Even smart people struggle to talk about “Wall Street”

Even smart people struggle to talk about "Wall Street"People talk about “Wall Street” like they talk about politics. Facts don’t matter so much. It’s all about what side you’re on. Frankly, it gets old in a hurry.

Even smart people aren’t immune. That’s a big problem. It’s not like you can just filter out the obvious dummies and rely on the professionals. The professionals themselves aren’t reliable.

Let’s take a recent example. John Tamny is Political Economy editor at Forbes. He recently published an article titled “Wall Street’s War On Main Street Is One Of The Greatest Fake News Stories Of All”. And his tone is as indignant as you’d expect, given the article’s title.

Mr. Tamny writes in part as a rebuttal to an article by David M. Smick. Here’s how Mr. Tamny describes Mr. Smick’s argument:

Author David Smick is the latest pundit to argue that the U.S. economy is performing sub-optimally thanks to the outsize prominence of “Wall Street.”…Supposedly booming economic growth will be our reward if some of the brightest financial minds in the world are neutered.

The art of a strawman

Before I go any further, I want to highlight one thing. I read Mr. Smick’s article. He calls out Wall Street in two places. Here’s the first:

Under corporate capitalism, even central-bank policy has favored the big, the corporate, and the status quo at the expense of the small, the young, the new, the inventive, and the entrepreneurial. It has favored Wall Street over Main Street. Today, a dozen risk-averse giant zombie banks control 75 percent of U.S. bank assets.

Here’s the second:

In any reform of Dodd-Frank, forget Wall Street and make restoring the vitality of regional and community banks, the workhorses of the grassroots economy, the top priority. He should allow small businesses that use the Subchapter S personal-tax schedules to pay their taxes at the lower capital-gains rate, the same rate Wall Street has been paying on its “carried interest.”

That’s it. At least in the one article that Mr. Tamny links to at the top of his post, Mr. Smick doesn’t seem to be arguing in favor of “neuter[ing]” any of our “brightest financial minds”. If anything, Mr. Smick seems to argue in favor of giving Main Street some of the breaks that our system currently affords Wall Street.

Mr. Tamny built a strawman so he could write an article praising the virtues of Wall Street. I have no problem with people singing Wall Street’s praises. (I’m not one of those people, but I respect that we can have different opinions on this topic.) Rather than just writing what he wanted, Mr. Tamny insisted on manufacturing a weak, exaggerated argument that he could tear down. What a strange way to lead into his piece.

Let’s look at one argument about profits

Here’s an interesting claim Mr. Tamny makes:

Indeed, such a view ignores the basic truth that investment banking and its attendant services is quite a bit more profitable for investment banks than is trading. So is wealth management a much more robust profit center.

Unfortunately for Mr. Tamny, his claim conflicts with the data.

Let’s look at the most recent 10-Q report from JPMorgan Chase. The first problem is that we cannot confidently speak to the profitability of investment banking versus trading. JPMorgan Chase includes both investment banking and trading in its Corporate & Investment Bank segment. So we can’t say whether or not it’s a “basic truth that investment banking and its attending services is quite a bit more profitable for investment banks than is trading”. At least we can’t make that claim confidently for JPMorgan Chase, one of the world’s largest banks.

The second problem  is that JPMorgan Chase reported a pre-provision profit margin of 30% for its Asset Management segment (or “wealth management”, in Mr. Tamny’s parlance). For the same quarter, the bank reported pre-provision profit margins of 48% and 60% for its Corporate & Investment Bank and Commercial Banking segments, respectively. So, again at least for JPMorgan Chase, it is not true that “wealth management [is] a much more robust profit center”. In fact, it lags the other segments, both in profit percentage and profit dollars.

Maybe JPMorgan Chase is a bad example. What about Goldman Sachs? Certainly its performance should align with Mr. Tamny’s claims.

But again…no. According to Goldman Sach’s most recent 10-Q report, the Investing & Lending segment (i.e. trading) generates more pre-tax earnings dollars and a higher pre-tax earnings margin than the Investment Banking segment. 

Also, the Investment Management (i.e. wealth management) segment generates fewer pre-tax earnings dollars and a lower pre-tax earnings margin than either the Investing & Lending or the Investment Banking segments.

And if you think this is an anomaly just for the most recent quarter, it isn’t. Here’s a post I wrote about how Goldman Sachs makes money. From 2013–2015, Investment Management had a smaller margin than Investment Banking, which had a smaller margin than Investing & Lending. The results are the opposite of what Mr. Tamny asserts.

So data from two of Wall Street’s most iconic institutions either fail to support, or conflict with, Mr. Tamny’s claims. That’s why learning about corporate finance can be so tedious and difficult. To get a reliable understanding, you have to go straight to the source, e.g. the SEC. Relying on the claims of journalists, even those of the Political Economy editor at Forbes, can get you in trouble. 

Talking about corporate finance is too often like talking about politics

Mr. Tamny’s article shows something I’ve always found interesting about corporate finance. It’s surprisingly political. And whenever politics gets involved, even smart, calm people struggle to engage productively.

Weirdly, it’s one of the reasons I’ve been drawn to finance. I realize that a lot of what we read and hear is colored by politics. And the more political a topic, the less likely we are to hear about facts and nuance. We’re more inclined to hear lectures. Lots and lots of lectures.

I wanted to learn the “truth” of finance, without relying on all the exaggerated claims and counterclaims in the financial press. I didn’t want the political motivations, where an author was using financial arguments to advocate for one politician or party over another.

I just wanted the finance. I wanted to know how large companies interacted with their stakeholders, primarily their debt holders (banks) and their equity holders (shareholders). I wanted to better understand the web of connections between banks and companies (which extends far beyond just debt). Mr. Tamny’s article shows why you can’t rely on the popular financial press to build this understanding. It’s too easy to find yourself in a rat’s nest of strawmen and half truths.

Be careful as you pursue self study. Pay attention to stories versus facts. Stories are essential. They’re how we communicate. But when they conflict with the facts, they’re troublesome.

You can quickly get yourself into trouble when you rely on storytelling about Wall Street. It’s a minefield. Proceed with caution. And rely on primary sources when possible.

Leave a Reply

Your email address will not be published. Required fields are marked *