Former Wall Streeter turned writer William D. Cohan goes to bat for his old team in the new book Why Wall Street Matters. Cohan’s argument is basically this: Wall Street makes it easier to access capital, which drives commerce in a million different ways, from lending money to small businesses to allowing you to float your purchases on your credit cards each month. An overreaction by regulators after the 2008 financial crisis has dried up a formerly liquid market, making it more difficult to access capital and thus hurting the economy.

Further, Cohan argues that the regulations put in place after 2008 do not get at the root of the problem: Wall Street employees get rewarded for taking risky chances with other people’s money. They get huge salaries and bonuses when things go well, and get bailed out when they don’t. With no skin in the game, what incentive do they have to change? Regulations may slow them down, but Cohan argues that those regulations are hurting you and me more than they are helping us (and more than they are hurting those greedy Wall Streeters you hate).


Why Wall Street Matters offers an interesting history lesson for those who may wonder how we got to this place. In the distant past (pre-1970), Wall Street was generally a rather cautious place. Investment bankers used their own capital to finance deals and to grow. If things went south for their firms, their personal wealth was at stake. That changed when these firms started going public and were suddenly awash in cash — other people’s cash. Suddenly the equation changed: larger financial risks could be taken at less (if any) personal risk to those doing the risk-taking. And things snowballed from there, with a range of new financial products (or schemes depending on your viewpoint) that most of us can’t quite wrap our heads around.

As I read this book, I was pretty much on board with everything Cohan was saying. Yes, Wall Street has an important role to play. Yes, over-regulation could be harmful. OK, I’m ready to hear Cohan’s solution… which turns out to be incredibly disappointing.

After spending 150+ pages talking about how ridiculous today’s regulations are, and how the real source of the problem is that Wall Streeters are still being rewarded (with no downside) for risking other people’s money, Cohan suggests that the problem could easily be solved by making Wall Street’s top executives again have their personal net worth at risk in every deal they make, just like in the old days. But Cohan does not see getting to this place as a job for the government, in terms of forcing the execs to have skin in the game. No. Instead, he envisions Wall Street policing itself, voluntarily putting their wealth at risk when they don’t have to! And he offers no argument as to why they might do this, why they would quit the current gravy train that has them holding all the cards with no downside risk. Not to mention the fact that Wall Street has shown absolutely no interest in self-regulating — how do you suppose the 2008 financial crisis happened in the first place?

Why Wall Street Matters is an interesting read, but it offers no feasible answer to the question of how we get the good that Wall Street provides while stamping out the inevitable misdeeds of those with nothing to lose and everything to gain.

— By Adam Jusko Follow KM Credit Money on Twitter