What Is Wall Street?

The conversation we’ve been having about Wall Street in this country for the past decade has become so utterly hyperbolic and polemic that if you’re like most people, amid all the outrage you’ve totally lost the thread of the discussion. Maybe you think the whole system is rotten to the core. Maybe you think, sure, there’s greed, excess, and bad behavior on Wall Street, with nary a consequence for those responsible, but is the right answer to these problems to break up the big banks? Maybe that’s about when you just checked out.

Even the phrase “Wall Street” conjures confusion. What are we talking about? The actual place? Just the very biggest investment banks, or the smaller ones, too? Does the term include hedge funds and private-equity firms?

Are we talking about the entire New York finance community? Do we include the banks, hedge funds, and private-equity firms in the rest of the country? What about the financial system of the entire globe? What are we even referring to anymore?

The questions keep piling up. Maybe we can define what we mean by Wall Street, but even if we do, how should we feel about it? Should we be angry that Wall Street seems to be nothing more than a festering, open wound of rampant self-interest and malfeasance? Or should we be happy that Wall Street has become a convenient metaphor that politicians use to park blame for every bad economic thing that has befallen the country in recent years?

Or could it be that Wall Street is something altogether very different? Is Wall Street the left ventricle of capitalism, the brilliantly designed engine that powers innovation, job growth, and wealth creation and that has become the most sustained way by which billions of people the world over have been lifted out of poverty and given a chance at a better, more economically fulfilling life?

Is Wall Street a cause for celebration or denigration?

This is a fundamental question that has become so supercharged that most people haven’t a clue how to answer it. Or don’t dare to try. But if pressed, their instinct would be to agree with Jean-Jacques Rousseau, the eighteenth-century Enlightenment philosopher, who once said that “finance” is “a slave’s word,” while the profession itself is nothing more than “a means of making pilferers and traitors, and of putting freedom and the public good upon the auction block.”

The modern-day equivalent of this sentiment can be found in the musings of Bernie Sanders, the U.S. senator from Vermont and former Democratic presidential candidate, whose stump speeches during the 2016 presidential campaign condemned Wall Street relentlessly. “Greed, fraud, dishonesty and arrogance, these are the words that best describe the reality of Wall Street today,” he said in January 2016. And then he paid homage to one of the most recognizable cultural touchstones about modern Wall Street when he referred to the famous “Greed is good” scene in Wall Street, the 1987 Oliver Stone film, where Gordon Gekko, played with oleaginous glee by Michael Douglas, lectures Bud Fox, his young and aspiring apprentice (played by Charlie Sheen). “So, to those on Wall Street who may be listening today, let me be very clear,” Senator Sanders continued. “Greed is not good. In fact, the greed of Wall Street and corporate America is destroying the fabric of our nation . . . We will no longer tolerate an economy and a political system that has been rigged by Wall Street to benefit the wealthiest Americans in this country at the expense of everyone else.”

Senator Sanders used his growing political power to influence the anti–Wall Street rhetoric of the Democratic Party’s 2016 platform. “To restore economic fairness,” the platform reads, “Wall Street cannot be an island unto itself, gambling trillions in risky financial instruments and making huge profits, all the while thinking that tax-payers will be there to bail them out again. We must tackle dangerous risks in big banks and elsewhere in the financial system.” And to do this, the Democrats advocated “breaking up too-big-to-fail financial institutions that pose a systemic risk to the stability of our economy” and an “updated and modernized” version of the so-called Glass-Steagall Act of 1933, which forced the separation of investment banking from commercial banking for the next sixty-six years, until its repeal in 1999. Plugging his new book, Our Revolution: A Future to Believe In, after the election of Donald Trump, Senator Sanders continues to lambast Wall Street. Hell, Wall Street has grown so unpopular that even the 2016 Republican Party platform called for the reinstatement of Glass-Steagall. Just think about that for a moment. Rest assured, Trump’s victory does not necessarily mean that the populist anger directed toward Wall Street dissolves overnight.

So, is Senator Sanders correct? Is Wall Street actually rigged to benefit the rich in America at the expense of everyone else? Or is what Wall Street does in its many guises a monumentally important, utterly irreplaceable way that capital gets allocated in the most efficient, fairly priced manner from the people who have it to the people who want it?

To be sure, there are many crucial challenges facing the world today—among them climate change, income inequality, suppression of human rights, nuclear proliferation, and political unrest—but our collective failure to decide whether Wall Street is a force for good or one for evil, whether it should be celebrated or dismantled, certainly ranks high among them and effectively precludes us from having a much-needed debate about what Wall Street does right, and should be encouraged, and what Wall Street does wrong, and should be eliminated.

People get rightfully befuddled by most of the words used by Wall Street bankers, traders, and executives. If you’re like most people, though, once you hear the term “leveraged buyout” or “credit default swap,” your eyes glaze over and you mentally check out. Or maybe you are just utterly confused by the fact that after attacking Wall Street mercilessly during his campaign, Donald Trump has surrounded himself with Wall Street veterans.

But here’s the thing: If you like your iPhone (which you clearly do, because more than one billion iPhones have been sold worldwide since its inception in June 2007), or your wide-screen TV, or your car, or your morning bacon, or your pension, or your 401(k), then you are a fan of Wall Street, whether you know it or not. If you like the power and functionality of Facebook, Snapchat, and Twitter, you actually like Wall Street. None of these things would be even remotely possible to have, in the size and the scope that we have them, and as affordable and as easily accessible as they are, without the free flow of capital that Wall Street manages to provide nearly twenty-four hours a day, seven days a week to people who need it anywhere on the globe. The ability of Wall Street to provide capital when and where it is needed at a fair price isn’t a magic trick, or a strange form of alchemy, or something to be feared, or detested. It is an essential fact of modern-day life.

It should be celebrated.

At the same time, of course, Wall Street is a business, a big business. Everything it does is designed to make money, or is done with the hope of making money, just like any other business on Earth. It doesn’t deserve or warrant extra vilification as a result. For instance, it’s no surprise that Apple would not exist if it weren’t profitable, or weren’t able to convince investors that one day it would be (as companies such as Amazon have been able to do for years). The fact that Apple is one of the most profitable companies in the world enables it to hire the best, the brightest, and the most creative people and pay them well. Apple’s success allows it to buy new equipment and to build new plants—including a space-age, $5 billion circular headquarters in Cupertino, California—and, of course, it allows Apple to design and to build new groundbreaking products, such as the iPod, the iPhone, and the Apple Watch, and to dream about what the future will look like, whether it includes the Apple car or the Apple personal transporter, like The Jetsons.

I know that in the current political climate, that might sound like a heavy dose of corporate pabulum, courtesy of a Wall Street or Apple flack, but here’s the point: It’s absolutely, demonstrably true. Companies like Apple need Wall Street to achieve their destiny and to become great.

Here’s the part Bernie would hate but be unable to disprove: Very little of Apple’s success story—it is the world’s most valuable publicly traded company—could have been written without Wall Street. Even a quick perusal of Apple’s IPO prospectus—the document that is required to be filed with the Securities and Exchange Commission (SEC) before a company’s stock, the value of a company after its debt and other obligations are satisfied, can be sold to the public and then traded—reveals the essential role that Wall Street played, and still plays, in figuring out, at each step of the way, how Apple—as well as millions of other companies around the world that want to be like Apple—gets the money it needs to operate and to achieve its dreams. This is not trivial. It is not unimportant. It is not evil. Nor is it meant to be mysterious. But very few people understand just how this happens or why it is essential. Instead, if they think about it at all, they probably see Wall Street bankers taking large fees for what seems like minimal risk (although there is certainly more risk than meets the eye). They chalk it up to “greedy bankers” and a “rigged” system and move on.

But the ongoing ability of companies to get the capital they need from the people who have it and want to invest it is one of the more amazing contraptions that the world has ever constructed.

Let’s back up for a minute. The December 1980 Apple IPO prospectus distills down generations of Wall Street art and science into a crisp forty-seven pages. Nearly everything an investor would want to know about Apple is included: how and when the company was formed; how it was financed and by whom; who owned the pre-IPO stock; and how Apple intended to use the proceeds from the IPO. That’s not a coincidence. In fact, it is government regulation at its best. One of the main reasons the Securities and Exchange Commission was created in the wake of the stock market crash of 1929 was to provide investors, or potential investors, with more information about the companies that wanted their money and to try to thwart charlatans. The Apple prospectus resulted from regulators at the SEC making sure that Apple complied with disclosure rules in ways that were not required before the creation of the SEC. This is a good thing.

Objectively speaking, we learn from the Apple prospectus that there would be no Apple, at least in its present form, without Wall Street.

The Apple IPO, in December 1980, raised $102 million, of which some $83 million went to Apple, $12.4 million went to the venture capitalists who sold shares in the IPO, and the remaining $6 million went to the underwriters, led by Morgan Stanley and Hambrecht & Quist, as fees for their trouble. The Apple IPO was “hot,” meaning that both underwriters and investors wanted into the deal. Indeed, the sheer number of Wall Street banks involved in underwriting the deal was extraordinary: The prospectus lists nearly 140 banks from around the world that participated by selling stock to investors. Many of those underwriters—such as Barings Bank, Bear Stearns, and Lehman Brothers—are long gone, which shows that contrary to what you might think, Wall Street has always been a dangerous and risky place. And risks do have consequences, even for Wall Street.

The $83 million that Wall Street delivered to Apple was far more money than the company had ever raised in its four-year existence. For that reason alone, the IPO would have been considered a success. And Apple had plenty of uses for the money it raised: $7.85 million was used to repay its outstanding bank loan, and the rest of the money allowed Apple, essentially, to act as its own bank in financing its working capital needs. Apple also intended to use $11 million of the proceeds to fund big new projects in 1981. By any measure, the Apple IPO was an unqualified success: for the company, for the new investors, for the selling shareholders, and for the Wall Street banks that underwrote the deal.

I am not arguing that Wall Street is above reproach—far from it—but I am saying that the essential elements of Wall Street—Wall Street in its purest and most practical forms—must be preserved, encouraged, and praised, while the behavior that has caused one financial crisis after another in the past thirty years—rewarding bankers, traders, and executives with millions of dollars in bonuses for taking risks with other people’s money without any accountability—must be stopped. Consider this a plea for a calm, thoughtful examination of how Wall Street evolved from a handful of traders on a cobblestoned street that once connected the East River to the Hudson River in lower Manhattan to the global financial behemoth that exists today, with its metaphorical fingers in trillions of dollars of annual transactions.

Wall Street is the capital in capitalism, and even when we hate its greed and recklessness, we not only need Wall Street to exist but want it to thrive, even when we think, or are led to believe, that we don’t.

Our collective challenge is not to try to prevent another financial crisis from ever happening, as seems to be the new mantra of the most powerful Washington regulators: That seems inevitable whether you obliterate Wall Street or not. Rather, the overarching necessity is to regulate Wall Street in such a way that preserves the things that it does right while also making sure that the people who work there have the correct incentives to not do the things that lead to financial calamities, the pain of which seems to be unfairly felt most acutely by the rest of us. More specifically, it is the responsibility of the Justice Department to hold Wall Street bankers, traders, and executives responsible for their questionable, and sometimes criminal, behavior. Just because in the wake of the 2008 financial crisis the Justice Department, under the former attorney general Eric Holder, failed miserably in that important role doesn’t mean that Washington’s politicians and the powerful Wall Street regulators should therefore adopt policies that sharply curtail the great things Wall Street has done for centuries.

That’s the kind of thinking that not only penalizes Wall Street but also hurts the rest of us.

Adapted from Why Wall Street Matters. Copyright © 2017 by William D. Cohan. Reprinted by arrangement with Random House, a division of Penguin Random House LLC. All rights reserved.

William D. Cohan, a former investment banker, is the author of the four New York Times bestsellers House of Cards; The Last Tycoons, which won the 2007 Financial Times and Goldman Sachs Business Book of the Year Award; Money and Power; and The Price of Silence. He is a special correspondent at Vanity Fair, has a biweekly opinion column in The New York Times, and writes frequently for the Financial Times, Fortune, The Atlantic, and The Washington Post, among other publications. Why Wall Street Matters is available now wherever books are sold.