A Wall Street pay puzzle
By Robert J. Samuelson
WashPost
Monday, January 18, 2010
Why does Wall Street make the big bucks? A nation with 10 percent unemployment is understandably puzzled and outraged when the very people at the center of the financial crisis seem to be the first to recover and are pulling down fabulous pay packages. At Goldman Sachs, the average bonus for 2009 has been estimated at nearly $600,000; at J.P. Morgan Chase's investment bank, it's been reckoned at slightly below $400,000. These averages conceal multimillion-dollar bonuses for top traders and investment bankers; underlings get smaller sums. Are Wall Street's leaders that much smarter and more industrious than everyone else?
By their own admission, they're not. Testifying last week to a congressionally created commission, Wall Street chief executives conceded that their errors directly contributed to the crisis. Wall Street money moguls may be bright and diligent, but they're not unique. It's where they work -- not who they are -- that's so enriching. A study of Harvard graduates found that those who went into finance "earned three times the income of other graduates with the same grade point average, demographics and college major," reports Harvard economist Lawrence Katz, the study's co-author.
Is it possible that what Wall Street does is three times more valuable to society than other well-paid occupations? That's hard to believe. It's not that Wall Street is just the vast casino of popular imagination. It helps allocate capital, which -- done well -- promotes a vibrant economy. In 2007, Wall Street firms enabled businesses to raise $2.7 trillion from the sale of stocks, bonds and other securities. But Wall Street sometimes misallocates capital, as the 1990s "tech bubble" and today's crisis painfully remind. The huge social costs (high unemployment, lost income) refute the notion that Wall Street consistently creates exceptional economic value that justifies exceptional compensation.
(More here.)
WashPost
Monday, January 18, 2010
Why does Wall Street make the big bucks? A nation with 10 percent unemployment is understandably puzzled and outraged when the very people at the center of the financial crisis seem to be the first to recover and are pulling down fabulous pay packages. At Goldman Sachs, the average bonus for 2009 has been estimated at nearly $600,000; at J.P. Morgan Chase's investment bank, it's been reckoned at slightly below $400,000. These averages conceal multimillion-dollar bonuses for top traders and investment bankers; underlings get smaller sums. Are Wall Street's leaders that much smarter and more industrious than everyone else?
By their own admission, they're not. Testifying last week to a congressionally created commission, Wall Street chief executives conceded that their errors directly contributed to the crisis. Wall Street money moguls may be bright and diligent, but they're not unique. It's where they work -- not who they are -- that's so enriching. A study of Harvard graduates found that those who went into finance "earned three times the income of other graduates with the same grade point average, demographics and college major," reports Harvard economist Lawrence Katz, the study's co-author.
Is it possible that what Wall Street does is three times more valuable to society than other well-paid occupations? That's hard to believe. It's not that Wall Street is just the vast casino of popular imagination. It helps allocate capital, which -- done well -- promotes a vibrant economy. In 2007, Wall Street firms enabled businesses to raise $2.7 trillion from the sale of stocks, bonds and other securities. But Wall Street sometimes misallocates capital, as the 1990s "tech bubble" and today's crisis painfully remind. The huge social costs (high unemployment, lost income) refute the notion that Wall Street consistently creates exceptional economic value that justifies exceptional compensation.
(More here.)
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