The recent recession provided Americans an unsettling view of how Wall Street really works. We saw how Wall Street firms created financial products that inspired many to momentarily reach the American dream of home ownership, all the while betting on their eventual default. Despite the finger-pointing and the political backlash over what caused the deepest recession since the Great Depression, we clearly see Wall Street’s dominance and influence over the average American household.
In Karen Ho’s new book, “Liquidated: An Ethnography of Wall Street”, Ho, an Associate Professor of Anthropology at the University of Minnesota, explains how Wall Street and the investment banking culture is able to dominate “corporate America” and ultimately, the American public. She discusses how investment bankers are incented to advise corporate America’s executives to generate more corporate transactions like mergers & acquisitions, eventually leading to systemic financial meltdowns.
The book, which was Ho’s doctorial dissertation, provides insight into the investment banking culture and history, which she uses to demonstrate a fundamental shift in market ideology. She describes the investment banking culture as elitist, recruiting the very best of the brightest and the hardest working Americans, operating in an environment where the only strategy is to make the most of the current moment. For her research, Ho also draws on her own real life work experience at an investment bank.
Her chronicles of the history of corporate America and the shareholder revolution is clear and concise and is a great primer for anyone interested in the shareholder movements that emerged in the 1980s. She discusses how prior to the shareholder revolution, corporate America was viewed as a social institution, serving the needs of many constituents, customers, shareholders and employees. She argues that the shareholder revolution and the aggregation of shares into the hands of few institutional investors (advanced by the repeal of the Glass-Steagall Act) have pushed corporate America’s managers to become shareholder focused.
To appease shareholders, managers have to constantly deliver high value to shareholders in a short timeframe, typically during quarterly earnings seasons, thus undermining an organization’s ability to plan for the long-term. In delivering this high value, Ho explains that these managers tend to rely on Wall Street investment banking advice on corporate actions like the merger of two companies, which can give a quick “pop” to their stock price. And, in return for this sophisticated Wall Street advice, investment bankers are paid handsomely which can be an addictive motive for furthering corporate transactions.
The perpetual need to deliver high shareholder value has also led to quick corporate management decisions on reducing their workforces and boosting the productivity among the few remaining employees. Ho says that this has led to rampant job insecurity and, more importantly, it has changed the dynamics in the American community.
We can over-simplify Ho’s argument as Wall Street greed and its effects on Americans; however, over-simplifying this shift in market ideology doesn’t explain how we have come to this present state and bears merit to read Ho’s argument that, in some ways, we are all responsible for this paradigm shift in ideology by allowing it to happen.
What amazes me about this book is that Ho’s revelations and research started over 10 years ago and, yet, years later, is timely for our current events. Had Ho published her book years earlier, perhaps corporate America would have reconsidered Wall Street’s role in defining shareholder value and, although extreme, a financial meltdown could have been averted.
Although written for a mostly academic audience, the book becomes easily digestible because of the summaries Ho adds in each section. She connects well the main theme throughout many areas of the book. Ho’s views should not be considered “anti-Wall Street” but viewed as an analysis of Wall Street’s effect on the American community and the financial markets. This book should be read by Wall Street investment bankers and corporate managers to better understand the social values and responsibilities of corporations and the role that they play in the American community.