How Wall Street Invests Its Money in Hard Times

The Wall Street Journal

In the midst of the 2008 financial crisis, a top Wall Street executive found himself in the entry hall of his bank's headquarters at 3 a.m., en route to an emergency meeting.

As he scanned the cavernous space, empty save for a few sleepy security guards, his gaze alighted on a row of automated teller machines.

"I walked over, hoping that no one would see me, and took $800 out," the executive, who has earned millions of dollars in his career, told me this week. "In those days, it felt good to have cash in my pocket."

Even Wall Street titans feel fear in troubled times, especially when it comes to their own money.

With market turbulence back with a vengeance in the past few weeks, I was curious to hear how the wizards of finance were adjusting their personal investments and whether lesser liquid mortals could learn something from it.

The responses I got from a dozen senior types were somewhat surprising.

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Although none admitted to hitting the ATM in the dead of the night, most disclosed investment strategies that were both ultraconservative for financial experts and at odds with their banks' advice to companies, fund managers and individuals.

"I am 80% in cash and Treasurys," said a top investment banker who in previous conversations hadn't once failed to extol the virtues of complex derivatives as a way to reduce risks in the financial system.

"What about using some of those derivatives in your own portfolio?" I asked, countering fear with logic. "No chance," came the reply. "I don't want to take any risks."

Another executive, a member of a big bank's management team, even showed glimpses of panic. He confessed that, as markets were buffeted by bad news from the U.S. and Europe in recent weeks, he changed his allocations from roughly 60% stocks and 40% bonds to a portfolio laden with U.S. government bonds and other investment-grade paper.

When I pointed out that he must have been selling in falling equity markets and buying in rallying bond markets, he didn't flinch. "Right now, it's all about capital preservation," he said. "If I lose some money in the process, so be it."

Which is precisely what many financial advisers, including those employed by Wall Street banks, are counseling individual investors not to do, urging them to weather the storm and keep their eyes on the long term.

Yet, even seasoned professionals are feeling the pressure of this rocky period.

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A veteran mergers-and-acquisitions banker described his attitude to his investments as veering between being "pessimist and very pessimist"—an extraordinary statement for an M&A banker, a job where perennial optimism is a condition of employment.

But this banker's gloomy disposition toward his wallet hasn't stopped him from telling CEOs to think positively and take advantage of the market slump to snag companies on the cheap.

It would be easy to condemn this dichotomy between what Wall Street says to its clients and what it does with its money as hypocrisy or mercenary opportunism. But something deeper is at play here.

All the executives I talked to had sat in a front-row seat to watch the near-destruction of global capitalism that was the 2008 meltdown. For them, as for many others, that was a traumatic experience, not just because of the systemic failure it highlighted.

The collapse in the share prices of many banks, and the disappearance of others, decimated the riches of hundreds of Wall Street executives whose bonuses often are largely comprised of a chunk of their companies' shares. I know several bankers that, perhaps naively, had counted on, and borrowed against, their stock to send kids to private school, pay for houses, boats and art.

When that wealth turned out to be as the paper it was made of rapidly depreciated, their financial world was turned upside down. All of a sudden, bankers had to reassess and resize lifestyles they had taken for granted for years.

Don't get me wrong. I am not advocating setting up a "Scarred Bankers' Fund" to help with Picasso collections and college trusts.

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But memories of having that close-up view during as painful a crash as the 2008 crisis can explain why bankers are throwing their courage to the wind, stashing their money in cash and Treasurys.

"What those executives are saying is that they are probably as afraid as the rest of us," says Meir Statman, a finance professor at Santa Clara University and author of "What Investors Really Want." "They extrapolate from the recent past, they make the analogy to 2008 and that makes them even more risk-averse."

Should our 401(k)s follow Wall Street's finest into the low-yielding safety of cash and bonds? Not according to the experts.

The big difference between common folk and finance's upper echelons is that the latter already have a lot of money in the bank—from the cash portions of their bonuses and the sale of their shares in the good times. They don't really have to worry about their pensions. Most of us do. And we need some high-yielding investments to pay for them.

"Individuals are still better off not trying to follow in the footsteps of those executives because if those executives are wrong they will end up having $28 million rather than $30 million," Prof. Statman says. "For young people taking risks is not a luxury, it is a necessity. The notion is that if you are rich you can take more risk but you don't have to."

Yet another difference between planet Wall Street and planet Earth.

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