Success from Entrepreneurship vs. Financial Engineering

Brad Stone wrote an interesting article that speaks to societal differentiation between success from building something and risking your own skin to achieve it, vs. enrichment from financial engineering risking other peoples’ money.


September 28, 2008

How We Value the Super-Rich


San Francisco — Americans, as unfolding economic events remind us, are of two minds about other people’s piles of money. We can resent the enormous riches generated on Wall Street. At the same time, we can venerate other kinds of wealth — Silicon Valley’s, for example.

It’s almost as if there are “good” billionaires and “bad” billionaires in the public consciousness. When the super-rich are loved and admired, or maybe unloved but respected, it is often because people can actually see and enjoy the fruits of their labors. Donald Trump builds office towers and puts his name on them. Steven Spielberg makes movies with nice special effects. Martha Stewart decorates our lives and houses. Tiger Woods, on course to be sports’ first billionaire, hits a golf ball really, really well.

The not-so-admired billionaires, particularly the wizards of Wall Street, operate in the shadows of capitalism. We are not really sure how they are making all that money. But we suspect that just a little bit of it used to be ours.

In Tom Wolfe’s “Bonfire of the Vanities,” the investment banker Sherman McCoy attempts to explain his Wall Street job to his daughter. His wife chimes in:

“Darling,” said Judy, “Daddy doesn’t build roads or hospitals, and he doesn’t help people build them, but he does handle the bonds for the people who raise the money.”


“Yes. Just imagine that a bond is a slice of cake, and you didn’t bake the cake, but every time you hand somebody a slice of the cake a tiny little bit comes off, like a little crumb, and you can keep that.”

Sherman is not well pleased about the crumbs, but imagine looking for a way to describe credit default swaps to a child.

The super-rich of high-tech, on the other hand, create tangible things that make our lives easier, and this we can respect. Steve Jobs gave us the ubiquitous iPod. Larry Page and Sergey Brin, the roller-blading Google guys, devised a better way to search the Internet. Jeff Bezos gave people a way to shop in their pajamas. Bill Gates makes the desktop software on the computers most people use every day.

Of course, a segment of the population, particularly those whose computers seized up last week, have complicated feelings toward Mr. Gates and his ilk. Some might argue that their epic wealth is bloated by bubbles in the stock market, but few would begrudge them their overall financial reward.

In contrast, the public seems to resent the big boys of Wall Street because they do not appear to have invented anything — unless you count ingenious ways to make more money. Option derivatives are as inexplicable to the general public as particle physics. Richard Fuld of Lehman Brothers, Alan Schwartz of Bear Stearns and Robert Willumstad of AIG might have tremendous records of innovation. If they do, none of us were told.

We tend to like our billionaires better as we get to know more about them, too. Perhaps sensing this, technology companies actively promote their gazillionaire founders and their rags-to-riches stories, sometimes even awkwardly putting them in television commercials (Mr. Gates, Michael Dell and Charles Schwab). Yahoo, the embattled Internet search giant, is suddenly inserting its co-founder and chief executive Jerry Yang into promotional videos at every opportunity.

The unpopular rich, on the other hand, are the ones who remain largely anonymous — until they burst onto the scene with a perp walk (L. Dennis Kozlowski or Ken Lay), or they are garroted by the press for their ridiculous pay (Robert Nardelli of Home Depot, Dick Grasso of the New York Stock Exchange).

Then there are all the visual contrasts that we react to so viscerally. We envision Wall Street bankers wearing crisp Hermès ties and Paul Stuart suits while we associate technology executives with khakis and turtlenecks. We imagine the finance folks riding in limos, the tech-set gliding on their Segways and in Priuses.

The Valley, to be sure, has carefully crafted its own image. But the upper-echelon of the region tends to believe its own spin. Entrepreneurs, they preach, should be rewarded only for what they create. Wealth is tightly linked to success; founders and executives receive equity in their companies and restrain annual salaries.

“If you succeed, you win; if you lose, you walk away with nothing,” said Mitchell Kertzman, at partner at Hummer Winblad Venture Partners and a longtime Valley entrepreneur

The Wall Streeters can apparently walk away from both the flaming wreckage of their storied firms and the smoking remains of the national economy. Daniel Mudd and Richard Syron, former heads of Fannie Mae and Freddie Mac, are together leaving with $9.43 million in retirement benefits, even after the government took over their companies and canceled their even larger severance packages.

To folks in Silicon Valley and those that share their business values, a big payday for steering your company into catastrophe smells.

“These are people who want to be rewarded as if they were entrepreneurs,” said Jeffrey A. Sonneneld, a professor at the Yale School of Management. “But they aren’t. They didn’t have anything at risk.”

In the last century, recurring high-profile scandals on Wall Street helped create this image problem. Congressional investigations before World War I into Wall Street’s banking trusts inspired the creation of the Federal Reserve and the Clayton antitrust law. During the Great Depression, Congress investigated the stock market crash and uncovered a variety of unsavory practices by the banks, leading to the creation of public disclosure laws for corporations. The savings-and-loan scandal of the 1980s exposed fresh Wall Street skullduggery and gave the public new antagonists (Charles Keating, Michael Milken).

“There has been a century of scamming, and we’re not allowed to control it because the Wall Street guys always appeal to the American spirit of freedom and innovation,” said G. William Domhoff, a professor of psychology and sociology at the University of California, Santa Cruz. “But lo and behold, sometimes they screw up and we begin to suspect that it’s all just a big cover for the fact that they want to make extraordinary profits.”

Now that the Wall Street wealthy have helped plunge the nation into economic calamity, they have an even more serious public relations problem. Perhaps they should move to Silicon Valley.

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