Lately there has been a great deal of news coverage of the ever-shrinking pool of bonuses awarded to the traders and investment bankers of the too-big-to-fail Wall Street firms. At UBS, for example, certain highly compensated employees will have to face the indignity of having part of their previous bonuses clawed back in the wake of a $2.3 billion loss resulting from the actions of a rogue trader. New York magazine recently ran a detailed piece on this subject appropriately captioned, “The Emasculation of Wall Street.” One of the article’s most poignant statements was voiced by an unnamed hedge fund manager.
“If you’re a smart Ph.D. from MIT, you’d never go to Wall Street now--you’d go to Silicon Valley. There’s at least a prospect for a huge gain. You’d have the potential to be the next Mark Zuckerberg.”
To this, we at Index Funds Advisors, Inc. say “Bravo!” and we wish it would have happened many years sooner. Society derives far greater benefit from the application of brainpower to real world innovations as opposed to financial innovations. The simple fact of the matter is that the primary financial instruments that are used to connect providers of capital with users of capital have existed since the nineteenth century. Much of the innovation that has come from the geniuses of Wall Street has been useless at best and incredibly destructive at worst. Nevertheless, we have seen a few advances that have truly helped investors such as index funds, but none of these required the talents of PhD. Physicists from MIT.
As noted by Matt Taibbi of Rolling Stone in his blog post of 2/8/2012, “The financial services industry went from having a 19% share of America’s corporate profits decades ago to having a 41% share in recent years. That doesn’t mean bankers ever represented anywhere near 41% of America’s labor value. It just means they’ve managed to make themselves horrifically overpaid relative to their counterparts in the rest of the economy.” All we really need from Wall Street are prudent people who will be reliable stewards of their client’s money for which they can expect to be well compensated as opposed to outrageously overpaid. What we don’t need are Fabulous Fabs aided by rocket scientists who help them conjure up new ways to “blow up the client” or “rip the client’s face off.” The world is a better place when the rocket scientists are actually designing rockets (i.e., actual products or potentially beneficial scientific research) and Wall Street bankers are playing their proper role as handmaidens to capitalism. Regarding the big-time traders, as more and more individual investors as well as trustees of foundations, endowments, and pension plans become wiser and go passive, the traders will have only each other to play against in their zero sum game. We wish them the best. Finally, the increasing adoption of passive over active will automatically reduce the bloated 41% share to a more reasonable level. This is far preferable to wielding the heavy hand of government regulations which all too often have unintended consequences.