New York (HedgeCo.net) – In the soon to be published, November 29, 2010, issue of The New Yorker, in “What Good Is Wall Street?”, John Cassidy questions the value of Wall Street, pointing out that many of the things that investment bankers, such as hedge funds, do have little or no social worth.

Last year, Goldman Sachs paid more than sixteen billion dollars in compensation, and Morgan Stanley paid out about fifteen billion dollars; yet, Cassidy writes, “neither came up with any spectacular new investments or produced anything of tangible value.”

After growing rapidly during the past twenty-five years, the financial sector is now responsible for more than a quarter of all the profits generated in the country. During a period “in which American companies have created iPhones, Home Depot, and Lipitor, the best place to work has been in an industry that doesn’t design, build, or sell a single tangible thing,” Cassidy writes.

For years, policymakers and economists accepted Wall Street’s estimate of its own worth, but this is now changing. Cassidy cites the work of Paul Woolley, a British financier and economist, who founded the Woolley Center for the Study of Capital Market Dysfunctionality, at the London School of Economics. “Why on earth should finance be the biggest and most highly paid industry when it’s just a utility, like sewage or gas?” Woolley says.“It is like a cancer that is growing to infinite size, until it takes over the entire body.”

The Woolley Center has published more than a dozen research papers challenging the benefits that financial markets and financial institutions bring to the economy, and Woolley believes that the financial sector should be about a half or a third of its current size. “Investment banking, prime broking, mergers and acquisitions, hedge funds, private equity, commodity investment—the whole scale of activity is far too large,” Woolley says.

“Most people on Wall Street aren’t finding the next Apple or promoting a green rival to Exxon. They are buying and selling securities that are tied to existing firms and capital projects, or to the price of a stock or the level of an exchange rate, To generate the sorts of profits that their stockholders have come to expect, [big firms] have to take more risks on their own account, which invariably involves scaling up their trading operations,” Cassidy writes.

“In most industries, a good idea is rewarded because the company generates profits and real cash flows,” he says. “In finance, it is often just a trading gain. The closer you get to financial markets, the easier it is to book funny profits.”

Editing by Alex Akesson
For HedgeCo.net
alex@hedgeco.net
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