Every Wall Street banker knows that giving a gift can lead to a potentially lucrative relationship. It’s just how business operates on Wall Street: give a gift in hopes of a future payoff.
But left unchecked, Wall Street’s vibrant gift economy can entrap even securities regulators, which can lead to loose policies and harmful economic consequences.
Of course, it’s tough to turn down a gift. Gift giving is one way that we humans create and sustain relationships. That’s true no matter where we dwell — on Wall Street or a distant Pacific island.
The Trobriand Islands are officially in the middle of nowhere, an archipelago in the Pacific Ocean which is part of Papua New Guinea. With just 12,000 indigenous inhabitants and where yams are used as money, you might think this far-flung place has an economy less advanced than what we have in the United States.
But on these islands there exists is a sophisticated practice of exchange that is similar to what happens among the Wall Street tribe. No, they don’t trade equity derivatives or credit default swaps. They trade gifts.
Trobriand islanders bestow arm bands and necklaces to others, as part of a gift exchange known as the “Kula,” first documented by Western anthropologists in the 1920s. These gifts flow in opposite directions around the archipelago: necklaces move clockwise, and arm shells move counterclockwise. Sometimes it can take a decade for one particular necklace to circle the islands.
During the Kula, islanders learn their standing within their community: Who owes them, and whom do they owe? If you sit on a gift for too long, you send the signal that you don’t need anyone’s help — now or in the future.
In my book Coined: The Rich Life of Money And How Its History Has Shaped Us, I explore not just how the gift economy works in the Pacific Islands but on Manhattan island, on Wall Street. Even though Wall Street is the center of the market economy, bankers understand that they can grease its wheels by doing favors. One Wall Street CEO even keeps a “people who owe me” list on hand.
So let’s look at three key ways in which the gift economy works on Wall Street:
1. Corporate access
Wall Street bankers and research analysts convince managers of the companies they cover to participate in road shows to meet investors. Opportunities to meet these management teams are given to the bank’s top brokerage clients. These in-person meetings are helpful: “You can pick up clues if you are looking people in the eye,” says one money manager. Money managers paid $1.25 billion, which is roughly 25% of the commission wallet, to brokers for corporate access, according to a 2013 Thomson Reuters Extel survey.
But such meetings aren’t allocated only to top-paying clients. When a brokerage identifies a new fund from which it wants to generate commissions, it will offer “gifts” in the form of corporate access meetings — in hopes that the fund will pay for corporate access in the form of future trading commissions. And when a management road show isn’t generating much interest, the situation is reversed: the broker calls the client, asking if they will do a favor by taking a meeting.
Most trading floors have lists of ‘bust’ accounts that never repaid a favor — and won’t be getting a call again.
The accounting for these meetings is highly subjective. The brokerage doesn’t list a price for each meeting, so each fund determines how much it’s willing to pay in terms of future business. It’s a bizarre process: Imagine you are at the grocery store and fill your cart with items, but when you checkout you don’t pay anything. And the grocer welcomes you back but is admittedly wary of you.
Not repaying the gift of corporate access is similar to Trobriand islanders not re-gifting an arm band or necklace as part of the Kula. You jeopardize your standing in the community. Most trading floors have lists of “bust” accounts that never repaid a favor — and won’t be getting a call again.
When it comes to big and potentially lucrative IPOs, bankers roll out the red carpet in order to win business: everything from Super Bowl tickets to a veteran banker personally picking up the CEO of a soon-to-be listed company from the airport. With IPO allocations, the gift economy is also at work. When there is an in-demand IPO, it can be difficult for large investors to get into the deal or obtain an adequately sized allocation. You can bet that fund managers are calling their brokers to make sure they get treated properly. During these conversations there can be horse-trading: “I’ll invest in your next deal, just get me into this one.”
Bankers recognize the importance of the gift economy to politicians. In 2013 and most of 2014, financial firms spent $1.2 billion in lobbying and campaign contributions. You can bet bankers expect something in return for these gifts — like beneficial policies, not armbands or necklaces. There isn’t explicit bribery, with bankers handing bags of money to regulators. But everyone knows what is expected.
Gifts don’t come always in the form of campaign donations. Instead bankers go to Washington to shape policies from within. These bankers-turned-policy makers are then welcomed back to Wall Street with the “gift” of a lucrative job. The revolving door of the gift economy has engendered policy carelessness among regulators and ought to be shut.
There is a revolving door among the rank-and-file too: Between 2001 and 2010, 400 former SEC employees filed close to 2,000 disclosure documents indicating that they were representing their corporate employers in a matter before the SEC, according to the Project on Government Oversight. These disclosure forms are required to be filed by employees who have left the SEC in the previous two years. One obvious first step would be to expand the disclosure period to four years, as a way to introduce greater transparency and accountability regarding this revolving door.
Gift giving is fundamental to how humans harmonize with each other, from corporate chieftains to aboriginal island chiefs. But it’s also important to recognize that gift giving can lead to negligent policies that affect us all.
Kabir Sehgal, a former vice-president at J.P. Morgan, is the author of Coined: The Rich Life of Money And How Its History Has Shaped Us (Grand Central Publishing), and the forthcoming The Wheels on the Tuk Tuk. (Beach Lane Books).