Wall Street and life all work. One person makes something and sells it to someone else at a profit. Closing the gap requires homework.
"It's just about awareness; it's just about education," is how Duhon puts it.
However you choose to divide or classify Wall Street, the truth is the traders are motivated and controlled by the same forces as everyone else. There is evil and goodness in all walks of life and it tends to be distributed more or less evenly throughout the population. If that horrifies you it says as much about you as it does the financial industry.
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- Wall Street