Another shocking exposé, this one from The Wall Street Journal, of Wall Street culture. They think of themselves as a “meritocracy” but behave more like an 18th century French aristocracy of the “let them eat cake” variety.
By ANDY KESSLER Dec. 3, 2017 for The Wall Street Journal
It was almost a rite of passage. Soon after I started on Wall Street in the 1980s, sales folks from the trading floor invited me to dinner. We met at one of those fancy New York steakhouses where French wines flow like tap water. I felt part of a new fun group.
Until, that is, the bill came. Everyone looked at me and another new guy. “You know about the tradition, right?” I recall the senior salesman asking. “Last one in, pays.” At 26, I wasn’t sure my credit-card limit would be high enough. I sheepishly asked how to expense the enormous bill. Simple, I was told: Mark it down as a couple of cab rides a week. Oh, and welcome to Wall Street.
This story came to mind last month after Navnoor Kang, a manager at New York’s state pension fund, pleaded guilty to fraud. He had been bribed to direct bond business to the trading firms Sterne Agee and FTN Financial. This included vacations, drugs and prostitutes. I kept thinking: How the heck did the salespeople at these firms write off all this stuff on their expense accounts?
Wall Street was supposed to have been cleaned up by now. In 2006 the investment-banking firm Jefferies paid nearly $10 million in fines after lavishing gifts on Fidelity traders. These included “a booze-fueled bachelor party replete with strippers and dwarves,” according to the New York Post.
Two years later the Securities and Exchange Commission charged Fidelity for “improperly accepting more than $1.6 million in travel, entertainment, and other gifts paid for by outside brokers courting [its] massive trading business.” The perks included “premium sports tickets to events including Wimbledon, the Super Bowl, and the Ryder Cup golf tournament.” Fidelity cleaned house.
Who hasn’t fudged expenses? At one point companies could lower their taxes by deducting 100% of entertainment expenditures as legitimate business costs. Partly to cut back on those infamous three-martini lunches, Congress changed the law starting in 1987 to allow only an 80% deduction. In 1994 the government lowered it to 50%, where it stands today. I can’t think of any good reason why it isn’t zero.
Think about it: If you have to ply your clients with gifts or meals to get them to do business with your firm, then your product probably isn’t worth its price. Why should taxpayers subsidize your company for producing lame products or you for being a lousy salesman?
When the new Yankee Stadium opened in 2009, the 1,800 premium seats in the sections around home plate—as much as $2,500 a game at first—were nicknamed the Goldman Sachs seats. This was during the financial crisis, and the optics of opulent bankers sipping champagne near the on-deck circle became too much. One Goldman partner told me at the time that if any of the firm’s employees were seen in those seats, with or without clients, they would be fired on the spot.
Houston Mayor Sylvester Turner told the Houston Chronicle that this year’s Super Bowl LI brought $350 million into the city’s economy—in one weekend, and you know virtually all of it was expensed. Thank you, taxpayers. Vic Macchio, who runs a corporate dining network called Dinova, has estimated the “business dining spend in the U.S. to be $60+ billion annually.” I’ll bet that’s low.
All this presents an opportunity. Why not zero out the tax deduction for business entertainment? Same for “sponsorships” and other client giveaways. That’s, by my calculations, tens of billions lost every year in exchange for unproductive schmoozing and bribes to buy bad products. Restaurants and bars will complain. So what? It would remove another distortion from the tax code.
And some personal advice: A lot of people cheat on their expense accounts, but don’t do it. I can go on about moral responsibility but will instead note that software can make audits easy. Modern code could have quickly found my months of illusionary taxi rides.
I’ll also remind you of Mark Hurd, Hewlett-Packard’s ex-CEO. In 2010 he was accused of sexual harassment by an outside contractor, an actress named Jodie Fisher. HP ’s board found that Mr. Hurd didn’t violate the company’s sexual-harassment policy, but he got axed anyway—for $20,000 of irregularities with his expense accounts.