NEW YORK (
) -- Bankers have become so vilified in the past 18 months that they couldn't even sue for libel if journalists called them blood-sucking money monsters who are ruining the world.
Money is the main motivator on Wall Street -- after all,
Bank of America
simply take money and make money. No goods are produced.
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But the financial industry is more important than any other and is used by everyone, from a retiree drawing on a 401(k) retirement plan to a middle-aged manager paying a mortgage to a 3-year-old child whose parents are saving money for college in a 529 plan. Unlike
, which plies us with iPods, iPhones and iPads, and
, which makes everything from light bulbs to MRI machines to airplane engines, banks create no new wealth. Their borrowing and lending -- or "money handling," as it was called in ancient times -- lubricate the process of production, distribution, exchange and consumption of wealth.
Banks, in other words, are the engine of economic growth. No banks, no Apple, no GE, no
Abercrombie & Fitch
The government's fraud accusation against Goldman Sachs justified those critical of the investment bank's mile-high pay package -- more than half a million dollars per employee, from the janitor at headquarters on West Street in Battery Park City to the head of the China unit on 7 Finance St. in Beijing. Envy is at the heart of the matter. While Goldman Sachs may catch all the headlines, many other financial firms reward their Harvard and Stanford MBAs with hundreds of thousands of dollars for middling jobs such as mutual-fund accounting and hedge-fund securities clearing.
Many services offered by large global banks -- providing loans to businesses, helping companies raise funds, handling mergers and acquisitions, and managing money for large institutional investors such as pension funds, endowments and foundations -- provide the economy with the fuel it needs to progress. While the negatives are visible, and egregious, banks' underlying activities power the economy, improving our way of life.
Bankers' pay gets people riled up -- and with good reason. Pay packages are in the six figures for inexperienced junior bankers in their 20s and stretch into the millions for the higher-ups, including not only investment bankers, but also bond and commodities traders with more brawn than brains.
Because the economy is driven by financial firms, of which there are only a handful, they rake in money. The pay culture is a remnant of a time when banks were private institutions with a partnership structure, which distributed earnings among the owners of the company as they saw fit. Since there was little to invest in capital improvements or research and development, the profits were huge and bankers were paid accordingly.
Once the banks went public -- with Goldman Sachs among the last, in 1999 -- that practice should have ended. After all, shareholders were the rightful owners of the banks and their profits. That didn't happen, and the risk-and-reward balance decoupled, with employees enjoying all of the reward with little exposure to the risk.
Decoupling led to outsized risk-taking in the past two decades. Still, the sexier parts of banking -- investment banking, hedge funds, private-equity funds, mutual funds -- account for a small section of the industry and aren't as widespread as it seems. With the help of borrowing, banks' main function, after all, losses from those risks were amplified. With the credit-default swap market swelling to hundreds of trillions of dollars, dwarfing underlying securities, it's sadly easy to understand how banks deep-sixed the economy. All the while, financial regulations, including those proposed by the Obama administration, have already been in place for decades, though have gone unenforced.
The government was forced to bail out banks because, if they didn't, America would have collapsed. Banks
the system, fueling everything that makes America the land of opportunity but, as a result, are susceptible to the weaknesses that make it the land of excess.
-- Reported by David MacDougall in Boston.
Prior to joining TheStreet Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.