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Gabriel Sherman on his NY Mag Cover: Has Wall Street Been Emasculated?

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Is Wall Street over? Done?

In the months since the Great Panic of 2008, investors, regulators, politicians, and the culture at large have given Wall Street banks a series of kicks to the groin. And while the stock market may have recovered some of its lost swagger, the Wall Street investment banks haven't. That's the thesis of Gabriel Sherman's New York cover story, "The Emasculation of Wall Street."

And he's right — to a large degree. Surveying a world in which structured products have disappeared, new capital standards have reduced the ability to take on leverage, regulations have prohibited once-profitable practices like proprietary trading, Sherman concludes that Wall Street is "afflicted by a crisis it would not be flip to call existential." Indeed, the widely documented decline of bonuses — combined with the high cost of living — has many bankers wondering what the point of the whole thing is.

As we discuss in the accompanying video, this delayed reaction has been a long time coming. Any time a sector blows up and inflicts damage on the economy, its financial and cultural footprint shrinks. The dotcom sector quickly went from massive hero to much smaller goat in 2000 and 2001. But Wall Street was spared a good deal of the pain associated with popped bubbles because the taxpayers and the Federal Reserve rushed to their aid. Ironically, investment bankers and traders were among the biggest short-term beneficiaries of the emergency efforts that reflated credit and stock markets in 2009 and 2010.

But time has been less kind to the bankers. And the Occupy Wall Street movement is the least of its problems. Turmoil in Europe and volatility has helped tamp down the pace of trading and dealmaking. The businesses of mortgages and their associated products, which fueled so much growth and easy profits in the past decade, have dwindled and are unlikely to return. "Certain products are gone forever," J.P. Morgan Chase CEO Jamie Dimon told Sherman. "Fancy derivatives are gone forever. Prop trading is gone. There's less leverage everywhere." Dodd-Frank forbids banks from risking depositors' capital on proprietary trading. The low-yield environment makes it tough to generate returns. And so banks are left with the boring, lower-margin, lower-octane of making commercial lines, advising big companies, and managing assets. All that translates into lower profits, less risk, and, worst of all, smaller bonuses.

It would be premature to write Wall Street off completely. Over the past 30 years, investment banks and financial players have shown an ability to transition, almost seamlessly, from one boom to the next — bond-trading in the 1980s, dotcom and telecom stocks in the 1990s, mortgage-backed securities in the 2000s. The industry has generally viewed regulations as obstacles to skirt through fancy maneuvering, or to tear down through lobbying. There's always a bull market somewhere, as the saying goes.

Of course, when the next boom does come, Wall Streeters are going to find it more difficult to cash in on it. For while the industry has felt its share of pain from Washington, there's likely more to come. Low tax rates on capital gains, dividends, and massive bonuses are likely to rise in coming years. Mitt Romney's presidential run has brought heightened focuses to one of Wall Street's most absurd advantages — the carried interest rule, which applies long-term capital gain tax rates to money private equity firms earn for managing other people's money. The Masters of the Universe, who were held aloft by cheap money and favorable regulation, are increasingly floating back to earth. As Sherman writes, "The system is being designed so that Wall Street grows as fast as Main Street."

That may be a bad thing for young Wall Streeters with visions of private jets — and for the real estate brokers and restaurateurs who cater to them. But it's not a bad thing for the rest of us, or the economy at large.

Daniel Gross is economics editor at Yahoo! Finance

Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com