Photo: Howard Schatz. An homage to Robert Longo. Model: Michael Scirrotto; Styling by Nikko Kefalas; Grooming by Danielle Cirilli.

On Wall Street, bonus season is a sacred ritual. It is the annual rite where net worth and self-worth get elegantly reduced to a single number. During the 25-year boom that abruptly ended in 2008, the only principle that really mattered come bonus time was how you ranked against the guys to your right and left. The system was governed by a kind of atavistic justice: You eat what you kill. From the outside, the seven- and eight-figure payouts that star bankers earned could seem obscene, immoral even. But on the inside, the outlandish compensation reflected a strict, almost moral logic. “Wall Street is a meritocracy, for the most part,” as a senior Citigroup executive put it to me recently. “If someone has a bonus, it’s because they created value for their institution.” The sanctity of the bonus was built on the idea that Wall Street pay was simply the natural order of capitalism.

And so, among the many dislocations Wall Street has suffered since 2008, none may have been more destabilizing than the headlines that flashed across Bloomberg terminals on the afternoon of January 17, when news leaked that Morgan Stanley would cap cash bonuses at just $125,000. A week later, Bank of America announced that it would be cutting the cash portion of its bonuses by 75 percent, giving the rest in stock. All across Wall Street, compensation is crashing. Goldman Sachs, coming off a lackluster fourth quarter, slashed compensation by 21 percent.

Banks have always had occasional bad years, but the sense on Wall Street is that this bad year is different. Over the past several weeks, I have had wide-ranging conversations with more than two dozen senior Wall Street executives, traders, bankers, hedge-fund managers, and private-equity investors. And what emerged is a picture of an industry afflicted by a crisis it would not be flip to call existential.

The crash four years ago was shocking enough to the financial class. But what is happening on Wall Street now is even more terrifying. No doubt the economy itself—the crisis in Europe, the effects of the tsunami in Japan, America’s sputtering recovery—has played a large part in the financial industry’s struggles. But even the most stubborn economies improve eventually. The bigger issues are structural. The Dodd-Frank financial-­reform act, much maligned, has already begun to change the shape of the financial system—even before a number of its major provisions are proposed to go into full effect this coming July. Banks are working hard to interpret Dodd-Frank’s provisions in a way most favorable to them—and repealing Dodd-Frank is a key piece of Mitt Romney’s campaign platform.

To comply with the looming regulations, banks have begun stripping themselves of the pistons that powered their profits: leverage and proprietary trading. In the wake of the crash, Morgan Stanley and Goldman Sachs converted to bank holding companies to tap the “discount window,” the Fed’s pipeline of cheap funds that gave the banks an emergency source of liquidity. That move seemed smart then, but the stricter standards required of banks have now left them boxed in.

With all the major banks unable to wager their own funds on big bets, there’s a growing sense that the money that was being made during the Bush boom won’t be back. “The government has strangled the financial system,” banking analyst Dick Bove told me recently. “We’ve basically castrated these companies. They can’t borrow as much as they used to borrow.”

Of course, described a little less colorfully, reducing the risk in the system at a cost of a certain amount of the banks’ profits was precisely what the government was striving for. All this has meant that Wall Street’s traders have found themselves on the wrong end of the market—a predicament that many of them have never seen before. Before the crash, when compensation slid, the banks risked seeing their top talent run for the doors to rival firms or hedge funds. Now, with a glut of hedge funds and an industrywide belt-tightening, bank chiefs are calling their star traders’ bluffs. “If you’re really unhappy, just leave,” Morgan Stanley CEO James Gorman bluntly told Bloomberg TV a few days after his bank announced its meager bonus numbers.

For New York’s bankers and traders, the new math suddenly reordered their assumptions about their place in a post-crash city. “After tax, that’s like, what, $75,000?” an investment banker at a rival firm said as he contemplated Morgan Stanley’s decision. He ran the numbers, modeling the implications. “I’m not married and I take the subway and I watch what I spend very carefully. But my girlfriend likes to eat good food. It all adds up really quick. A taxi here, another taxi there. I just bought an apartment, so now I have a big old mortgage bill.” “If you’re a smart Ph.D. from MIT, you’d never go to Wall Street now,” says a hedge-fund executive. “You’d go to Silicon Valley. There’s at least a prospect for a huge gain. You’d have the potential to be the next Mark Zuckerberg. It looks like he has a lot more fun.”

Photo: Howard Schatz. An homage to Robert Longo. Model: Michael Scirrotto; Styling by Nikko Kefalas; Grooming by Danielle Cirilli.

On Wall Street, the misery index is as high as it’s been since brokers were on window ledges back in 1929. But sentiments like that, accompanied by a full orchestra of the world’s tiniest violins, are only part of the conversation in Wall Street offices and trading desks. Along with the complaint is something that might be called soul-searching—which is, in itself, a surprising development. Since the crash, and especially since the occupation of Zuccotti Park last September (which does appear to have rattled a lot of nerves), there has been a growing recognition on Wall Street that the system that had provided those million-dollar bonuses was built on a highly unstable foundation. Disagreeable as it may be, goes this thinking, bankers have to go back to first principles, assess their value in the economy, and take their part in its rebuilding. No one on Wall Street liked to be scapegoated either by the Obama administration or by the Occupiers. But many acknowledge that the bubble­-bust-bubble seesaw of the past decades isn’t the natural order of capitalism—and that the compensation arrangements just may have been a bit out of whack. “There’s no other industry where you could get paid so much for doing so little,” a former Lehman trader said. Paul Volcker, whose eponymous rule is at the core of the changes, echoes an idea that more bankers than you’d think would agree with. “Finance became a self-justification,” he told me recently. “They made a lot of money trading with each other with doubtful public benefit.”

The questions of how to fix Wall Street–style capitalism—from taxes to regulation—are being intensely argued and will undergird much of the economic debate during this presidential election. And many on Wall Street are still making the argument that the consequences of hobbling Wall Street could be severe. “These are sweeping secular changes taking place that won’t just impact the guys who won’t get their bonuses this year,” Bove told me. “We’ve made a decision as a nation to shrink the growth of the financial system under the theory that it won’t impact the growth of the nation’s economy.”

And yet, the complaining has settled to a low murmur. Even as bonuses have withered, Wall Street as a political issue is gaining force. Bankers are aware that populism has a foothold, even in the Republican Party, and that these forces are liable to accelerate the process already taking place. “There’s a real sense the world is changing,” says a private-­equity executive with deep ties to the GOP. “People are becoming aware there’s real anger out there. It’s not just some kids camping out in some park. The Romney attacks caught everyone by surprise. We have prepared for this to come from the Democrats in the fall, but not now. You could run an entire campaign if you’re Barack Obama with ads using nothing but Republicans saying things about finance that you’d never hear two months ago. It’s an amazing thing.”

A few hours before Barack Obama delivered the State of the Union address, ­JP­Morgan Chase CEO Jamie Dimon sat in a cream-colored chair in his 48th-floor office, talking about the changed reality on Wall Street. “Certain products are gone forever,” Dimon told me. “Fancy derivatives are mostly gone. Prop trading is gone. There’s less leverage everywhere. Mortgages are back to old-fashioned conservative mortgages—which is a good thing.”

Reducing risk may be a good thing for the economy, but it has been dismal for the banks. All across Wall Street, financial institutions are suffering their worst results in years. JPMorgan reported last month that fourth-quarter profits were down by $1.1 billion. Goldman Sachs reported profits fell by 56 percent, Bank of America saw its profits drop by 38 percent, and Morgan Stanley reported a 26 percent drop.

As we talked, Dimon tried to put the best face on the results. Compared to some of his peers, he has deftly navigated the new landscape, holding JPMorgan’s stock price level. With 260,000 employees and thousands of Chase branches, Dimon’s company, unlike that of his rivals at Goldman, has a real, physical business to fall back on. “Companies big and small will still need underwriting, credit, capital management, and advice. McKinsey did a report that showed that the credit needs of multinationals are going to double in the next ten years,” he said. “The net worth of the world is going to double in the next decade. Institutional funding will double in the next ten years. We’re a store, you can buy bonds, FX, advice—we provide great products at a great price. That store is not going to go away. If you’re a big, smart investor and we can give you the best price and the best service, you’ll still be coming here, just like Wal-Mart and Costco.”

Photo: Howard Schatz. An homage to Robert Longo. Model: Michael Scirrotto; Styling by Nikko Kefalas; Grooming by Danielle Cirilli.

Wall Street as Wal-Mart? A few years ago, the Masters of the Universe never could have imagined their industry being compared to big-box retailing. And yet, the model that had fueled bank profits has finally broken, as markets sputtered and new regulation kicked in. “Compensation is never really going to come back,” a Wall Street headhunter told me. “That is something entirely new.”

What is even more startling about this reversal is that few thought the much-vilified Dodd-Frank act would have much effect at all. From the moment it was proposed in 2009, the bill was tarred from all sides. Critics from the left, who wanted a return of Glass-­Steagall, which had kept investments banks and commercial banks separate until it was repealed during the Clinton years, howled that Dodd-Frank wouldn’t go far enough to break up the too-big-to-fail banks. “Dodd-Frank was an attempt to preserve the status quo,” Harvard economist Ken Rogoff told me. The too-big-to-fail banks, for their part, argued that the 2,300-page bill would create an overly complex morass of overlapping regulators that risked killing their ability to compete against foreign rivals. “We joke that Dodd-Frank was designed to deal with too-big-to-fail but it became too-big-to-read,” said the Citigroup executive.

By the time the bill passed, in July 2010, the legislation hadn’t found many new friends. Banks were especially upset by the inclusion of the Volcker Rule, which banned proprietary trading and virtually all hedge-fund investing by banks. Banks also complained about an amendment that slashed lucrative debit-card fees. They capitulated mainly because the alternative—breaking them up—was worse.

Part of the perception that the financial crisis changed nothing is that, in the immediate wake of the crash, the banks, buoyed by bailout dollars, whipsawed back to profitability. Goldman earned a record profit of $13.4 billion in 2009, as markets roared back from their post-Lehman lows. This dead-cat bounce was central to the formation of Occupy Wall Street and the neopopulist political currents that first erupted when the Treasury Department appointed Ken Feinberg to regulate bonuses for several TARP recipients. “The statute creating my authority was populist retribution,” Feinberg told me recently. “The feeling was, if you’re going to bail everyone out with the taxpayers, it has to come with a price.”

And yet, from the moment Dodd-Frank passed, the banks’ financial results have tended to slide downward, in significant part because of measures taken in anticipation of its future effect. Since July 2010, Bank of America nosed down 42 percent, Morgan Stanley fell 25 percent, Goldman fell 21 percent, and Citigroup fell 16—in a period when the Dow rose 25 percent. Partly, this is a function of the economic headwinds. But the bill’s major provisions—forcing banks to reduce leverage, imposing a ban on proprietary trading, making derivatives markets more transparent, and ending abusive debit-card practices—have taken a pickax to the Wall Street business model even though the act won’t be completely in effect till the ­Volcker Rule kicks in this July (other aspects of the bill took force in December; capital requirements and many other elements of the bill will be phased in gradually between now and 2016). “If you landed on Earth from Mars and looked at the banks, you’d see that these are institutions that need to build up capital and that they’re becoming ­lower-margin businesses,” a senior banker told me. “So that means it will be hard, nearly impossible, to sustain their size and compensation structure.” In the past year, the financial industry has laid off some 200,000 workers.

Nobody on either side would say that Dodd-Frank perfectly accomplished its aims. But while critics lament that no bank executives have gone to jail and have argued for a law that would have effectively blown up the banking system, Dodd-Frank is imposing a painful form of punishment. “Since 2008, what the financial community has done is kick the can down the road,” the senior banker added. “ ‘Let’s just buy us one more quarter and hope it gets better.’ Well, we’re now seeing cracks in that ability to continue operating with the structures that had been built up.”

To understand how radically Wall Street is changing, you have to first understand how modern Wall Street made its money. In the quaint old days, Wall Street tended to earn its profits rather boringly by loaning money, advising mergers, and supervising bond issues and IPOs. The leveraging of the American economy—and the supercharging of the financial industry—began in earnest in the early eighties. And banks have profited from a successive series of financial bubbles, each bigger and more violent than the one preceding it. “Wall Street did a really good job convincing people it was really complicated and they were the only ones who could do it and it justified paying them millions of dollars,” a former Lehman trader explained. Credit was the engine that powered the explosion in bank profits. From junk bonds in the eighties to the emerging-markets crisis in the nineties to the subprime mania of the aughts, Wall Street developed new ways to produce, package, and sell debt to willing investors. The alphabet soup of complex vehicles that defined the 2008 crash—CLO, CDO, CDS—had all been developed to sell more credit. “If you look at the past 25 years, the world economy was going through a process of leveraging,” a senior Citigroup executive said. “Debt has grown faster than economic growth. The banking industry was at the epicenter of facilitating the growth of credit creation. It drove every business.”

Before the crash, and even in its immediate aftermath, traders could dismiss the populist critique by clinging to the notion that Wall Street’s extreme salaries were rewards for steering capital to its most efficient uses. “For every lender, there has to be a borrower” is how a former Bear ­Stearns executive put it. If Americans wanted to buy plasma TVs and flip McMan­sions, then, by God, Wall Street would help.

From 1986 to the middle of the last decade, Wall Street’s earnings grew from 19 percent of all U.S. corporate profits to 41 percent. And the talent followed. “The big banks of the world have dramatically outcompeted industry in recruiting top graduates from the top schools,” a Goldman veteran said.

After the big investment banks went public, the sense of restraint that sometimes could hold back private partnerships from taking on too much risk—it was their own money—was removed. Bank earnings and ever-rising asset values allowed them to borrow ever-larger amounts of money, which in turn juiced ever-greater profits. Banks, which had previously made their money advising corporations and underwriting securities, essentially became giant hedge funds (in 2007, Morgan Stanley held $1.05 trillion in assets supported by just $30 billion in equity). The triumph of the Wall Street system was the exploitation of the real-estate boom: Real estate enabled the biggest credit bubble ever conceived—and a bust of similar magnitude, which some shrewd traders also took advantage of. “The mortgage mess is the biggest financial mess we’ll see in our lifetime,” Jamie Dimon told me.

And without real estate to fuel growth, many on Wall Street know it’ll be a long time before there is ever a profit center like it again. “The number of houses being sold is 25 percent of what it was,” a former Lehman trader says. “You don’t have the mortgages behind it. Essentially the pump has stopped working. All the IPOs, the mergers—everything is slowing down. And the number of new homes will never jump back to what it was. If you look at history, the past 50 years have been incredible. Never has there been a period of time of so little disease and so few wars and such growth of such absurd wealth.”

The implosion of the credit bubble destroyed Wall Street’s business model. Now regulations are kicking in that will sap its ability to create the next bubble. Over the past year and a half, the banks have dramatically deconstructed their proprietary-trading desks to comply with the new rules of the game. Among ­Volcker’s provisions is a rule that mandates that banks can invest just 3 percent of their core capital in hedge funds and private equity, meaning that, in addition to being banned from trading for their own accounts, they can’t take risks in outside funds either. “There’s less money to go around because the revenue business model is changing, and it has to change,” a former Lehman trader says. “You can’t print the cheap money anymore.” And nowhere is this rule more devastating than at Goldman Sachs, where proprietary trading accounts for an astonishing 10 percent of the firm’s revenue.

Goldman’s trading has been a storied part of the firm’s history; its alumni include Bob Rubin, Eddie Lampert, and Eric Mindich. But the new rules mean that Goldman effectively can’t wager its own capital. Months before the Volcker Rule is set to kick in, star traders began to leave in droves. In March 2010, Pierre-Henri Flamand, the London-based global head of Goldman’s Principal Strategies group, quit to start his own hedge fund. A few months later, in September, Goldman revealed it was shuttering its entire desk. In October, the nine traders at Goldman’s U.S.-based desk, run by Bob Howard, decamped en masse for KKR, the private-equity firm. Around the same time, Morgan Sze, one of the highest-paid traders in Goldman history, who was said to have earned a bonus of $100 million in 2006, announced he was leaving to launch his own $1 billion–plus hedge fund.

Goldman was the first of the major banks to announce it was shuttering its internal hedge funds. Morgan Stanley, which like Goldman converted to a bank holding company to tap Fed funds during the post-Lehman panic, is also being forced to abandon its proprietary-trading activities. Morgan, which had been known for its traditional investment-banking prowess—advising companies on mergers and acquisitions, trading for clients, and raising capital—dived headlong into proprietary trading during the boom. It was a huge source of profits, but unlike Goldman, which had ruthless risk management, Morgan was almost completely undefended from the housing calamity. In 2007, Howie Hubler, a Morgan Stanley trader, recorded the biggest loss in Wall Street history when his mortgage fund blew up and took over $9 billion with it. John Mack, Morgan’s former CEO, called the trades “embarrassing for me, for our firm,” a description he’d now consider an understatement.

With Hubler’s loss and Dodd-Frank looming, Morgan Stanley announced last January that it was getting out of prop trading entirely. The bank decided to spin off its secretive Process Driven Trading unit, a 70-person desk run by Peter Muller, who was the kind of trader who came to embody Wall Street’s exotic ethos in the aughts. (Muller, who writes New York Times crossword puzzles for fun and plays Cat Stevens–style soft rock at Caffe Vivaldi, recruited MIT Ph.D. “quants,” who helped PDT achieve a remarkable 20 percent return since 1993.) Last March, a few months after disbanding Muller’s group, Morgan Stanley announced it had finished spinning off FrontPoint Partners, a multibillion-dollar hedge fund it had purchased for $400 million near the peak of the bubble in 2006. (Ironically, FrontPoint manager Steve Eisman, who was lionized by Michael Lewis in The Big Short, made hundreds of millions betting against subprime loans.)

And last month, Citigroup announced that it, too, was closing its prop-trading desk. At Citi, trading had become a disastrous problem that symbolized the reckless greed of the boom. Last fall, Citi reached a proposed $285 million settlement with the SEC (though a judge rejected the settlement and the matter may go to trial in July) after it was alleged that traders had taken short positions betting against $1 billion in mortgage securities the bank had packaged and sold to investors (“Possibly the best short ever!” one trader bragged in an e-mail).

As the banks jettison their trading arms, they’re being restrained by rules that force them to retain more capital. In December 2011, the Fed announced it would compel banks over the next few years to effectively double the amount of capital they hold on their books, a move that would curb leverage and, ultimately, profits. At the boom’s peak, banks like Lehman and Bear Stearns levered up 30, even 40, to 1. Under the new rules, banks would only be able to borrow $12 for every dollar they spend. In Europe, the rules are even stricter: British regulators have indicated that banks may have to hold as much as 20 percent on their books. “Everything that happened over the past 30 years comes back to the leveraging of the global economy,” a former Bear Stearns executive said, “and now that’s reversing.”

This means that banks won’t be able to borrow as much money to make loans and sell products to their clients.

And even the basic businesses that banks relied on for steady profits are being battered by new rules. As the Dodd-Frank bill moved through Congress, the banks vehemently protested the Durbin Amendment, a rule proposed by Democratic senator Dick Durbin that would slash fees banks could charge merchants. The rule passed and overnight wiped out $6.6 billion in revenues banks had made on debit cards. In response, Bank of America announced it would charge consumers $5 a month for their debit cards. After being savaged by outraged customers, BofA announced this past November that it would drop the plan. “The Durbin rule was the worst rule,” says an executive at one of the major banks. “Debit cards had nothing to do with the crisis. The fact is, we give free stuff to our customers. Now we’re going to have to be the bad guy.”

Just a couple of years ago, traders faced with hardships like this would simply have jumped over to a hedge fund, and made more money with less hassle. In the boom years, banks had to keep star traders happy or they’d bolt to make even bigger money at a fund.

But recently, hedge funds have fared just as poorly as the banks. The bad economy plays a role in this, of course. But just as important is the fact the hedge-fund industry is almost as overbuilt as the housing and credit markets that drove its profits. In 1990, there were 610 hedge funds in the world. In 2000, there were 3,873; in 2011, there were 9,553, according to a report by Hedge Fund Research. All these funds are chasing fewer surefire trades. “When markets are panicked and there’s global risk fear, the markets move in the same direction,” one analyst at a Manhattan hedge fund says. “It’s just a lot harder to make money.” The easy, obvious plays are oversubscribed, which shrinks margins.

The rising tide of the real-estate and credit markets lifted all boats. But nowadays, while some hedge funds will still make ridiculous money, just as many will lose. One Leon Cooperman fund was down 12 percent over the first three quarters of last year, while a Bill Ackman fund was off 16 percent—not the kind of returns investors pay the hedge-fund premium for.

And as the world becomes deleveraged, money has been pouring out. In October 2011 alone, hedge funds saw $9 billion go out the door. The London-based Man Group, the largest publicly traded hedge fund in the world, saw its stock dive 25 percent over the course of one day in September, when it shocked the market by announcing that $2.6 billion had been redeemed by clients over a three-month span.

“We used to rely on the public making dumb investing decisions,” one well-known Manhattan hedge-fund manager told me. “but with the advent of the public leaving the market, it’s just hedge funds trading against hedge funds. At the end of the day, it’s a zero-sum game.” Based on these numbers—too many funds with fewer dollars chasing too few trades—many have predicted a hedge-fund shakeout, and it seems to have started. Over 1,000 funds have closed in the past year and a half.

In October, a thousand protesters stood outside John Paulson’s Upper East Side townhouse and offered the hedge-fund billionaire a mock $5 billion check, the amount he earned from his 2010 investments. Later that day, Paulson released a statement attacking the protesters and their movement. “The top one percent of New Yorkers pay over 40 percent of all income taxes, providing huge benefits to everyone in our city and state,” he said. “Paulson & Co. and its employees have paid hundreds of millions of dollars in New York City and New York State taxes in recent years and have created over 100 high-paying jobs in New York City since its formation.” The truth was, Paulson was furious that the protesters had singled him out. Last year, he lost billions of dollars on bad bets on gold and the banking sector. One of his funds posted a 52 percent loss. “The ironic thing is John lost a lot of money this year,” a person close to Paulson told me. “The fact that John got roped into this debate highlights their misunderstanding.”

It’s certainly true that Wall Street’s money played an important part in New York’s comeback, helping to transform the city from a symbol of urban decay into a gleaming leisure theme park. Consciously or not, as a city, New York made a bargain: It would tolerate the one percent’s excessive pay as long as the rising tax base funded the schools, subways, and parks for the 99 percent. “Without Wall Street, New York becomes Philadelphia” is how a friend of mine in finance explains it.

In this view, deleveraging Wall Street means killing the goose. The next decade or so will answer the question of whether a Wall Street that’s built on a more stable foundation—and with smaller bonuses—can sustain the city the way the last one did. But as banks cast about for a new business model, the city’s economy will need to find new sources of growth (this is why the Bloomberg administration has aggressively courted the tech and science industries).

Questions about how the banking industry—and the New York economy itself—will reconstitute are being widely debated amid a grudging new consensus among financial types that the past decades represented a distorted type of capitalism. Partly, they acknowledge, the profits of past years were a function of highly specific policies—the repeal of Glass-Steagall, Alan Greenspan’s expansionist monetary policy, the government’s headlong push to encourage home ownership—that allowed Wall Street compensation to explode.

Like an addict, Wall Street is now taking its first step toward recovery by accepting its failings. “TARP led to a lot of this anger,” said Jamie Dimon. “People said, ‘Well, you got bailed out and you would have failed.’ It’s not true in our case, but I can understand why people are upset about that.”

And Dimon acknowledges the issue highlighted by Occupy Wall Street. “I do think we’ve become a less equitable society,” he told me. “So I’d ask the question—let’s say we agree it’s become less equitable—what would you do about it?”

This brand of self-criticism is clearly smart politics. But it also appears to be somewhat sincere. In recent months, a parade of financiers have jockeyed to get on the side of the Occupiers. At a public forum at UCLA’s Anderson School of Management this past November, Bill Gross, the co-head of the massive bond giant PIMCO, told the audience that he shares “sympathy for labor as opposed to capital.” Gross, a registered Republican, articulated the view that finance, and Wall Street compensation, had become disconnected from the real economy. “It’s been several decades when money and finance have dominated at the expense of labor and Main Street. How can one not sympathize with their predicament?”

And, knowing a losing position when they see one, much of Wall Street is onboard with some of the tax changes Obama has been proposing. “I would tax dividends and interest income higher and capital gains,” said Dimon. “Have a higher tax rate. If you said there’d be a certain percent rate for people making over a million dollars and a higher percent rate for people making over $10 million, no problem with me. I don’t think people should be able to pass unlimited amounts on to their kids.”

Even Home Depot founder and financier Ken Langone (“You bet I’m a fat cat,” he told me proudly) isn’t arguing for the status quo. “I would enthusiastically embrace a tax increase,” he told me. “I’m more than willing to pay taxes. I’m saying, take the money and use it to lower the debt.”

Last Tuesday, about 150 people packed into the soaring marble-floored atrium of the Museum of American Finance, housed in the former Bank of New York Building on Wall Street. Large murals on the wall extolled American industry and Wall Street’s role in building businesses. The gathering was a conference honoring the long career of legendary Vanguard Group founder Jack Bogle, but as I listened to the conversation, the hypercapitalism of the aughts sounded like a museum exhibit from an earlier time. Bogle, who built Vanguard into a $1.6 trillion mutual-fund giant, was the guest of honor, but the clear star of the event was Paul Volcker, who caused heads to crane when the genial six-foot-eight former Fed chairman arrived carrying a stack of newspapers and took his place in the audience as Ken Feinberg and Lynn Turner, the former chief accountant for the SEC, debated how Wall Street compensation got so insane. During their panel, I noticed ­Volcker flipping through his copy of the Financial Times, stopping to read an article headlined “Forget Big Bonuses, a Pay Squeeze Is Coming.”

During a break in the panels, attendees streamed up to Volcker, and a book editor implored him to write his memoirs. It was a dramatic reversal for Volcker, who had been shunted aside during the financial-reform debate but found himself back in the center after Obama embraced a version of his prescriptions. “It’s beginning to have an impact,” he told me when I asked about how his rule is changing Wall Street. “It is a factor in moderating compensation, because compensation was very high for these traders, and that kind of spread through the business into people who didn’t feel like they had a fiduciary responsibility.” As much as anything else, the daylong conference at the museum exposed a generation gap. The Wall Street that spawned the careers of Bogle and Volcker was very different from the one that attracted the next generation of hyperambitious young people to New York and Greenwich, Connecticut, eager to have their lives measured by a number—seven figures or more, they hoped. For those people, especially, it’s difficult to get their minds around a Wal-Mart future for finance. “It’s been three years, and people have to readjust their spending habits,” a former Lehman executive told me. “People have been in different stages of denial.”

Of course, many still argue that the new rules will have unintended consequences. “Banking is very global now,” said Dimon. “If rules are written in a way where American banks can’t compete and are disadvantaged versus non-U.S. banks, that’ll be a problem for banks and for American competitiveness. Banking cannot be made into a utility.”

Some hedge-funders are still going to find ways to make billions, even in this new environment—one of Ray Dalio’s Bridgewater Associates funds made a return last year of over 20 percent. While the big banks’ rank and file saw their cash bonuses slashed, the money that was deferred may eventually end up in their bank accounts; and the CEOs tended to do rather well. Also, it should be remembered that anytime Wall Street has been faced with new regulatory obstacles, it has fairly quickly found ways around them. Many of Dodd-Frank’s rules are still being argued in Washington, and Republicans seem bent on reversing a lot of them.

But for now, the strictures that are holding the banks back now are tighter than any since the thirties. And those laws kept banking reliably risk-free and dull until the deregulation mania of the eighties and nineties unleashed finance. The system is being designed so that Wall Street grows only as fast as Main Street. “The bubble can’t happen again,” Jack Bogle told me. “The underlying reason is, corporations make money. We do things that make society better. But they grow, and this won’t surprise anyone, at rate of GDP.” On Wall Street, recent history was the exception. “Reversion to the mean is the rule of the financial market.”