I love New York City. As a New Yorker who wants to see our commercial real estate market thrive, I know that a strong local economy is an essential element to healthy real estate fundamentals. In order for our local economy to be strong, we need a strong financial services sector, and Wall Street is the keystone to our most dominant industry. As it goes, so goes the city.
The topic of Wall Street bonuses is one which elicits tremendous emotion from U.S. citizens and most of that emotion has been anger. Certainly, we have seen Congress object strenuously to these bonuses and even the president has referred to them as “the height of irresponsibility” and “shameful” and “obscene.” He claimed that the Fat Cat bankers were acting in a manner which was “in violation of our fundamental values.” The president endorsed a special tax on the big banks because he said, “We want our money back,” referring to the TARP money which was invested in the system. After all, “Wall Street caused this mess,” according to the White House.
Recently, Mr. Obama has softened his language. Perhaps this was because he realized a populist position against New York’s big businesses was not the only thing that he could do to revive his plummeting approval ratings; perhaps it was because bankers pointed out that they were really not the cause of the crisis; or, perhaps, it was because he doesn’t want to appear to be as overly anti-capitalistic as some of his positions convey.
The anger felt across the nation is palpable and hit home for me when I made a pro-Wall Street bonus comment at a distressed asset conference I was speaking at in Los Angeles recently. I mentioned that the way Wall Street bonuses were being paid, in both amount and nature, was anti-stimulative, particularly relative to the New York City economy. My argument didn’t go over well. I have been contemplating whether to write this piece or not for weeks as I know it is not likely to be popular. I do, however, think it is important to look into this issue further, especially given the impact it has on New York City’s local economy and on our commercial real estate market.
THE FIRST ASSUMPTION that needs to be challenged is that Wall Street created the financial crisis. There were indeed many market participants with culpability in creating the worst recession since the Great Depression. Bankers were joined by brokers, appraisers, rating agencies, mortgage brokers and other players, all operating under the assumption that housing prices would never go down. This was not as outlandish an assumption as we now think as average home prices in the U.S. had remained fairly steady for decades prior to this recession. But understanding the dynamics of this downturn helps us realize that Wall Street was not the cause.