Robert J. Samuelson 09.17.08, 11:15 AM ET
Wall Street as we know it is kaput. … Greed and fear, which routinely govern financial markets, have seeded this global crisis–just when it will end isn’t clear.
What is clear is that its origins lie in the ways that Wall Street–the giant investment houses, brokerages, hedge funds and “private equity” firms–has changed since 1980. Its present business model has three basic components.
First, financial firms have moved beyond their traditional roles as advisers and intermediaries. Once, major investment banks such as Goldman Sachs (nyse: GS – news – people ) and Lehman worked mainly for their clients. They traded stocks and bonds for major institutional investors (insurance companies, pension funds, mutual funds). They raised capital for companies by underwriting, or selling, new stocks and bonds for them. They provided advice to corporate clients on mergers, acquisitions and spinoffs. All these services earned fees. Now, most financial companies also invest for themselves. They use partners’ or shareholders’ money to place bets on stocks, bonds and other securities–so-called “principal transactions.”
Second, Wall Street’s compensation is heavily skewed toward annual bonuses, reflecting the profits traders and managers earned in the year. Despite lavish base salaries, bonuses dominate. Managing directors with 15 years’ experience can receive bonuses five to 10 times their base salaries of $200,000 to $300,000.
Finally, investment banks rely heavily on borrowed money…
