Conclusion

What will the bonus system reward next, if investment banks are not held accountable this time around?

“Two things stand out about the credit crisis cascading through Wall Street: It is both totally shocking and utterly predictable. Shocking, because a pack of the highest-paid executives on the planet, lauded as the best minds in business and backed by cadres of math whizzes and computer geeks, managed to lose tens of billions of dollars on exotic instruments built on the shaky foundation of subprime mortgages. Predictable because whether it's junk bonds or tech stocks or emerging-market debt, Wall Street always rides a wave until it crashes.”

-Fortune, November 12, 2007

The hot sector on Wall Street tends to lift revenues and bonus pools before giving out under its own weight. During the dot com era, top bankers worked in stock trading, underwriting, and research, putting together deals
and engaging in trading activities that scored them record bonuses. Their activities eventually resulted in massive class action lawsuits and high profile investigations from New York Attorney General Eliot Spitzer.
Certain practices allegedly inflated the value of stocks and ripped off legions of investors, many of whom were middle-class Americans just starting to put their money in the stock market – and encouraged to do so by the star analysts of Wall Street.

The Spitzer investigations led to a $1.5 billion settlement, but this didn’t curb the investment banks’ appetite for quick money. Of course, $1.5 billion is a paltry sum when held up next to the $36 billion in bonuses that five investment banks handed out last year.

Now, as the subprime market collapses, it is clear that the same pieces were in place this time around: highly-compensated top talent at subprime-related bond desks, several years of skyrocketing revenues and bonuses that were pushed higher by the subprime sector, and alleged improprieties that pushed the market to unsustainable levels. “Dot com” was not a niche business at these investment banks, and neither was “subprime.”

In the wake of this collapse, other sectors will likely pick up and start driving the banks’ revenues. What will be the next “hot” Wall Street business segment – the next “dot com” or “subprime” – that drives revenues and bonuses up in future years? Will the market once again be pushed to unsustainable levels, before crashing down on American homeowners, investors, and consumers?

Will Wall Street’s investment banks continue to reward short-term greed at the expense of long-term prosperity?