Why Wall Street Matters by William D. Cohan

The Blurb On The Back:

”This is my effort to pry open the black box that Wall Street has carefully constructed around itself in the last generation, much to its detriment.  It’s a black box that makes it almost impossible for the average American to understand what goes on there, why it is important to nearly everything we hold dear, and why we wouldn’t much like to live in a world without Wall Street.”

If you like your smartphone or your widescreen TV, your car or your pension, then, whether you know it or not, you are a fan of Wall Street.

William D. Cohan, bestselling author of House of Cards, has long been critical of the bad behaviour that plagued much of Wall Street in the years leading up to the 2008 financial crisis, and, as an ex-banker, he is an expert on its inner workings as well.  But in recent years he has become alarmed by the vitriol directed at the bankers, traders and executives who keep the wheels of our economy turning.  Why Wall Street Matters is a timely and trenchant reminder of the actual good these institutions do and the dire consequences for us all if the essential role they play in making our lives better is carelessly curtailed.

In a brisk, non-nonsense narrative, Cohan traces the history of Wall Street from a handful of traders on a cobblestone street in downtown Manhattan to the global financial behemoth it is today.  Along the way, he argues that Wall Street and the big banks, with their important interstitial role between those who have capital and those who need it, are the invisible, albeit flawed, engines that power our ideas.  Instead of denigrated, they should be celebrated and made to work better for us.

Maybe you think the banks should be broken up and the bankers held accountable for what happened in 2008.  Maybe you hate the greed of Wall Street but know that it’s important to the world economy.  Maybe you don’t really understand Wall Street, and phrases such as credit default swap make your eyes glaze over.  Maybe you think President Trump is America’s saviour or believe that he will destroy everything.

Whoever you are, whatever you think, the blunt, brief and utterly accessible Why Wall Street Matters will be your beacon through the fog.

The Review (Cut For Spoilers):

William D. Cohan wrote this extended essay out of concern over what he sees as the over-regulation of Wall Street and a misguided political campaign to split commercial and investment banks into separate entities.  Unfortunately, although Cohan sets out the interesting history of Wall Street and pointing out the complexities of the existing regulatory system with stress-testing and Dodd-Frank coming in for justified criticism, his arguments supporting Wall Street are less convincing, in part because he doesn’t cite much in support of his points – there are no footnotes and the limited bibliography doesn’t contain any works published after the financial crash.

Cohan’s arguments boil down to the following:

  1. too much regulation makes banks risk averse, which risks drying up liquidity and the provision of capital to other businesses and prevents the innovation that helps to make Wall Street so important to the US economy. I have a lot of sympathy for this point, but it overlooks the decades of light touch regulation, which led to Wall Street operators taking increasingly riskier punts, which led to financial bubbles (e.g. the first dotcom bubble) until the system crashed – that is clearly unsustainable;
  1. splitting up banks into commercial and investment operations (which is being touted by Senator Elizabeth Warren among others) is too expensive, too complicated and will again, encourage risk averse behaviour among bankers, which in turns harms the US economy. I was not convinced by this – Cohan’s own history of Wall Street showed that when investment banks and brokerage firms were permitted to list, then they got the liquidity to make investments in what became a golden age of product innovation – Cohan doesn’t consider the potential benefits at all while the process of splitting out operations would be beneficial for the professional advisers who service Wall Street by enabling them to develop more expertise;
  2. the best way of regulating Wall Street is to make decision makers have a financial stake in their banks, such that their full net worth can then be clawed back from them in the event that they engage in risky behaviour.  To be honest, I didn’t see how this would lead to the same risk averse behaviour that Cohan deplores in point 1 above but also, the central argument made against this is that unless you implement it worldwide, then you risk losing talent to other financial centres that won’t insist on such measures.

WHY WALL STREET MATTERS was released in the United Kingdom on 28th February 2017.  Thanks to the Amazon Vine Programme for the review copy of this book.

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