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The Wolf of Wall Street’s Schadenfreude

Buzzing with five Oscar nominations, “The Wolf of Wall Street,” provides another Hollywood tale of drug induced, sex-crazed robber barons on Wall Street. Early in the movie, big-time broker Mark Hanna (Matthew McConaughey) corrupts the young and naïve Jordan Belfort (Leonardo DiCaprio)—whose memoir of the same title acted as a loose basis for the movie—during his first day working at an established brokerage firm, while they indulge in an expensive lunch overlooking New York City skyscrapers.

Wolf on Wall StreetAccording to Hanna, the keys to doing his job are: hookers and cocaine. After snorting cocaine and ordering several vodka martinis, Hanna quickly corrects Belfort’s client-based mentality towards the brokerage business: “Name of the game: move the money from your client’s pocket into your pocket.” This highly cynical encounter full of bizarre chants and financial mockery foreshadows Belfort’s “pump and dump” scheme and endless hedonistic parties at what became the largest over-the-counter brokerage firm in the late 1980s and 1990s: Stratton Oakmont, founded by Belfort himself.

The movie depicts Belfort’s boiler room operation, in which he and his employees swindle millions of dollars through the undeniably attractive and repetitious sales pitches Belfort crafts—in between taking Quaaludes of course. As Hanna mispronounces at the impressionable lunch years earlier, “It’s all fugazi…we don’t create s***, we don’t build anything.” To Hanna, Wall Street is all about gleaning and reinvesting clients’ earnings as a means to “take home cold hard cash, via commission.” No doubt Gordon Gekko’s “greed is good” mantra lives on in the Financial District, but Martin Scorsese’s portrayal of Jordan Belfort does not accurately represent his scam, let alone Wall Street.

In an op-ed published by the Wall Street Journal, Ronald Rubin, who was the Securities and Exchange Commission enforcement attorney for a case against Steve Madden (one of Belfort’s accomplices), not only denies Belfort “as emblematic of Wall Street’s greed,” but describes him as “nothing more than a thief who found a way to steal from anyone who trusted him and to blame it on the stock market.”

Although painting another Madoff-like Ponzi scheme in the abstract, while focusing on borderline offensive behavior at overblown office parties is entertaining, these many disingenuous interpretations of financial firms coming out of Hollywood elude the real issues concerning the investment industry and fuel the irresponsible rhetoric swirling around Wall Street. During an interview with Maria Bartiromo, Bill O’Reilly admitted:

I just put 25 percent of my investments in stocks, because I don’t trust it. I think it’s a rigged game…I think there are people who manipulate the market up and down, and I don’t understand any of it.

While misguided, O’Reilly’s conspiracy theories, coupled with haunting memories of the 2008 financial crisis and for many the crash of 1987, cause retail investors to assume extremely conservative approaches to the market, if they are even invested at all. Yes, financial crises and headwinds arise as Bartiromo noted, but she rejected the notion that markets are rigged, and stressed that over the long term, “you’ve got to be invested in stocks.”

Likewise, in “Market Wizards,” one of the most successful traders of all time, Michael Marcus, responds to Jack D. Schwager’s question about misconceptions that get people into trouble:

The foolish belief that there is conspiracy in the markets. [sic] I have known many of the great traders in the world, and I can say that 99 percent of the time, the market is bigger than anybody, and sooner or later, it goes where it wants to go. There are exceptions, but they don’t last too long.

The feasibility of manipulating the market infers a timeless debate surrounding the efficient-market hypothesis. Nevertheless, steadfast views that the market acts as a rigged casino are misinformed and harm mainstream investors, as they become too timid to capture long-term capital appreciation and income by neglecting to invest in financial instruments based upon faulty logic. In the face of exceptions as Marcus mentioned, his statement suggests a sort of “invisible hand” at play in financial markets.

Fundamentally, capital markets enable economies to thrive, and promote wealth creation. The zero-sum game and schadenfreude that McConaughey’s character—Mark Hanna—touts, is in his own words “fugazi.” Without capital markets, savings could not be efficiently channeled to borrowers in more productive, timely and affordable fashions, which is needed to make loans, finance operations, invest in research and development, expand companies and start new businesses. All these efforts help build a robust economy and prosperous society; in fact, much of the success of developing nations hinges upon the depth and breadth of their capital markets.

[pullquote]     Using exceptions as sweeping illustrations of the financial sector masks reality[/pullquote]

In addition, capital markets help grow the pension funds, 401(k) plans, and IRAs of hardworking individuals, so that they keep up with inflation and have sufficient funds for retirement. Despite the unpopularity of brokers and dealers, they provide liquidity to the market, which is crucial for an investment environment. And as frustrated as individuals are with the “golden parachutes” and excesses of the financial sector, often punishing those on Wall Street hurts those on Main Street. For instance, JPMorgan Chase paid a record settlement of $13 billion last year, largely due to the sales of faulty mortgages made by Bear Stearns before it was acquired in 2008. The fairness of this penalty is debatable as the government encouraged the acquisition, but regardless, it hurt shareholders (either through individual positions or holdings in a mutual fund), not the wealthy executives Hollywood abhors, who still received big bonuses.

Regulating and holding the investment industry accountable is needed in some capacity, but often, the results accomplish little more than theatrics; politicians appeal to their bases, big banks secretly position themselves in Washington’s back pocket and mainstream investors suffer. The Dodd-Frank Act for example—a response to the 2008 financial crisis—creates uncertainty, squanders small businesses, passes costs to investors and consumers, favors large financial firms and impedes economic growth. All the while, the bill does not create incentives to maintain sounder banking institutions, and continues to safeguard banks that are too-big-to-fail.

Consequently, the feckless risk taking by bankers and traders that spur financial crises is left unchallenged. Rather than joining in the schadenfreude Hollywood relishes, we should recognize the abounding benefits of capital markets on macro and micro levels, and try to informatively address the incentives that reward the imprudent speculative behavior that actually plagues markets. Using exceptions as sweeping illustrations of the financial sector masks reality, and empowers voters and politicians to materialize overbearing legislation that cause more headaches without fixing root problems.