The Other Market Casualty
The upside of the downturn is that the capitulation can come and the system—including the egos that wrecked it—can reboot.
Another casualty of this relentless financial crisis—which may not be nearly as readily apparent as the 39% decline in the Dow Jones Industrial Average in the past year—is that old Wall Street swagger. You know the one that featured prominently in the gaits of the M&A managing director, the private-equity partner and the hedge-fund principal, who all just knew they deserved every penny coming to them? This was the evolved version of Michael Lewis’ Big Swinging Dick, fast-forwarded into the 21st century and updated for Ketel One vodka shots, for Ferrari, Maybach, and Maserati dealerships on Park Avenue and for the expectation of annual multi-million dollar bonuses soon to be converted into Fifth Avenue co-ops.
The stereotype reached an apotheosis of sorts in the wake of Steve Schwarzman’s now legendary $3 million, 60th birthday party at the Park Avenue Armory in February 2007. And yesterday, perhaps, the final nail was put in its coffin: the stock of Blackstone Group, where Schwarzman is of course the CEO, declined $3.99 per share, or 31.4%, to $8.71 per share. Since Schwarzman took his extraordinary firm public in June 2007 at $31 per share, the stock has done basically nothing but fall. It is now down a whopping 72% since its IPO. Blackstone’s stock has become a bellwether, but not in the way that Schwarzman had hoped.
Blackstone’s stock has become a bellwether, but not in the way that Schwarzman had hoped.
Just as we have had to come to grips in the past month with a Wall Street future without investment banks, we must also get used to the idea of humbled Wall Street without all its cockiness and arrogance.
There will be other benefits of this turmoil as well. While it is painful to watch the daily lurching downward of the stock market, the air must come out of the balloon. There is no way around it. We will all be better off with the Dow at 6000 as soon as possible, so that the final capitulation can come and the system can reboot. By whatever measure you choose—the lack of covenants in the loans supporting high-priced LBOs, the astronomical leverage used to bulk up Wall Street’s balance sheets with increasingly worthless mortgage-related securities and derivatives, or the staggeringly high bonuses paid to the Wall Street bankers and traders who got us into this mess—the culture of Wall Street had once again spun out of control by 2007. Risk had become the only consistently under-priced asset in the market.
Detoxification is never a pleasant experience, as any addict can attest. But during the cleansing period, there is always the hope that on the other side lay the chance for a fresh beginning. The time has come for what remains of Wall Street to return to the period when banks knew their borrowers, when bankers and traders were held accountable for their actions through some form of shared liability, and where compensation was a reflection of the actual contribution to society discounted for future disasters rather than a short-term grab for riches.
Only then will the graduating class of Harvard Business School—always a harbinger—choose professions other than those whose main criteria for success seems to be nothing more than the ability to push paper around.