Thursday, 29 December 2011

Wall Street jobs no longer an Ivy dream amid turmoil

America's 'best and brightest' are veering away from finance careers as investment banking goes bust


Guanyu 道 said...

Wall Street jobs no longer an Ivy dream amid turmoil

America's 'best and brightest' are veering away from finance careers as investment banking goes bust

William D. Cohan
29 December 2011

We are witnessing the decline and fall of the investment-banking profession as we have known it for the past 40 years.

The evidence is everywhere: The increasing regulations on Wall Street will require the remaining companies to increase their capital, curb their risk-taking and reduce their principal investing.

The regulations are required by the Dodd-Frank law and are still being written by the Federal Reserve, Securities and Exchange Commission, Commodities Futures Trading Commission and other agencies in the US and Europe.

Aside from the fact that investing principal and proprietary risk-taking per se had nothing to do with the recent financial crisis - and that the ability of Goldman Sachs to make a huge proprietary bet against the mortgage market probably helped saved the firm - these new rules will greatly curb Wall Street's revenue and profitability during a severe slowdown.

What sank Wall Street in 2008 was the seemingly more conventional business of being a middleman for the manufacture, packaging and sale of increasingly risky mortgage-backed and other debt securities.

Not being able to make those big proprietary bets when you see them developing - in effect, the closing of the casino that Wall Street has become over the past few decades - will severely limit bankers' profit opportunities.

It will also protect the rest of us when those big bets go wrong or are perceived to be too risky. For every Goldman Sachs acting brilliantly, there is an MF Global Holdings acting foolishly.

There is little debate that Wall Street has become highly dependent on trading operations. Around 90 per cent of Bear Stearns' profits in the years leading up to its March 2008 demise came from its trading and debt-origination activities.

The percentages are not that much different at Goldman Sachs, where in 2010, its traditional investment-banking operations generated only US$1.3 billion of US$12.9 billion in pre-tax earnings, about 10 per cent. All but US$1 billion or so of the rest of Goldman's pre-tax earnings came from its trading, lending and investing businesses.

The slowdown in business, combined with the looming trading curbs, has resulted in job losses across Wall Street. Morgan Stanley recently announced it was firing 1,600 employees.

Goldman Sachs has done its usual turn of eliminating the bottom 10 per cent of its workforce and a group of its long-serving partners. Bank of America announced that about 30,000 employees would be let go by the end of 2012, although a number of the firm's investment bankers lost their jobs in the past month.

Yet those suffering the most are the foreign firms that tried to break into Wall Street's business. Nomura Holdings has pretty much scuttled its most recent Wall Street experiment (it bought Lehman Brothers Holding's European and Asian banking operations) and firms such as Societe Generale, UBS, Credit Suisse and Royal Bank of Scotland are all cutting Wall Street bodies.

In November, Bloomberg News estimated that more than 200,000 people who work in finance had already lost or would lose their jobs this year.

Not only will the headcount reduction continue for the foreseeable future, but the vast sums overpaid to bankers and traders will inevitably continue to fall as well - as many of them are finding out this bonus week.

There is simply no easier and quicker way for Wall Street firms to keep up a modicum of profitability than by cutting pay for the people who still work there. Needless to say, the inevitable decline in Wall Street's compensation will mean less tax revenue for New York City and New York State and fewer government services for the rest of us (absent higher taxes).

Guanyu 道 said...

The most reliable leading indicator of Wall Street's future prospects is the way recent graduates of Harvard, Princeton and Yale - supposedly our best and brightest - choose to spend their time after graduating.

For years, hordes of graduates from those institutions beat a fast path to Wall Street. Now the road is far more difficult to travel. For those who choose to make the journey, there is the prospect of incurring the wrath and scorn of fellow students who make up the various Occupy Wall Street movements - a fact not likely to deter many. And then there are dimmer prospects for a job on Wall Street in general, given the slowdown in business.

According to a December 21 article in The New York Times, some 46 per cent of Princeton graduates in 2006 who had jobs lined up after graduation went to Wall Street. Four years later that number had fallen to 36 per cent.

At Harvard in 2006, a quarter of the class got jobs in finance. By 2011, that number had fallen to 17 per cent. In 2006, 24 per cent of Yale graduates had jobs in finance and on Wall Street, while in 2010, the number had fallen to 14 per cent.

The word around Goldman Sachs, I'm told, is that even those offered a still highly coveted entry-level job at the firm are having second thoughts. More and more banks are losing talent to Teach for America, a fact that may turn out to be one of the most heartening consequences of the financial crisis.

William D. Cohan, a former investment banker and the author of Money and Power: How Goldman Sachs Came to Rule the World, is a Bloomberg columnist.