Not to be undone by the bonus hating New York Times Business Section, Washington Post business columnist Steven Pearlstein dedicates todays column to complaining about "Wall Street's Season of Excess."
Here's Pearlstein's explanation for why Wall Street firms have so much money to throw around:
Wall Street is a classic example of an oligopoly, a cozy club of competitive firms that manage somehow not to compete on price. There are lots of reasons. Because the fees are, even now, a small fraction of the money at risk, clients are less focused on price than on the reputation of the firm and its key employees. Nobody ever lost their job hiring Goldman Sachs. Because of this reality, it is difficult for new firms to enter, while existing firms know they can get more business by bidding up the price of talent than by cutting fees.
To find the evidence of this less-than-robust competition, look no further than the bottom line. In the fiscal year ending in November, Goldman was able to report an after-tax profit margin of 25 percent, and an effective return on equity of nearly 40 percent. Those results are well above the comparable figures for other industries and raise the obvious question that why, in a free-market economy, have they not been competed away over time?
That's a good question that deserves an answer but Pearlstein doesn't even attempt one. It really isn't enough to say that the established banks have a tremendous advantage over newcomers. The question is why this should be so. Pearlstein thinks i'ts timidity of clients in the face of the great reputation of the established investment banks. But the last century is of long-standing Wall Street firms of good repute that no longer exist. So why isn't their more competition on Wall Street? One word: regulation. Banking and capital markets regulation stifles competition, and helps explain why so many newcomers to the financial world are concentrated in private equity and hedge funds.
That said, Pearlstein closes with something that bonus bashers should at least worth keep in mind when they lament this year's bonus numbers.
But don't get too exercised about the Wall Street bonus orgy. It turns out that these big paydays are not quite as big as they appear. For residents of New York City, the marginal rate for federal, state and city income taxes is 51 percent (although I doubt very many pay that amount). And because all these masters of the universe are competing for the same Park Avenue co-ops and sailboats and reservations at hot restaurants, a portion of the rest is lost to above-average inflation in the price of things people crave rather than the things they need.
What we have, then, is form of rough economic justice. The beneficiaries of an arms race in compensation are themselves the victims of an arms race in the price of luxury goods and services. It couldn't happen to a nicer group of folks.
Wall Street's Season of Excess [Washington Post]