Sunday, May 2, 2010

The Wall Street Potlatch

I want to play around with the idea that the orgy of bonus-giving that is a way of life among Wall Street investment banks (and related institutions) is a perverse form of the potlatch, the ceremony among Northwest Coast Indians in which leaders (Big Men) give away enormous quantities of food and goods to another tribal group. When I say “play around,” I mean that. I’m making this up as I go along. I’m not giving you a quick tour of a sophisticated piece of intellectual analysis that I or someone else has already done. Rather, I’m attempting to find out whether there is a sophisticated piece of analysis to be done and, of so, where one might begin.

Let me start with two confessions: I do not command the literature of potlatch ceremonies, nor to I have any direct experience with the inner workings of those large investment banks that have managed to bring our economy to its knees. With that out of the way, let’s proceed.

Potlatches have entered the public imagination as extravagant and often wasteful ceremonies in which enormous quantities of goods were often destroyed; though, according to Lewis Hyde, (The Gift, pp. 36 ff.) this represents a late and decadent form of the practice. At heart the practice was one of redistribution. A group leader and his followers would gather food and goods and give it all away in a big party for another group where all who attended were entitled to food and goods. The other group would then reciprocate at a later date, trying to outdo the first group in extravagant generosity. The long-term effect was to keep goods in circulation among the large group and to foster solidarity across that larger group.

At first glance, this seems to involve interaction between three of the four basic forms of social interaction Alan Fiske has found in all societies: Communal Sharing, authority ranking, and equality matching. That is to say, this is an aspect of the basic biological stuff out of which human communities are built. The relationship between a leader and the members of the group is one of authority ranking; the leader uses his authority to organize the work required to throw a potlatch – work that may take as much as a year. Communal Sharing takes place during the ceremony, in which all guests get something though they did nothing to produce the wealth being distributed. And, lastly, equality matching demands the potlatches be reciprocated. In effect, leaders (and their communities) are keeping score of who’s given a potlatch for whom.

Now let’s consider the Wall Street potlatch. At the top of each investment firm there is a small committee of top executives that determines how much of the firm’s profits are to go into the bonus pool and how that bonus pool is to be distributed. The members of this committee, in their day-to-day operating executive capacity, exercise authority over all other members of the firm (authority ranking). They are the tribal Big Men throwing the potlatch. The distribution of the bonus money is, in effect, the potlatch itself. That bonus distribution is communal sharing; everyone gets (a carefully graded) piece of the profit pie. While, as a practical matter, employees at such firms consider the bonus to be a proper part of their compensation package, the term itself, “bonus,” indicates that it is discretionary on the part of management. It is a gift, but one in which all share in communal fashion. It is this sharing that motivates them to work hard, not simply to please the executives, but to contribute to their work-place community. It is the sharing that, in some deep sense, makes the workplace into a community.

Note, however, that these Big Men of Wall Street throw the potlatch for their own followers, not for the followers of another clan or village. The Big Men of Goldman Sachs don’t give bonuses to the staff of Morgan Stanley, nor do the Big Men of Morgan Stanley give bonuses to the staff of Lehman Brothers, nor do Lehman Big Men, in turn, give bonuses to the staff of Goldman Sachs, etc. Come to think of it, though, Lehman doesn’t exist anymore, does it?

So, the bonus potlatch does not involve equality matching, reciprocity, among Wall Street firms. Of course not, for those firms are in competition with one another. These bonus potlatches do not keep anything in circulation. Rather, they take money out of a large pool that’s spread over many organizations and individuals (investors or one sort or another) and put it into the pockets of local Wall Street tribesmen. And these days some of that money has come, if indirectly, from the U.S. Treasury. And it is in that sense that these potlatches are deeply perverse.

Among the Northwest tribes, the potlatches involved redistribution of food and other goods on which the people lived and which they themselves produced. The Wall Street bonus potlatch is quite different, as befits the fact that they exist in a much more complex economic environment. The Wall Street potlatch draws on funds that bear a distant, obscure, and complex relationship to the production and circulation of actual goods and services. Not only that, but in this most recent escapade, the Big Men of Wall Street have, through their relationships with the Big Men of Washington, D.C., managed to arrange matters so that they can draw on a potentially endless source of funds nominally committed to the public good through taxation.

It is in this sense, then, that the Wall Street potlatch is deeply perverse, if not flat-out evil. The Big Men make their own status with other people’s money and the Big Men’s followers, of course, are quite happy with this arrangement. For they too benefit from other people’s money. They get to use it to hire those other people to mow their lawns, repair their cars, and diaper their babies.

At this point, if not before, you might be thinking, “Gee, this bonus system is really quite different from the potlatch, so why bother with the comparison?” Because I want to focus on the dynamic involving the Big Men and their followers and to ground that dynamic in some notions about human behavioral biology (namely, Alan Fiske’s notion of relational models). And, on that point, the comparison seems useful. To be sure, we have no equality matching, no reciprocity, in this high-tech tarted-up version of the potlatch. And that seems to me a rather important point, one which I’m not prepared to explore at this time. But we’ve still got the coupling of authority ranking and communal sharing that is essential to the potlatch. And that, I believe, is what I’ve been fishing for; that’s what allows these tribes to function as an insular world that feels safe to ignore the political turmoil that has surrounded their actions over the past three years.

It’s that dynamic that keeps these squirrels running in their well-appointed exercise wheels. That dynamic is somewhat independent of the rules and regulations that govern the obscure transactions the produce the money flow. And that dynamic will do everything it can to persist through whatever regulatory actions the government takes. It’s that dynamic that creates a small bunch of wealthy tribesmen who, to all appearances, seem utterly out of touch with the larger world. That world doesn’t exist except as a vehicle to be manipulated so as to keep the money flowing into the bonus pool. It’s just streams of numbers flowing through their Bloombergs.

I rather suspect that the Big and Not-so-Big Men and Women who run the exercise wheels of Wall Street have as much collective intelligence, savvy, and cunning as any group of politicians and bureaucrats attempting to regulate them. They will keep their wheels spinning no matter what regulations get imposed on the construction and operation of those wheels. The deeper problem is to get them reconnected to the larger world which they exploit, to see it as part of a larger community in which they live and on which, ultimately, they depend. That connection cannot be regulated into existence. Creating it is a different kind of problem.


  1. I was thinking about this just this weekend. It occurred to me that for people who have made wealth, after some period of time, their wealth becomes both invisible and obvious to them. That is to say that every day that they work, at their level, they become more intimately familiar with the ways in which they are compensated for their knowledge.

    As I was listening to the GS testimony by Blankfien, I noticed how quickly and easily his descriptions of market making, underwriting and counterparty risk went from that which was relatively simple to understand into something very complex - a complexity that is nonetheless both invisible and obvious to people in his business. Obvious because there are clearly trillions of dollars tied up in such deals and who knows how many thousands of them transacted by his firm and others. Invisible because unless you spend time reading up on what CDOs are you have no idea.

    And yet what a CDO is and how they are transacted are essentially public knowledge to anybody who seriously takes the time to study them, as we all have been in a half-assed way to satisfy our curiosity about what Goldman Sachs has been up to. Which is what any financial insider must think when looking at the lot of us.

    Of course they have a right to profit, they must think. This is how the market works, this is what you have to do and this is how we do it all the time. And this is how we are compensated because we have bothered to take the time to learn what it is we know. And, obviously, this is what our clients are willing to pay us for the privilege of our services. It surely isn't extortion.

    As a software guy, I'm certain my needs and wants, demands and expectations of software are orders of magnitude more exacting than that of the average Joe, and is also, by dint of my experience, much higher than that of my customers. Likewise I would find it very difficult to believe that Hugh Masakela would pass his spare time listening to The Black Eyed Peas. Our expertise guides our consumption, and people who are the smart money, literally the people that the richest people and institutions in the world trust to transact their business are bound to have expectations of money that are far beyond our more simple tastes.

    A friend of mine once told me that it's easier to get 10 million dollars in securities than it is to get 50,000 in cash. That's because everybody knows what to do with $50,000 in cash, but very few people know how to get and spend 10 million in securities.

    I think there is a sense of entitlement our professions give us that tells us that only we know the true value of our work and work products. So a gift from one composer to another is not likely to be received to or from anyone but a peer. Similarly what Richard Stallman meant when he talked about Free Software had to do with his entitlement and for those who understood that concept as programmers when he hatched the idea. What programmer would ever stoop to accept only what his commercial customers pay for? What musician would limit their access to music as per the rules of a record store?

    It is in this way that I see the appetites and demands of experts in every field.

  2. But, you know, a lot of those guys pulling down the seven and eight-figure bonuses DIDN'T understand the paper they were selling. There's is the entitlement of (malign) insularity, not expertise.