Wall Street: Is It Good to Apologize for Greed?

If you think the controversy over the gigantic hauls at Wall Street powerhouses during tough economic times—for example, the current dustup over Goldman Sachs (GS) Croesus-like 2009 bonus pool—is a recent phenomenon, think again. It happened during another turbulent era in finance: The 1901 takeover battle over the Northern Pacific railroad, perhaps the fiercest such contest in U.S. history. However, like so many struggles on Wall Street to this day, it was really a fight for power and dominance, of outsized ego and overheated rivalry. The takeover struggle for the northwestern rail is a convoluted tale of market manipulations, ruthless maneuvers, corners and shorts, soaring and plunging prices. In one corner was the legendary banker J. P. Morgan, the "Robber King" of Wall Street. He controlled the railroads of the East and Northwest. In the opposite corner: Edward Harriman, the financier who owned the railroads of the Southwest. Harriman's allies included the oil-rich Rockefellers and Jacob Schiff, patriarch of Kuhn, Loeb and Morgan's only real investment banking rival. The feud led spectacularly to the largest market crash in a century, writes historian Ron Chernow in The House of Morgan. The New York Herald headline of May 9, 1901 captured the sense of the nation: "GIANTS OF WALL STREET, IN FIERCE BATTLE FOR MASTERY, PRECIPITATE CRASH THAT BRINGS RUIN TO HORDE OF PYGMIES." Morgan: "I owe the public nothing"Little wonder ordinary folks recoiled at the accumulation of power among financiers. The feeling grew on Main Street and in Washington that the American economy was held hostage to the whims of the "Wall Street Money Trust. " (Sound familiar?) What was Morgan's response to the revulsion? Did he issue a press release announcing a new public works program? Set up a fund for the thousands of bankrupted investors? Call a press conference to accept responsibility and soothe the fears of a frightened populace? Not J.P. According to Chernow, he didn't tolerate any criticism of his role in the Northern Pacific debacle, magisterially pronouncing that "I owe the public nothing." Wall Street had a lot to answer for back then—and now. More recently, banks, investment banks, and the other financial institutions that make up today's Wall Street gorged on a credit bubble that ended in the Great Recession, the longest, deepest downturn since the 1930s. The U.S. taxpayer bailed out Wall Street. Now Goldman Sachs, a global powerhouse that played a prime role during the bubble and had to be rescued from the risk of oblivion by the federal government, is set to pay its employees a record bonus estimated at nearly $17 billion. The news has outraged Main Street and Washington. But in a reflection of how things have changed in a century, Goldman called a press conference in New York this past week. "We participated in things that were clearly wrong and have reason to regret," said Lloyd Blankfein, the firm's chief executive officer. "We apologize." A nifty half-billion for goodwillThe mea culpa is backed by a $500 million fund that is to help out cash-strapped small business. The initiative also has Warren Buffett, Goldman's largest shareholder, lending his expertise to small business owners. It's impossible to imagine Morgan ever making such a gesture. But the crafty Morgan might nonetheless appreciate Blankfein's stratagem. After all, it's a savvy trade if spending a half-billion dollars for goodwill preserves a $16-plus billion bonus pool. It's somewhat reminiscent of Lord Clive of India's remark: "When I consider my opportunities, I marvel at my moderation." A critical lesson lies in the history that runs from Morgan to Goldman. Yes, the economic role of the financial sector is to gather capital and fund profitable ideas and enterprise. But the real business of Wall Street is to make money—lots of money, as much as possible. In his financial memoir The Mind of Wall Street, legendary investor Leon Levy tells of a dinner party he attended after the stock market crash of '87. The group asked his opinion, and he replied by telling them about one of his favorite plays, The Tiger at the Gates by Jean Giraudoux. It's about a debate between Ulysses and Hector about the possibility of averting war. Yes, war is terrible, it becomes clear. Everything should be done to avoid it. But the play's closing lines bring word that "the Trojan War has begun." Writes Levy: "The play's message for me is that some events are inevitable." betting high stakes on the futureWell, it's inevitable that Wall Street will pursue money with an unusual passion. It's a place where driven people gather to innovate, to find the next money-making opportunity in stocks, bonds, and other assets, always trying to outthink the next person. Wall Street is also unique in American society, maybe even in the global economy. Most parts of society, from chief executives to nonprofit managers, give lip service to change. Only Wall Street truly thrives on change, turmoil, and upheaval. "They're trying to predict where the world is going," says Richard Sylla, an economic historian at New York University. "The people who can get in on the ground floor will make a fortune." The ways that Wall Street deals with the occupants of the other floors—for instance, the ordinary folks who wonder when the benefits from the massive government intervention in the economy will flow to them—have obviously changed since the heyday of the Morgans and Harrimans. The relentless drive for money hasn't. And that's why Washington can't stumble with major regulatory reform. Wall Street traders learned during the credit crunch that the path to true riches lies in making as many "heads-I-win, tails-the-taxpayer loses" bets as possible. It's in their DNA. The lesson for everyone else is simple: The more Wall Street puts the financial system at risk, the more it needs to be tightly controlled. Proper oversight now will eliminate the need for apologies later.