Young Money: Inside the Hidden World of Wall Street's Post-Crash Recruits (17 page)

“
Give me that or I’ll fucking break it!
” Novogratz yelled, grabbing for the inside of my jacket with one hand. His eyes were bloodshot, and his neck veins were bulging. The song onstage was now over, and a number of prominent Kappas had rushed over to our table, where it was now very clear something was amiss. Before the situation could escalate dangerously, Alexandra Lebenthal—a bond-investing socialite and a former Grand Swipe—stepped in between us. Wilbur Ross quickly followed, and the two of them led me out into the lobby, past a throng of Wall Street tycoons, some of whom seemed to be hyperventilating.

Once we made it to the lobby, Ross—who looks a bit like an ancient Galapagos turtle, and was wearing purple velvet moccasins with the Kappa Beta Phi logo—congratulated me on having gained entry into the dinner.

“I admire your ingenuity,” he said, laughing nervously.

For the next fifteen minutes, he and Lebenthal reassured me that what I’d just seen wasn’t
really
a group of wealthy and powerful financiers making homophobic jokes, mocking poor people, and bragging about their business conquests at Main Street’s expense. No, it was just a group of friends who came together to roast each other in a benign and self-deprecating manner. Nothing to see here.

“Remember that these are some of the most charitable people in America,” Ross said. “Just leave out the vulgar stuff, please.”

It was fairly clear, from their initial reactions, that they were terrified that I was going to print their exploits in the newspaper. But the extent of their worry wasn’t made clear until Ross offered himself up as a source for future stories in exchange for my cooperation.

“I’ll pick up the phone anytime, get you any help you need,” he said.

“Yeah, the people in this group could be very helpful,” Lebenthal chimed in. “If you could just keep their privacy in mind.”

I was appalled. Not so much by the blatant favor trading (I’d had financiers try to bribe me off a story before, though never quite as explicitly) but by the implication that there was nothing morally wrong with what Kappa Beta Phi stood for, and what its members did.

Here, after all, was a group that included many of the executives whose firms had collectively wrecked the global economy in 2008 and 2009—the top executives of Morgan Stanley, Citigroup, Bank of America, Lehman Brothers, Bear Stearns, and other firms that had either failed or required billions of dollars in emergency bailout money. These were public, highly visible companies, and their actions had, in no uncertain way, catalyzed a crisis that resulted in the loss of hundreds of thousands of jobs, tore apart lives and families, and made billions of dollars in middle-class savings simply disappear.

And yet, despite their failures and the economic havoc they’d wrought, these people—all of whom had remained extraordinarily wealthy since the crash—were content to laugh off the entire financial crisis in private, as if it were a long-forgotten lark. (Or worse, sing about it—one of the last skits of the night was a self-congratulatory parody of ABBA’s “Dancing Queen,” called “Bailout King.”)

In any year, the Kappa Beta Phi dinner would be tone-deaf; in January 2012, just a few months after a global protest movement had taken root in opposition to the moral and financial offenses of the 1 percent, it amounted to a gargantuan middle finger to Main Street.

After several more minutes spent trying to talk me out of writing about what I’d seen, Ross and Lebenthal escorted me out of the St. Regis. Lebenthal led me past a group of angry Kappa members, who were sobering up considerably at the thought of having the evening’s activities made public, into the elevator and out of the hotel.

On my way back to the newsroom to write up my story, I thought about the implications of what I’d just seen for my young finance-world sources.

The first and most obvious conclusion was that the upper ranks of finance are composed of people who have completely divorced themselves from reality. No self-aware and socially conscious Wall Street executive, in the year 2012, would have agreed to be part of a group whose tacit mission is to make light of the financial sector’s foibles. Not when those foibles had resulted in real harm to millions of people.

The second thing I realized was that Kappa Beta Phi was, in large part, a fear-based organization. Here were executives who had strong ideas about politics, society, and the work of their colleagues, but who would never have the courage to voice those opinions in a public setting. Their cowardice had reduced them to sniping at their perceived enemies in the form of satirical songs and sketches, among only those people who had been handpicked to share their view of the world. And the idea of a reporter making those views public had caused them to throw a mass temper tantrum.

The third thought I had, as I walked through the streets of Midtown in my ill-fitting tuxedo, was that many of these self-righteous Kappa Beta Phi members had surely been first-year analysts once. Some of them had no doubt been college graduates, unsure of their places in the world, who just happened to land on Wall Street, some at the same firms whose young workers I was now spending time with. And in the twenty, thirty, or forty years since, something fundamental about them had changed. They had internalized the haughty, uncaring worldviews of the Wall Street barons who came before them, and begun to perpetuate those views themselves. Their pursuit of money and power had removed them from the larger world to the sad extent that, now, in the primes of their careers, the only people with whom they could be truly themselves were a handful of other prominent financiers.

Perhaps Kappa Beta Phi is a bastardization of the real Wall Street culture. After all, I know of several top executives who have turned down the group, or who are members but choose not to attend the annual dinners, on the grounds that the skits and jokes are too tasteless to be associated with. There are, in fact, members of the financial elite who want nothing to do with mockery and light-heartedness—who take their responsibilities as employers and guardians of investor capital quite seriously. And many of the analysts I spoke to about the event afterward simply laughed. To them, the idea of a bunch of out-of-touch plutocrats gathering to carry out the rites of a secret fraternity seemed absurd and antiquated.

“It sounds like something Occupy Wall Street would invent if they wanted people to hate bankers even more,” one told me.

But I am continually scared by the idea that some of the thoughtful, socially conscious young analysts I know will end up succeeding beyond their wildest dreams on Wall Street and will in the process be changed, to the point that the idea of belonging to such a powerful, exclusive group of executives becomes seductive rather than funny.

Perhaps, I thought, it was best to think of Kappa Beta Phi as a barometer of Wall Street’s aspirational mood. If in two or three decades, the fraternity is still the kind of club that commands respect and envy in the financial world, and if first-year analysts still hanker to become part of it, then it will mean that the culture of Old Wall Street has endured. If, however, it becomes the kind of antiquated, pitiful event that draws grimaces and eye rolls from those inside the sector as well as those outside it—well, maybe there’s hope for New Wall Street after all.

“WHAT THE FUCK
is Justin Bieber doing here?”

I rolled over in bed, pawed my eyes open, and saw Derrick Havens stripped to his boxers and splayed out on my couch. He glanced to the corner of my studio apartment, where a life-sized cardboard cutout of the tween-pop sensation leaned up against the wall.

“Well,” he said. “I guess we had a good night.”

Derrick and I had spent the previous night at a raucous dance party. After arriving, Derrick proceeded to drink shot after shot of Jim Beam, dance until he was covered in sweat, make out with a woman he’d never met before in a dark corner of the club, stumble out at 3:00 a.m., find the only remaining open business—a twenty-four-hour pharmacy—locate a Justin Bieber cutout in the novelty aisle, shriek with joy, break out his credit card to pay for it, drunkenly carry the corrugated pop star all the way back to my apartment, and end the night by vomiting in my bathroom and passing out on my couch. “I feel like death,” he now confessed, rubbing his eyes.

Derrick, who had left Wells Fargo in Chicago six months earlier to take a job at a private equity firm in Manhattan, was settling in nicely to a New York lifestyle. He had more free time now that he was out of the banking cycle, and he’d used it to partake in everything the city had to offer a twenty-four-year-old with discretionary income—parties, fine restaurants, and posh downtown clubs where women far too attractive for him went to mingle with men much richer than he.

Most parts of Derrick’s city life still felt like playacting to him. He knew that his parents and friends back home in Waupaca would scoff at the amounts of money he was spending on a weekly basis, and that Erica, his ex-girlfriend, would cackle at the notion of him pretending to be a high roller. Derrick’s job was the envy of first-year bank analysts everywhere, but he still acted like a Midwesterner in most ways, and he embarrassed himself frequently on account of how little he knew about the city. (I was there when he’d asked a cab driver to take him to “
Hyoo-ston
Street,” before being corrected to “
How-ston
.”) His colleagues, most of whom had gone to fancy East Coast schools and considered themselves sophisticates, often mocked him by imitating his flat Wisconsin accent, which turned
bag
into
beg
and
sorry
into
sorey
.

A lot of Derrick’s day-to-day work at the private equity firm was the same as it had been at Wells Fargo—making presentations and Excel models in order to value companies and prepare client deliverables. But he also had more hands-on responsibility when it came to evaluating deals, and he spent a lot of time flying around the world to the headquarters of companies his firm was in the process of bidding on. He liked this work, known in the industry as “due diligence.” He enjoyed rubbing shoulders with the blue-collar workers and the local executives, many of whom reminded him of his friends and family back home in Wisconsin. And he liked that this work felt grounded in reality, unlike at Wells Fargo. He wasn’t just pushing numbers around on spreadsheets. He was getting his hands dirty with the work of capitalism.

At the same time, Derrick’s due-diligence visits always made him slightly afraid of what would happen to these salt-of-the-earth manufacturing workers once his firm acquired their employer. Often, private equity firms—his included—laid off workers and shipped manufacturing jobs overseas in an effort to make the companies they acquired more profitable.

Derrick knew that layoffs and closures were sometimes unavoidable. He’d seen his dad lay off workers at his grocery stores during down years, and while it was always painful, it was part of the normal life cycle of a business. Derrick’s boss had often compared the work of private equity to surgery—if they, the surgeons, needed to amputate a limb to save the life of the patient, then it was better than letting the patient go untreated and die.

What made private equity different than surgery, Derrick was learning, was that his firm usually succeeded even if its surgeries ultimately failed to save the patient. They pulled this off through the use of leverage, and a financial engineering tactic known as a “dividend recap,” or recapitalization, which involved loading a company with more debt in order to pay out the private equity firm and its investors. The dividend recap had been invented decades ago, but had only truly been popularized during the buyout boom of the early 2000s. It was, Derrick thought, a useful way to return money to shareholders, but it often accelerated the deaths of failing companies.

He was also bothered by the tone in which his firm’s executives spoke about the components of their turnaround plans in depersonalized business-school jargon. Laying off workers and cutting pension plans was often referred to as “right-sizing” or “rationalizing head count,” and outsourcing was euphemized as “streamlining” or “leaning out the business.” It wasn’t wrong to cut jobs or outsource if you needed to save a dying company, he thought, but at least have the decency to call it what it was.

One night, over dinner, I asked Derrick if he felt ethical about working in private equity—an industry that had been attacked as a form of “vulture capitalism” during Mitt Romney’s 2008 presidential run (and that would soon taint his 2012 run). He thought for a minute, took a sip of his beer, set it back down.

“Being ethical is kind of on a spectrum, right?” he said. “Like, I really like my firm, I really like the people I work with, and I think that within private equity, we do a good job of actually improving businesses rather than just going for quick money. But what conflicts me is that we don’t play by the same set of rules as everyone else. It’s a completely rigged system.”

I asked him what he meant.

“Well,” he said, “we buy these little companies, we put the best lawyers and consultants in the world on it, and if it goes bankrupt, we never lose. We put in stipulations that don’t leave us liable, there are seventeen blocker corporations between us and the company.” He paused, then chuckled. “How are you going to out-money private equity? Good luck.”

But surely, I said, it wasn’t easy to identify the right investments, find the right ways to engineer a portfolio company’s finances, and time an acquisition with trends in the market. Wasn’t there also some skill involved?

“Well, look at it this way,” Derrick replied. “My dad’s up there, intelligence-wise, with anyone I work with, but the money doesn’t flow to him like it does to the guys I work with. It’s the system. People in private equity are smarter than your average person, but they’re not that much smarter. And as long as the system is structured like this—where, two years after the world’s worst financial crisis, you can get four-times-debt on a bankrupt business—it’s not going to change.”

Derrick let that hang in the air for a moment, then added with a wry chuckle: “Of course, I say all this knowing that the fucked-up system is how I have an apartment that I don’t worry about the rent for, how I take cabs everywhere and go out for nice meals and wear clothes that I don’t care how much they cost.”

Derrick’s rant threw me off guard. I knew he was less than convinced about the basic goodness of the financial industry than many of the analysts I knew, and I suspected that the Occupy movement had resonated with his left-of-center political conscience, but it was rare to hear anyone in finance using phrases like “the system,” or undercutting the myth that people who engineered complex financial transactions were smarter and more capable than people in other sectors. The supremacy of Wall Street’s intellect was, in many ways, the financial sector’s founding myth, and it was part of the reason that thousands of high-achieving Ivy League graduates flocked there after college.

But although Derrick’s words were surprising, I couldn’t say they rang false. My shadowing of first-year analysts—and my interviews with top executives for my day job at the
Times
—had convinced me that many Wall Street workers were, by and large, as smart as top achievers in any other sector. They read the news constantly, they studied foreign affairs and domestic economic trends, and they were conversant on lots of nonfinancial topics. But, on the whole, they weren’t
brilliant
. Only four or five of the people I met struck me as actual, bona fide geniuses, the kinds that could foment a groundbreaking, industry-changing insight or invent a revolutionary new product. And many of the rest were essentially escalator riders—people who worked hard to get on a machine with an automatic upward trajectory, and, once they got there, only had to hold on.

Part of this is surely the fault of the stodgy workplace culture of banks, which can stifle creativity and genius if it appears outside the hierarchy they’re accustomed to. But another part of it, I suspected, was the kind of people banks tend to attract—confused, insecure college seniors, who are smart and capable in a general, all-purpose way, but aren’t phenomenally talented at any one thing.

Derrick knew that if he wanted to be a visionary, or even particularly creative, he would probably have to exit the private equity industry sooner or later. But it was far too early to consider that. He’d just gotten to New York, and he was still enjoying the high life. When it came to balancing ideological comfort with material comfort, the contest still wasn’t close.

One night that winter, Derrick met me for drinks at a downtown bar after work. He arrived late, looking every bit the harried private equity associate in a sharp suit, a blue tie, and a watch with a face the size of a golf ball. He ordered his usual (Tanqueray and tonic) and proceeded to vent about work. What had set him off was a conversation about Occupy Wall Street that had quickly turned into a humorous pile-on.

“Everyone at my job jokes about Occupy Wall Street, but there is a problem in this country,” he said.

Derrick maintained that his stance, as a private equity worker, wasn’t completely contradictory. (“The people at Zuccotti Park aren’t protesting me,” he said. “They’re protesting the guys who are thirty-five and making $5 million a year.”) But the ethical and moral challenges of the past few months had clearly gotten to him and driven a wedge between him and the rest of his colleagues.

That night, we sat at the bar watching the local news, which was primarily composed of Occupy scenes interspersed with Jets highlights. And before we left, Derrick began to switch from criticizing his bosses to criticizing himself.

“Do you know any good charities or nonprofits I could get involved in?” he asked me. “I mean, Jesus, I’m so self-centered, and I spend so much time feeling so sorry for myself and worrying about my shit and my life. I need to give back.”

Derrick’s crisis of conscience surprised me, but it shouldn’t have. After all, he was the young financier I knew who was the most removed from Wall Street culture. He had been in New York for only a few months, and he had yet to fully absorb the private equity industry’s values. Most of his heart was still back in Waupaca, with his father’s grocery business and his down-to-earth friends. And he was being pulled between that world—where people made tangible things, clocked in and out at work every day, and got paid hourly wages—and the exotic and cutthroat world of Wall Street, where you could make $200,000 a year as a twenty-five-year-old and still consider yourself below average.

In a way, Derrick was hoping to pull off an expert-level balancing act. He wanted to work in finance, with all the glitz and glamour the Wall Street lifestyle afforded him, but he also wanted to keep himself grounded in the values of Main Street. He wanted to absorb the good parts of the private equity experience—the management experience, the deep knowledge of how businesses work, and the ability to turn around struggling companies—without buying into the industry’s abiding principle of “shareholder value,” which held that a strategy of mass layoffs, pension cuts, and tax avoidance could be good, as long as it made more money for the private equity firm and its investors.

If Derrick could truly thread that needle, and harmonize the cognitive dissonance of working in finance as a nonbeliever, it would be a rare feat, and it would mean that perhaps he’d be able to sustain his New York life after all. But until he figured out how, he was in for a lot more sleepless nights spent listening to the angel perched on his shoulder, yelling in his ear.