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Wall Street Critic Says Stop Beating Up Wall Street

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Enough with punishing Wall Street by loading it down with a glut of regulations as retribution for its culpability in the financial crisis, says William D. Cohan, outspoken bestselling author of books about Wall Street firms and ex-JPMorgan Chase investment banker, in an interview with ThinkAdvisor.

As for his newest work, “Why Wall Street Matters” (Random House), in the interview, the financial journalist and former banker shares his recommendation for a better way to change financial services’ “bad behavior,” and stresses the personal responsibility of clients to choose trustworthy FAs.

Further, the candid Massachusetts native, 57, relates a painful experience to ThinkAdvisor: losing the wrongful-termination arbitration he brought against JPMorgan when the firm fired him in 2004.

Long a critic of Wall Street’s conduct in the years just prior to the financial crisis, Cohan, in his new book, calls instead for folks to celebrate Wall Street for the crucial role it plays as an engine of U.S. economic growth.

In the course of 17 years, he worked as an M&A investment banker at Lazard Freres, Merrill Lynch and finally, JPMorgan. An earlier career saw Cohan toiling as an investigative reporter covering public institutions in Raleigh, North Carolina.

Frustrated at being denied a dream job at The Wall Street Journal, he enrolled in Columbia University Business School, then entered financial services. When life in that arena ended bitterly, he returned to writing and penned three successive bestsellers profiling the Wall Street firms of Goldman Sachs, Bear Stearns and Lazard Freres.

He writes for a number of publications, including The Washington Post, The New York Times Magazine and Vanity Fair, where, in his March column, he brands President Donald Trump “a deeply unqualified…buffoon.”

But forthright Cohan spreads around the scorn, perhaps reserving his most severe appraisals — that is, of Sen. Elizabeth Warren and the Financial Industry regulatory Authority — for our interview.

ThinkAdvisor recently spoke by phone with the New York-based author, just back from a trip to Japan. Here are excerpts from our conversation:

THINKADVISOR: You write that Wall Street needs “smart regulation,” not political retaliation for the financial crisis. Do you have specific regulatory suggestions?

WILLIAM COHAN: This is an opportunity to use a scalpel, not a sledgehammer. Some of Dodd-Frank makes sense: higher capital requirements, less leverage. If Donald Trump changes the regulation on Wall Street, and elsewhere, it basically will be a good thing. But he strikes me as a sledgehammer type of guy, so I worry.

Sen.Elizabeth Warren is pushing a new Glass-Steagall bill.  Her efforts to bring back Glass-Steagall are “inane,” you write. How so?

Where does one begin? She’s a demagogue on the issue of Wall Street for her own political gain. She taught bankruptcy at Harvard Law School; but to hear her talk about Wall Street, she doesn’t really understand how it works. Either she was a very bad Harvard professor, or she understands Wall Street perfectly well, which I assume she does, and is just exploiting it for her own personal gain. For her to go around denigrating anybody who ever worked on Wall Street is appalling.

You say that the government’s “demonizing Wall Street” has thwarted America’s economic recovery. How?

The capital markets, a huge asset for America, have to able to function smoothly. But now small and medium-size businesses are having trouble getting access to credit. Businesses [of this size] create most of the jobs in this country. But banks aren’t willing to make loans to them because [government-imposed] capital charges are too high. So, by hurting Wall Street, you also hurt the American economy because the two are highly correlated.

You were an M&A investment banker at JPMorgan Chase. Why did you leave and start to write books?

I left because I was fired. After 9/11, when the s— hit the fan, especially on Wall Street, JPMorgan made all these promises about the kind of revenue they were going to generate. But they couldn’t meet their projections. So they decided they had to fire people.

Did you like working there?

It was interesting to advise CEOs of companies about deals. But as you get more and more senior, that became less and less. And there were so many crazy things that went on with people’s behavior and backstabbing and political mind games.

Why were you terminated?

I had my best year ever in 2001. I was in my 40s and making a lot of money. It took them two years to get to me. After two years of putting me in nothing jobs and making me miserable, they fired me in 2004. They were ruthless. 

Did you receive severance pay?

No. I was so angry at them for the way they treated me that, instead of taking a settlement, I took them to NASD arbitration [National Association of Securities Dealers, predecessor to FINRA] on the grounds that I was wrongfully dismissed. But I lost the arbitration, had to pay my lawyers and ended up not getting the settlement.

That was rough.

It was horrible. FINRA arbitration is utterly stacked against anybody who works on Wall Street. It’s outrageous. People don’t understand the system — it’s not the same as a court of law — but they’re forced into it. It was an awful, awful, awful, awful experience.

FINRA now has a new president-CEO, Robert W. Cook. Maybe things will change.

It’s all the same. It’s a corrupt organization run by the people it’s supposed to regulate. It’s amazing that it exists and that Wall Street employees and brokerage clients have no choice but to go to FINRA arbitration for any monetary disputes.

You write that “the biggest way to change people’s behavior on Wall Street is by changing what they get rewarded to do.” Please explain.

You could take the whole Dodd-Frank law and all the other regulations attached to it and toss them in the garbage if you did just one thing: Change the compensation system on Wall Street. Unfortunately, no one but me is talking about that. [Wall Street leaders] are all too busy trying to curry favor with the Trump administration. They’re all a bunch of cowards and lemmings. It’s really distressing. This is something that should have been done immediately after the financial crisis. They know I’m absolutely right, but they don’t want to do it.

How would changing the comp system change people’s behavior?

By having accountability: Instead of rewarding bankers, traders and executives in the underwriting and loan businesses — where big chunks of capital are committed — for taking big risks with other people’s money, reward them to take prudent risks as if it were their own money. 

You mean, put their personal net worth on the line.

Yes. That would do more than any regulation. That’s the way Wall Street operated for the first 200 years of its existence — before companies went public, which changed everything.

Would such change in the comp system mean abolishing the big bonuses bankers, traders and executives get or giving them smaller ones?

Instead of giving them bonuses based on the revenue they’ve generated, Wall Street needs to come up with a different metric for rewarding them — like risk management or being a team player. Right now, they get rewarded for generating revenue. It’s not hard to do that. But the problem is that, for one, it has to be profitable revenue.

Did you complain about the compensation system when you worked as an investment banker at JPMorgan Chase?

No, of course not!

Should financial advisors’ comp system be changed too?

That’s a different business line. But advisors should have the right incentive too. Advisors should be rewarded to advise in the best interest of their clients. It’s ridiculous that Trump wants to roll back [the Labor Department’s fiduciary rule].  But [financial advisory] is a different business. There’s no capital being risked.

Sometimes advisors take big risks with their clients’ money, as with mortgaged-backed securities during the financial crisis, though, typically, they didn’t realize what they were recommending.

Advisors should be penalized harshly for getting clients into things that aren’t good investments. But it’s up to a client, as well, to choose a financial advisor they can trust and who isn’t going to screw them. So it works both ways. A client shouldn’t put himself or herself in a situation where a financial advisor can take advantage of them.

“More than eight years after the financial crisis, punishing Wall Street has gone too far,” you say. What should have been done?

It was the job of the Justice Department to punish Wall Street for its bad behavior. But after it prosecuted the two Bear Stearns hedge fund managers, it lost its spine and decided not to prosecute anyone else for wrongdoing. That left the American pubic pretty pissed off because when things go wrong, we like there to be accountability.

What were the repercussions?

Into that void of accountability jumped politicians — Bernie Sanders and Elizabeth Warren, Donald Trump — mercilessly blaming Wall Street for everything. And somewhere between the politicians and the regulators, it was decided that Wall Street should be punished through regulations instead of by prosecution.

You call Wall Street “a beautiful machine.” Please elaborate.

No economy creates jobs, companies and opportunities like our economy does, and Wall Street is the engine of that growth. If you destroy Wall Street, you destroy our job-creating machine and the ability to pay people higher and higher wages. Why would you want to destroy it? I can understand wanting to hurt Wall Street people who caused the financial crisis. However, don’t destroy the machine. Don’t throw sand into the gears of this beautiful machine.

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