Early in 2008, Ethan Garber was part of an elite group of traders whose purpose was to generate huge profits for Wall Street firms.
He worked at Bear Stearns Cos. Inc., where he deployed the firm's own money – multiplied many times over through borrowing – to seek profits in distressed debt. There were ski trips to France and Colorado, and birthday parties at a Manhattan nightclub famous for its "mermaids" swimming in a floor-to-ceiling aquarium.
Now, Mr. Garber views those days as a relic. Bear Stearns is gone. Wall Street firms have jettisoned many of their proprietary traders – those who make bets using the company's capital – to comply with new regulations. Some of his friends were fired, and others decamped for hedge funds.
"The barbaric enthusiasm of unlimited compensation and an unlimited sense of self-importance" is over, said Mr. Garber, 46, who is now chief executive of IdleAir, a trucking services firm.
"The tone is less fun, less unexpected, less surprising."
Five years after the financial crisis, Wall Street is a changed place: Less profitable and more prudent, an industry with much greater oversight and far less swagger.
Its innate appetite for risk appears contained, at least for now. But it has also proven agile in framing new rules to its benefit – and some argue the constraints don't go far enough to prevent a future implosion.
Since 2008, Wall Street has become a subdued version of its earlier self, although it's probably more apt to describe it as reined in rather than revolutionized. Predictions of dramatic reform – overhauling the way bankers are paid, or breaking up banks – have not materialized.
Perhaps not surprisingly, the biggest change is increased regulation. During the crisis, it was clear that both the rules and those who enforced them were not adequate to the task of safeguarding the financial system. The Dodd-Frank Act, passed in 2010, was a major attempt to plug that gap. And each year, the largest banks find their balance sheets under a microscope when the U.S. Federal Reserve tests their ability to weather a financial shock.
"They are clearly much better capitalized. They have much more liquidity. Their asset quality is better," said H. Rodgin Cohen, a partner at Sullivan & Cromwell LLP in New York considered the dean of Wall Street lawyers. "And they're not going to be perfect, but I think there is better risk management."
Some experts say the effort to subdue risk-taking and make banking duller and safer is not complete. "We've not gone as far as wisdom would have taken us," said Harvey Goldschmid, a former commissioner at the U.S. Securities and Exchange Commission and a law professor at Columbia University. "It's less exciting than it used to be. But even that depends on where the rule-making [process] comes out."
Increasing regulatory demands and decreased risk-taking has translated into weaker profits. The most commonly used measure of profitability for the industry – return on equity – averaged between 10 per cent and 13 per cent after tax at the end of last year, according to The Boston Consulting Group. It predicts that figure will decline by a further three percentage points as the process of implementing new regulations continues. By contrast, before the crisis, it ranged between 15 per cent and 20 per cent – and for some firms still higher.
Many of the products that proved most profitable to Wall Street firms – and most toxic to the financial system – face new requirements that make them less lucrative. And there's little demand for the most complex creations that helped fuel the market mayhem. Earlier this year, for instance, JP Morgan Chase & Co. and Morgan Stanley cancelled a plan to sell a synthetic collateralized debt obligation – or CDO, made up of pools of credit derivatives.
The greater regulatory attention has handed more power to the people within financial firms who were often shunted aside in the race to reap profits before the crisis. One former executive at a Wall Street firm tells the following story as illustrative: A partner goes to the head of his firm, one of the biggest in the business. He has a complaint: There are teams of accountants, lawyers and compliance officers tracking his activities, he protests, restricting his ability to make bets and money. "Good," replies the chief executive.
The monumental paydays of the past have changed, too. Across Wall Street, banks are handing out smaller average bonuses than they did before the crisis and announcing ways to defer their distribution, so the process is less of a one-time windfall. James Gorman, the chief executive of Morgan Stanley, has been vocal about the need to rein in compensation. Pay in the industry is "way too high," he said in an interview last year with The Financial Times. "I'm sort of sympathetic to the shareholder view that the industry is still overpaid."
Even with smaller bonuses, people working on Wall Street continue to receive handsome rewards. In New York last year, the average compensation for those in the industry was $363,000 (U.S.) – down from the pre-crisis high of $402,000 in 2007, according to government figures. The number of people in the city employed by such firms has dropped 10 per cent since 2008.
Wall Street faces a war for talent as the industry grapples with a more subdued trading environment, less spectacular paydays and public disapprobation, said James Malick, a New York-based partner in the capital markets practice of The Boston Consulting Group. "If you're at a cocktail party, you're hesitant to even say you work for an investment bank – unless you're in a crowd of investment bankers," he said.
Industry veterans counter that the business will remain attractive to smart, driven individuals. "You're still going to be a 1-per center," said Robert Wolf, the former chief executive of UBS Americas Inc. who now heads his own consulting firm, 32 Advisors LLC. Although other industries have proven alluring to young recruits over the years – for instance, dot-com firms during the tech bubble – "at some point, they always come back."
Mr. Garber, the former Bear Stearns trader, said he has no regrets about his time on Wall Street. The coda to his career is a fitting one: After Bear nearly failed and was bought by JP Morgan, he stayed on until August to unwind his portfolio. Then, after Lehman Brothers went bankrupt, he was tapped to help the estate settle its derivatives mess.
He now splits his time between New York and Tennessee, where his company is based. Post-crisis Wall Street appears to him a place with fewer dedicated risk-takers but not a deeper overall sense of responsibility. "I'm hardly an angel," he said. "But I do find greater satisfaction in trying to build a company that is creating jobs."