Can Wall Street be fixed? Sam Polk, a former investment banker who walked away from millions as a hedge fund investment manager, isn’t entirely sure.
“High-achieving, successful kids get jobs on Wall Street and quickly become part of the system,” he says. “There’s this incredibly strong pressure that distorts their perception of reality, and makes them feel poor when they’re earning hundreds of thousands of dollars.”
In a far-ranging discussion, as in his memoir For the Love Of Money, due out next week, Polk suggested it would not be so bad if such kids were contributing to society as well as to their personal bottom lines. Or even, perhaps, if they were using financial tools to help solve economic problems, which is after all Wall Street’s raison d’être.
Instead, the relationship between Main Street and Wall Street – or between businesses and the financial sector, if you prefer – is broken.
It’s a phenomenon often referred to as “financialization”: the growth in size, rate of growth and overall profitability of Wall Street (and finance in general) as a proportion of our economy. Between 1980 and 2006, GDP increased fivefold. Profits at financial firms increased 16 times, while those at their non-financial counterparts rose sevenfold. Prior to 1980, the rate of growth in the two groups had been roughly equal.
People like Polk were there to witness it all, as Wall Street morphed into a self-dealing monster.
“Wall Street started to look less like a bunch of ‘smartest guys in the room’ and more like a group of men who’d secured a seat in a ring of chairs surrounding a huge pile of money, a pile that was growing not because of their skill, but because that’s what money did,” Polk writes in his memoir.
“The system was structured – through monetary policy, carried interest deductions, corporate tax breaks and industry lobbyists – to ensure it.”
As he acknowledges, Polk’s epiphany may not sound all that revolutionary. But we have had few enough voices willing to call bullshit on some of Wall Street’s more toxic practices. Polk recently wrote a New York Times column on the Street’s well-known misogyny and what such “bro talk” might mean in terms of depriving the financial sector of talented professionals or driving them out of the largest institutions.
Until now, insiders who have written about Wall Street have tended to temper their criticism. A Colossal Failure of Common Sense by Lawrence McDonald and William D Cohan’s tomes are excellent and richly detailed, but they are not first-person chronicles of what it is like to live as a banker and to realize the system is flawed.
Thus far, the only book to attempt that is Greg Smith’s Why I Left Goldman Sachs, published in 2012. Alas, while Goldman Sachs may not have treated some of its clients very well – the bank paid what then was a record $550m to the SEC in 2010 to settle claims it had misled investors involved in a subprime housing investment, and promised to overhaul its business practices – the book wasn’t tremendously impressive, mostly because of Smith’s complete lack of self-awareness. He’s a ping pong champion, a workaholic and just so utterly brilliant. Why don’t his Goldman bosses love him more?
Polk, too, struggled with emotional trauma, but by the time he sat down to write his memoir, he did so with painful self-awareness. For him, money had become a way to fill an emotional void.
“Wall Street wasn’t a talent-based meritocracy; it was more like an addiction,” he writes. “Doing whatever you had to do – rationalizing, lying – to get the money to fill that empty hole inside.”
The money multiplied – less than four years after starting to work on Wall Street, Polk was offered a guaranteed $1.75m for two years. But that didn’t make him happy, as he watched a colleague pull ahead of him in trading profits on the desk:
Cold liquid jealousy seeped into my stomach. If the year ended like this, Jeff would get paid more than me.
Eventually, Polk left the trading desks of the investment banks for the hedge funds, where the risks and the paychecks were bigger still. Well, the pay was, at any rate. One of Wall Street’s dirty little secrets, he says now, is that while it’s full of people talking about how risky their jobs are, they’re dissembling.
“It’s one of the most stable career paths available,” he argues. “Once you get to the level of making $1m a year, you rarely dip below it. Hedge fund managers who leave Goldman talk about how risky it is, but it’s all upside.”
Even if their hedge fund fails, some will walk away with the management fees they made from the first one, and can raise money for a new one in a year or so. Others can simply go back to a bank’s trading desk or work for another hedge fund, he says.
Polk’s hubris peaked when his boss offered him a bonus of $3.75m. Polk, a 30-year-old English major, rejected it, and demanded $8m to stay in a job he knew made him unhappy. Denied his lavish payday, he quit – and crashed.
“I’d become an expert in a profession that wasn’t worth a damn,” he writes.
Polk’s memoir, combining insights into Wall Street and the psyche of at least some of those who work there, will hit bookstores at a significant moment.
Now that Hillary Clinton and Bernie Sanders have sworn to campaign together to beat the presumptive Republican nominee, Donald Trump, Sanders’ views of Wall Street have made their way into the Democratic platform. Not only is Clinton pledging to defend Dodd-Frank and expand regulation to cover the shadow banking system (long part of her own platform), she will find herself endorsing a plan to recreate a modern version of the Glass-Steagall Act, reinstating the division between consumer and investment banking.
Polk has clear views on what has been done, and remains undone.
“There is a large amount of new regulation, which is positive; leverage is lower at the ‘too big to fail’ banks and banks have implemented clawback provisions on compensation, so you don’t get bonuses for several years,” he says.
“I think in the end we should reinstate Glass-Steagall and close the carried interest tax loophole,” he adds, referring to the process which enables hedge fund managers and others to have their wealth taxed at the ultra-low rate designed for business owners.
Still, both Clinton and Sanders might want to pick up a copy of Polk’s memoir, in order to really understand what no amount of Wall Street regulation will fix: the culture.
If there’s one question Polk would like his erstwhile colleagues to ask themselves, it’s this: are you proud of your contribution to the world?
Some will say yes. They will argue that they have raised capital for new businesses that otherwise could not have obtained funding. Perhaps they will argue that they devised new financial products, and that this was intellectually satisfying.
Polk argues that this is only a partial answer. Did their efforts make the world a better place, or just make them richer and feel more important?
“Change does start with redefining success,” he says.
That kind of idealism may be tough to swallow, and there are few models for what it may look like in America’s capitalist system. The B Corp – a new kind of designation reserved for companies that put other metrics alongside the pursuit of profit – is just starting to make its mark on the landscape. Etsy, its model as a publicly-traded company, was one of last year’s worst-performing IPOs.
Polk has left behind the pursuit of wealth for its own sake. Settling in Los Angeles, he runs a food non-profit serving an area where per capita income is a mere $13,000 a year, delivering produce and other healthy foods. And yes, he has tapped his Wall Street network to help fund the initiative.
If the system is going to encourage bankers to hone their greed, Polk will fight back by helping them develop their philanthropic side. As he discovered first hand, even vintage champagne and Nobu dinners lose their novelty eventually.
