Bringing Broken-Windows Policing to Wall Street

The banking industry needs more than regulation. It needs a new culture.

By:  Chris Arnade

The call came from another trader near midnight one night in ‘95. I assumed it was about a crisis in the financial markets, something bad happening in Asia. No, it was about a strip club. “Dude, turn on the TV news. Giuliani is raiding the Harmony Theater.”

The Harmony Theater was a two-level dive club in lower Manhattan, popular among Wall Streeters because it bent rules. It was a place where almost anything, including drugs and sex, could be bought in the open.

When I turned on the TV I saw a swarm of close to a hundred police, many in riot gear, escorting handcuffed strippers and sad-looking clients into waiting police vans. No traders, or at least none that my friends or I knew, were arrested that night.

The closing of the Harmony Theater was broadcast widely because it was the public launch of the “zero tolerance” policy of Mayor Giuliani and his police commissioner William Bratton, who argued New York City was out of control, not because it was too big, but because it was badly managed.

Zero tolerance was the first big application of “broken windows,” a theory of policing first argued in a 1982 Atlantic article by James Q. Wilson and George Kelling. They suggested that by targeting minor crimes, “fixing broken windows,” police could reduce the sense of disorder that often causes more serious crimes. “One unrepaired broken window is a signal that no one cares, and so breaking more windows costs nothing,” they warned.

Broken windows proposed that disorderly behavior left unchecked, even if it seemed harmless, made cities “vulnerable to criminal invasion.” Its implementation by Giuliani was an attempt to lower crime by fundamentally changing the behavior of New Yorkers and the culture of New York. It would, for the next 20 years, reshape the average New Yorker’s life. Rule breakers, no matter how inconsequential, would be arrested and jailed. Gone, after repeated arrests and considerable fines, was anyone who bent or broke the law (well, anyone in minority and lower-income neighborhoods, that is), no matter how gray or small the offense: The squeegee men, folks littering, anyone with marijuana, graffiti artists, prostitutes, panhandlers, and subway-fare jumpers.

At the same time an opposite policy, launched out of Washington, reshaped Wall Street. While the average New Yorker was being subjected to increased police scrutiny, under the theory that individual liberty can collectively be corrosive, financial firms in Lower Manhattan were being subjected to almost no scrutiny, under the theory that individual liberty, especially when applied to businesses, can be collectively beneficial.

My banker friends and I benefited from both policies. We were ignored during the day by regulators and free at night from squeegee men and muggers.

Wall Street and New York City boomed. The firm I joined in ‘93 was an investment bank with 5,000 employees and $110 billion in investments. Fourteen years later it had grown, through acquisitions and mergers, into a financial conglomerate with more than 200,000 employees and $2.2 trillion in investments.

That growth in the financial sector culminated in the massive financial crisis of 2008, which bankrupt my firm and almost bankrupt the country. Following the crisis politicians were finally forced to deal with the reality that it was Wall Street that was out of control and had too many broken windows.

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