Two and a half years after the crash, Wall Street ought to be feeling pleased with itself. It lost billions of dollars, devastating the world’s economy in the process, the federal government had to put up $700 billion of taxpayers’ money to prevent an even worse disaster, and otherwise reasonable politicians began using epithets like “fat cats” and “robber barons” for the first time in decades. And yet now the financiers are firmly back in business. Bonuses are flowing again—JPMorgan Chase CEO ­Jamie Dimon got a 51 percent raise in 2010, to $23 million—and Bernie Madoff is the only chief executive to end up in jail. It’s almost as if nothing had happened.

“No one has laid a glove on them,” says Janet Tavakoli, a derivatives expert. “There was massive fraud, and nothing was done. If you are a banker, you are slapping high fives at the moment.” Michael Mayo, an analyst at Crédit Lyonnais Securities, adds, “Wall Street is back, to a far greater degree than many people, including me, would have expected during the crash. Investment banks are alive and kicking.”

Nonetheless, despite all the reasons for celebration, the mood inside many banks is downbeat, even paranoid. Bankers, while not exactly overly sensitive to others’ perceptions of them (hence the goal of “fuck-you money”), still find it a shock to be so publicly despised. More important, many fear that the twenty-year bull run that led up to the crash, when bonuses, debt, and leverage all grew to what turned out to be unsustainable levels, may turn out to be a golden age that will never return. Wall Street feels not only loathed but also fearful.

Even if investment banks find new ways to make money after the previous methods ended in a crash and scandal—their age-old pattern of behavior—many wonder if any newfangled proposition can rival mortgage securitization. It just made so much money. “We always seem to find the next thing; that’s part of our DNA. But nothing else feels as large as that. It was just so enormous,” says one executive.

There is a deeper worry: that the only way banks can make the megaprofits they need to support their vast staffs and infrastructure is in operations that are at best opaque and impossible for outsiders to understand and at worst unethical and possibly illegal. Wall Street’s history is that, at the peak of bubbles, sensing that the end is coming and the profit opportunity disappearing, it degenerates into shocking behavior.

That was the story of the Internet ­initial-public-offering boom of the late nineties, which culminated in Eliot Spitzer’s uncovering the research scandal as attorney general of New York. It was even more the case with the mortgage bubble. Banks were able to make huge profits because the market was extremely opaque. That allowed them to charge investors big fees compared with a fraction of a cent on ­public-stock-­exchange trades. Ultimately, it also provided cover for the unscrupulous.

“I am charitable enough to say that 80 percent of the time, banks try to identify ­clients’ needs and innovate in a healthy fashion to meet them,” says one executive. “Then there is fraud, an activity that ought to be illegal if people were smart enough to write laws that made sense. Do you admit to your boss that your business no longer makes sense, or do you start to cheat? Or, as your margins decline, do you raise the leverage to make up for that? It’s insidious.”

This spring has brought a coda with the trial of Raj Rajaratnam, the founder of the Galleon Group hedge fund, on charges of insider trading. Rajaratnam denies the charges, but the jury in lower Manhattan was played long, damning wiretaps of his conversations with two former McKinsey & Company partners, Anil Kumar and ­Rajat Gupta. Kumar says Rajaratnam paid him $500,000 a year for information.

Gupta actually used to run the management consultancy—about as respectable a job as exists—yet he has been accused by the Securities and Exchange Commission of leaking tidbits to Rajaratnam while on the board of directors of both Goldman Sachs and Procter & Gamble. Whatever the outcome, the trial at the very least raises the question: Is this how members of elite financial circles actually operate?

Lloyd Blankfein, the former trader who is now chairman and chief executive of Goldman, testified at the Galleon trial against Rajaratnam. Goldman had had its reputation tarnished by how it behaved during the credit boom, having paid a $550 million fine to settle SEC charges that it misled investors in its Abacus ­collateralized-debt-obligation deals.

“I see much less boastful pride than there used to be,” says one top executive at a Wall Street firm. “I wouldn’t call it humility, just shame. I am astonished by how many senior people I meet who are ashamed of their own institutions. They are still a bit paralyzed by the shock of realizing how much of their profits came from unsavory practices.”

April 10, 2011

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