VOLUME AND RISK.

The argument that Wall Street is actually allergic, rather than attracted, to risk brought to mind a quote from Michael Lewis's Liar's Poker:

The biggest myth about bond traders, and therefore the greatest misunderstanding about the unprecedented prosperity of Wall Street in 80s, are that they make their money by taking large risks. A few do. And all traders take small risks. But most traders act simply as toll takers. The source of their fortune has been nicely summarized by Kurt Vonnegut (who, oddly, was describing lawyers): "There is a magic moment, during which a man has surrendered a treasure, and during which the man who is about to receive it has not yet done so. An alert lawyer [read bond trader] will make that moment his own, possessing the treasure for a magic microsecond, taking a little of it, passing it on."

Lewis, of course, was talking about 80s-era bond traders. This crisis was not really a crisis of 80s-era bond trading. But though the instruments are different, the basic insight holds: A lot of Wall Street's profits come not from risk but from the simple movement of money. That is what Wall Street is fundamentally paid to do. Move money around. When a stock trader buys a stocks, he takes a cut. When he packages an asset and sells it, he takes a cut of that. And so on and so forth. A lot of financial innovation consists of inventing new things to move money into. But this gets to another side of Wall Street: It is, in part, a volume game. Introduce too much evident risk into this process and you'd lose volume. Skittish investors wouldn't want their money moved around if they thought they might lose it. So what you saw, as Salmon argued, was a process in which bankers moved money often, and moved it ever further from evidence risk. Less risk was what customers wanted. But more movement is what Wall Street wanted. And so they figured out a way to actually increase movement by falsely decreasing risk.

Incentives, folks. They work.

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