Wall Street Losses/Main Street Gains

The Wall Street Journal tells the sad (?) story about how Citigroup’s last proprietary trader – Anna Raytcheva – is walking out the door. Before you cry any crocodile tears for Ms. Raytcheva, please note that she is leaving to manage her own hedge fund. But the important part of this story is why she’s leaving in the first place.

Proprietary traders at banks are high-paid employees that buy and sell for the firm’s own account, rather than to match investing clients with securities…

Banks used to routinely engage in proprietary trading. Citigroup and other large banks including Goldman Sachs Group Inc. and Morgan Stanley had multiple desks dedicated to the lucrative but risky practice before the financial crisis.

But the “Volcker rule”, part of the post-financial-crisis regulatory overhaul, banned most types of proprietary trading and shifted banks’ trading activities to those on behalf of clients. To comply with the rule, Citigroup sold or spun off businesses, including an emerging-markets hedge fund and a private-equity unit. It also closed down Citi Principal Strategies, its dedicated proprietary trading desk, in January 2012.

Such retrenchment has been common at big banks over the last five years, with proprietary traders decamping to hedge funds and other less-regulated industries.

According to an analysis by the Federal Reserve Bank of New York that was released yesterday, this is part of a trend. As we saw immediately after the Great Recession, most job growth was centered in high-paying high-skilled fields as well as low-paying low skill industries. From 2013 to 2015, that trend has been reversed.

Given that this analysis focused on the New York region, it is interesting to note what is going on.

More than any area in the United States, with the possible exception of San Francisco, New York City has come to symbolize an economy built on vast gains for a lucky few, with most everyone else largely standing still.

But as the motor of New York’s economy, Wall Street is yielding to Silicon Alley and Brooklyn, as technology companies like Google and smaller start-ups bulk up while banks and hedge funds slim down…

“In the past, the city has counted on job growth from Wall Street to fuel economic growth during recoveries and expansions,” Mr. Dudley said. “This time around, however, job gains in the securities industry have been quite meager.”

Hiring in fields like internet publishing, online shopping and scientific research and development, Mr. Dudley added, “is picking up much of the slack created by the softness of the securities industry.”

The local tech boom has also spread the largess well beyond the canyons of Wall Street. Private sector job growth in Brooklyn, Queens and the Bronx was stronger last year than it was in Manhattan.

It will be interesting to see whether those main street trends emerge in other parts of the country. But regardless of that, this is just one more sign that Dodd-Frank is working to rein in Wall Street.

Nancy LeTourneau

Nancy LeTourneau is a contributing writer for the Washington Monthly.