Network News

X My Profile
View More Activity

Why do Harvard kids head to Wall Street? An interview with an ex-Wall Street recruit.

One of the common complaints about Wall Street is that it sucks up a lot of Ivy League talent that could be going toward more productive endeavors. The common assumption is that the students are just following the money. But, my friend, an anonymous Harvard graduate who spent some time on Wall Street says that's not always the case. An edited transcription of our conversation follows:

You went to Harvard. Then what happened?

So, I'd done a summer internship with Goldman in my third year. Then, after I graduated, I had a month off, and then I started at Goldman in the middle of the summer. There's a training program; it's about two months. And then I hit the desk.

What did you study at Harvard?

I focused on history and government and political philosophy.

And why did Goldman Sachs think that would be good training for investment banking?

Why Goldman thought I'd be good for investment banking is a very fair question. There are a lot of Harvard people at Goldman and they've put a lot of effort into recruiting from the school. They really try to attract liberal arts backgrounds. They say this stuff isn't so complicated, that you'll pick it up as you go along, that it's all about teamwork, that they have training programs. That being said, it would be very hard to get a full-time job there without a previous summer internship.

How did you end up going to Goldman, though? Presumably, as a social sciences major, you hadn't meant to head into the financial sector.

Investment banking was never something I thought I wanted to do. But the recruiting culture at Harvard is extremely powerful. In the midst of anxiety and trying to find a job at the end of college, the recruiters are really in your face, and they make it very easy. One thing is the internship program. It's your junior year, it's January or February, and you interview for internships. If all goes well, it's sort of a summer-long interview. And if that goes well, you have an offer by September of your senior year, and that's very appealing. It makes your senior year more relaxed, you can focus on your thesis, you can drink more. You just don't have to worry about getting a job.

And separate from that, I think it's about squelching anxiety in general. It checks the job box. And it's a low-risk opportunity. It's a two-year program with a great salary and the promise to get these skills that should be able to transfer to a variety of other areas. The idea is that once you pass the test at Goldman, you can do anything. You learn Excel, you learn valuation, you learn how to survive intense hours and a high-pressure environment. So it seems like a good way to launch your career. That's very appealing for those of us at Harvard who were not in pre-professional majors.

The impression of the Ivy-to-Wall Street pipeline is that it's all about the money. You're saying that it's actually more that Wall Street has constructed a very intelligent recruiting program that speaks to the anxieties of the students and makes them an offer that there's almost no reason to refuse.

Exactly. I wouldn't speak for everyone and there certainly are people who want to be in finance, but a large portion are intrigued by these jobs for those reasons. I think that's a majority, at least at Harvard. And the same goes for consulting jobs or even Teach for America. It's this limited-time commitment, the ability to get new skills. These aren't the types of things you grow up dreaming of doing, but you wear a business suit, you meet clients. It's a way of growing up very quickly. And investment banking has the added advantage that you can make money very quickly and afford a great apartment in New York, which is very expensive.

Does that trap people? It's common to talk about "golden handcuffs" in law, where people go to law school and want to do public interest law but decide they'll go to a corporate firm for a few years first. Then they get used to the lifestyle the corporate money provides and never really give it up.

The law comparison is a good one. That's the risk of it. As you said, when people leave law school with a lot of debt, they figure they'll get some good skills and good money at a top-tier firm before going to save the world. But then you have a great apartment, more responsibilities, kids. You start enjoying it. It's not even all material.

And I think it's important to point out, that things happen very quickly. Private equity firms were trying to recruit us in the first year of my two-year training program. There's this notion of the accidental banker, people who get caught up in that world and get more and more pay and find it harder to justify leaving. But the cultural effect of all of this -- and even with regulatory reform, we need to think about that -- is that a lot of people decide to sacrifice much more time than they normally would because the money is so good, and then they believe they deserve extremely high pay because they're giving up so much time. It's not malicious. But there are a lot of unhappy people who end up in that situation.

You hear this sort of thing in a lot of articles. I remember Gabe Sherman's New York magazine piece that quoted a banker saying, basically, I deserve this money -- I'm answering my BlackBerry at 2 a.m.

The question is what's the answer? Can you cut everyone's pay and hours in half so people are happier and you have more reasonable salaries? That's tough. Certain people really are crucial. But it's a bit odd when someone says they deserve to get paid so much because they answer their BlackBerry at 2 a.m. and the guy at my convenience store doesn't get to go home until his shift ends at 3:30 a.m. People on Wall Street work very hard and they feel they chose this path because there was a reward promised to them. And now, when it's being taken away from them, they get very angry. If the reward hadn't been offered to them, they feel they would've followed their passion and become a journalist or something.

The flip side of that is that the malice towards the individuals at places like Goldman is misplaced. I get where it comes from, but just like it's wrong for the banker to say they work harder than everyone else and deserve more, it's also dangerous to paint bankers as evil. Lloyd Blankfein isn't out to screw the world. Wall Street's problems are more systemic. Individuals are behind systems and leaders have a huge responsibility. And there's been some real arrogance, but the personal attacks on individuals make them defensive.

By Ezra Klein  |  April 23, 2010; 4:25 PM ET
Categories:  Interviews  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati   Google Buzz   Previous: USAA and financial regulation
Next: The Affordable Care Act's spending and coverage in graphs

Comments

I'm speachless.

Them that gots, gets. Amen.

Posted by: luko | April 23, 2010 4:36 PM | Report abuse

That's interesting how Goldman et al. recruit into the anxieties of Harvard students, especially their anxiety abut comitting to a career path. It sounds like the most valuable people at Goldman are the psychologists who design programs like this and teach the sales folks how to exploit the anxieties and vanity of their marks -- er, customers.

The part at the end about how the rest of us are supposed to subsidize the unhappiness of people who fell into a cushy world where they were expected to work hard for the big bucks is really appallingly whiny, however.

Posted by: Mimikatz | April 23, 2010 4:42 PM | Report abuse

man. i really wish i had gotten in to harvard. sounds like life would be much easier.

Posted by: rt72 | April 23, 2010 4:43 PM | Report abuse

the anxieties of Harvard students?

Really MimiKatz?

I would expect the level of anxiety of Harvard students measures about as high as the anxiety level of a first round NFL draft pick.

In essence its locked in. I doubt we'll find many homeless Harvard grads out there.


All that being said I'd agree that there are many people that work harder than they should and make much less in their entire careers than a GS higher up makes in a month.

Sorry no sympathy here to either side.

Posted by: visionbrkr | April 23, 2010 4:53 PM | Report abuse

You're not describing Harvard students. You're describing Harvard students in the poli-sci/econ/business crowd, and most of these kids are all about the reward/effort ratio, and you don't get a higher ratio than in finance.

Posted by: jfpbookworm | April 23, 2010 4:59 PM | Report abuse

"you learn Excel." !!!

Posted by: bdballard | April 23, 2010 5:00 PM | Report abuse

Yeah he went to Harvard and its easy to joke about his job "anxiety" - really easy - but let's be honest, this is a still a young person, who is no doubt incredibly bright, but has no life experience. So like anyone, they are going to be nervous about finding the job out of school.

Posted by: truth5 | April 23, 2010 5:18 PM | Report abuse

"They feel they chose this path because there was a reward promised to them. And now, when it's being taken away from them, they get very angry."

That is a very strange attitude for people whose job involves assessing risk.

Posted by: Unwisdom | April 23, 2010 5:25 PM | Report abuse

truth5,

the point is its relative. I'd suspect your local community college grauduates have much more anxieties nowadays than Harvard graduates.

Its like the point a week or so ago that Ezra made when a financial planner whined about his taxes and then used the african immigrant as a comparison and told him he had absolutely no right to complain about taxes because of how well he had it.

Posted by: visionbrkr | April 23, 2010 5:27 PM | Report abuse

I don't get the last paragraph. Harvard and Goldman Sachs flaunt their prestige, power, and wealth. They are the system in many cases, At best, that last paragraph might be understood to mean: "Harvard and GS are grossly overrated and need the rest of humanity to constantly remind them of that."

Posted by: NotStephenGlass | April 23, 2010 5:57 PM | Report abuse

Investment banking isn't cushy. It's extremely hard work. I don't think it's worth the money.

I know several investment bankers. They work 85 hours a week and have maybe 12 days off a year, including holidays. They put in something like 4,500hrs/yr.

Let's say one of these analysts, if they lived in NYC and worked for Goldman, ends up making $90,000/yr in salary and $135,000 as a bonus. That's $225,000/yr. That translates at $50/hr.

Let's compare this to a teacher who makes $40,000. She works 180 days a year, and I'll give her 9 hour days 7 normal plus 2 lesson planning/grading outside of school. That's $24.70/hr. So the investment banking analyst in our case makes about double what a teacher does on an hourly basis.

However, most teachers live in places other than New York. The investment banker either sacrifices 2-4 additional hours of his day commuting or lives in Manhattan. Manhattan is extremely expensive. Rent for what are basically closets in Manhattan is astronomical. Bankers are required to wear expensive stuff, so that they look presentatable to clients. You won't be allowed to represent Goldman in something from Men's Wearhouse. We'll say the the typical costs of living in the rest of the country are 80% of what they are in Manhattan, so $50/hr buys only $40/hr worth of goods and services. Now our investment banker only makes 62% more an hour than a teacher.

Finally, we get to the issue of taxes. Let's assume that the teacher pays an average of 16% of her income in taxes, and the investment banker something like 31% (assumes SSTax on the first $100k, Medicare at 1.45%, effective federal at 20%, effective state/local at 6% - 30.85%).

That brings our differential down to 33% more per hour.

On an hourly basis, adjusted for taxes and costs of living, these guys make maybe 1/3 more than a teacher does. Don't get me wrong, Lloyd Blankfein makes dozens of times that amount, and part of the allure of the job is that you have a chance to get there. But these aren't cushy lives. Investment banking is a great job in terms of pay and career prospects, but it's very, very demanding, especially for young analysts.

Posted by: justin84 | April 23, 2010 5:58 PM | Report abuse

By the way, that was a very gracious nod to the convenience store guy. Yeah, that guy works until 3am, but unlike the investment banker he probably wasn't there from 8am. The Ibanker in this case worked 18 hours.

Also Ezra, great job getting this interview. It's nice getting to see a perspective of an investment banker as a real person.

Finally, one issue with the top line - outside of government interference such as the bailouts - money goes to its most productive uses. If wall street bankers are paid the most, then they add the most value. If talent provided a great dollar value of output in another use, why isn't the manufacturing firm or the consulting firm stealing that productive worker by offering a higher wage?

Posted by: justin84 | April 23, 2010 6:08 PM | Report abuse

good interview and pretty balanced take. what it misses, i think, is that the guy was recruited from harvard to be an entry level analyst for two years at goldman. while well paid compared to his compatriots, this is not a master of the universe.

the best investment banker i've known referred to analysts as "cannon fodder." they were used and abused. well paid. and replaced by new cannon fodder.

for most of these analysts, this was two (and infrequently three) years of growing up, getting résumé points, before going off to business school, law school, etc. sure, many came back to wall street and became titans, but current-day analysts didn't cause the wall street meltdown. the problem was systemic, and it was at or near the top.

one other thought: the rocket scientists whose math skills cooked up the derivatives nightmare were not english or social science majors from harvard.

Posted by: bbebop | April 23, 2010 6:15 PM | Report abuse

I'd say that relationship is pretty much matched by Oxford/The City in the UK as well. At university recruitment fairs the only companies represented were banks, management consultancies and law firms. A lot of people just end up drifting into those jobs because other options aren't put in front of them and the pay is good.

I think the anxiety point is fair. If your parents are wealthy and they spent a lot of money sending you to a private high school, there's a feeling that you can't step away from that and need to have a well paid job.

Posted by: secretagentvladimir | April 23, 2010 6:34 PM | Report abuse

> You hear this sort of thing in a lot of
> articles. I remember Gabe Sherman's New
> York magazine piece that quoted a banker
> saying, basically, I deserve this money --
> I'm answering my BlackBerry at 2 a.m.

Every employee on the production side of every electric utility who read that bust a gut laughing. Not only do they answer their Blackberries at 2 AM (both management and union/hourly), but they put their hard hats on and head out into weather and working conditions that cause Wall Street to declare a day off. And they do that 365.24 days/year their entire careers (which tend to be short; a lot of people with those jobs die of heart attacks at 50-55).

sPh

But of course, no $20 million bonuses...

Posted by: sphealey | April 23, 2010 6:45 PM | Report abuse

Joke?
"... If wall street bankers are paid the most, then they add the most value..."
Posted by: justin84 | April 23, 2010 6:08 PM
justin84?
Please say you snarked that.

Posted by: JanusDaniels | April 23, 2010 7:53 PM | Report abuse

This story is not an unfamiliar one. Investment banking has a similar scam going on as corporate law: clients are willing to pay big bucks per hour for each worker assigned to the project, so banks and law firms suddenly discover the need to assign dozens and dozens of analysts/lawyers to the project. But they're "worth it," the client is told, because, after all, these lawyers/analysts went to Harvard/Yale/Princeton/Stanford/MIT.

It almost makes hedge funds look like honest work: after all, at the end of the day, your bonus at a hedge fund is based on how much money you have made for your investors, rather than feeding off the fees generated for completing a merger deal which you, the banker, convinced the client to do in the first place.

Ok, less snarkily: it's not that difficult to understand why people go into banking. First, the money is good. Second, lots of your friends are doing it. Third, you get to live in New York/London/Hong Kong. From reading Ezra's posts over the years, particularly when he's discussed the primary care vs. specialist physician issue, I keep getting the impression that Ezra doesn't really understand things like opportunity cost when it comes to money. Yes, you could take a lower paying job, but _each and every year_ you stay in that lower paying job you are giving up money you _would_ have had at a higher paying job.

I'm sure that working at the Center for American Progress or another non-profit is nice and that you can live well on $40,000/yr. But if you are given the chance to make $100,000/yr, are you really going to give up $60,000 _every year_? The more into the future you think about the issue, the less sense it makes. You're not taking a job that makes a little bit more money. You're talking about _exponential_ differences in salary. So of course once it's presented to you and once you find yourself in that position, you're going to stick with it. The cost of leaving is just too high, even without discussing an attachment to a certain lifestyle.

Posted by: tyromania | April 23, 2010 8:34 PM | Report abuse

"How did you end up going to Goldman, though? Presumably, as a social sciences major, you hadn't meant to head into the financial sector."

And ... Ezra jumps the shark.

Goldman and other major investment banks have been climbing over each other for generations to recruit liberal arts majors from Ivy League universities -- which don't typically have "finance" majors.

Why is a commentator who doesn't know this given "voice" here at the Washington Post on the subject of investment banking?

(Oh, and Ezra, economics is a social sciences major).

Posted by: lsm47 | April 23, 2010 9:29 PM | Report abuse

lsm47, Ezra didn't say, "presumably the financial sector wouldn't want a social sciences major." He said, "presumably, as a social sciences major, YOU hadn't meant to head into the financial sector."

Posted by: tyromania | April 23, 2010 9:32 PM | Report abuse

Seems like English majors are still safe from corruption!

Posted by: Bertilak | April 23, 2010 9:48 PM | Report abuse

That's the point. The question reveals Ezra's ignorance.

Social sciences and other liberal arts majors is *exactly* the pool from which Goldman and its peers targets the most often. It's the kind of background Harvard students choose to go into investment banking.

You can't spin it, Ezra didn't know that.

He filled in the gaps of his knowledge with what made sense to *him*, which is very typical for liberal commentators out of their element. (Ezra repeats this sin daily when he talks about healthcare and insurance issues).

But come on, investment banking? What the heck is Ezra doing here, given "voice" by the Washington Post on a subject about which he demonstrates he knows so little?

Posted by: lsm47 | April 23, 2010 9:50 PM | Report abuse

"things happen very quickly. Private equity firms were trying to recruit us in the first year of my two-year training program. There's this notion of the accidental banker, people who get caught up in that world"
Oh, the calm innocence of those little monsters... I was once a Harvard Law student (never graduated). Basically everyone, like really 90 percent of the class, ended up practicing corporate law in any one of its manifestations, and they would all told the same story. In short: it's not that I like corporate law, but you know it kind of just happened after my internsip... A Harvard grad (college or grad school) has a very very wide range of choices regarding what to do after school. People who go into investment banking make a choice to do that, period. And to those who dare say with a straight face that they just got sucked into it even if they don't really like it, I'd like to ask this: why didn't you choose something else exactly?

Posted by: rp521 | April 23, 2010 9:55 PM | Report abuse

Sorry for the typos

Posted by: rp521 | April 23, 2010 9:58 PM | Report abuse

justin84:

"Finally, one issue with the top line - outside of government interference such as the bailouts - money goes to its most productive uses. If wall street bankers are paid the most, then they add the most value. If talent provided a great dollar value of output in another use, why isn't the manufacturing firm or the consulting firm stealing that productive worker by offering a higher wage?"

People who are still saying lies like this should be harvested for organs. Wall St happily sucked huge amounts of money into their own pockets, and then crashed the system.


Posted by: BarrytheD | April 23, 2010 10:15 PM | Report abuse

The tradeoff is pretty simple, work like a serf, participate in senior level decisionmaking right out of school, get a pretty good leg up on future (management) career choices.

If you're an academic type, you want to study/teach at Harvard. If you're a tech type, you want to work at Google. If you're a business type, you want to work at Goldman. They are the biggest collections of talent in their respective fields, and Goldman is also a great training ground and has a strong culture of excellence.

Sounds like this person is a bit confused about why he's there, but I think he's the exception.

Also, last I checked, Men's Wearhouse sells business suits, people at Goldman wear business suits (for a while, a lot of areas went casual but maybe that's no longer the case.)

(I know a lot of people there and do business with them, at one time did some consulting, they're a little intense for my taste - there's some truth to the notion that they used to have clients but now have counterparties - I feel about them like some people may have felt about Microsoft (or now Apple) - highly competent, successful superpower that sometimes overreaches or abuses their position - but of course the scale of Goldman's success and the recent economic catastrophes and government support make it an attractive target)

Posted by: curmudgeonlytroll | April 23, 2010 10:22 PM | Report abuse

lsm47, it's possible that Ezra didn't know about the recruitment practices of the financial industry. However, you can't infer that from that question because, as tyromania pointed out, the question was asking why the interviewee was attracted to Goldman, not why Goldman was attracted to the interviewee. You seem to be misunderstanding that, either willfully or because you didn't read the question correctly.

Otherwise, I'm puzzled by your demand that people in journalism not gather facts (as Ezra did by conducting this interview) but rather that they must somehow inherently know them. It would seem that a good way to find out about Goldman's practices with respect to recruiting ivy leaguers would be to interview one such ivy league recruit. And then, it would be even more informative to then publish that interview. Yet somehow, you seem to be saying that doing as much shows the lack of value of this blog. Strange indeed.

Posted by: seanconnery | April 23, 2010 11:20 PM | Report abuse

I'm focusing on what Ezra doesn't know. When it comes to investment banking, it's evident, that's quite a lot.

Again, he "presumes" that someone who went into the social sciences wouldn't have in mind a career in investment banking. (Shall we suppose that includes the social science of economics?).

No question about it, Ezra jumps the shark. No, it's not just a question of what Goldman looks for (bizarre spin), given that this is precisely the kind of major that students who *want* to go into investment banking study.

If you're well informed, you'd presume the opposite of what Ezra does.

It is fascinating, though, to watch so many jump in here, anxious to make sense of Ezra's mistake.

Given how many on the Left rely on him as gospel on another subject where he's woefully uninformed, health care, does this hit too close to home?

Posted by: lsm47 | April 24, 2010 12:12 AM | Report abuse

"Given how many on the Left rely on him as gospel on another subject where he's woefully uninformed, health care, does this hit too close to home?"

Your entire argument is simply mystifying. Seriously. The whole thing. From A to Z. It looks to me like complete nonsense. And yet you seem so thoroughly pleased with it. How do you do that?

Posted by: slag | April 24, 2010 12:24 AM | Report abuse

Re: Ism47,

Why, exactly, do you assert that Harvard students in the social sciences or liberal arts choose those majors intending to go into investment banking? Obviously, there are those that do - mostly in economics. But, just as obviously, any is a far cry from many or most. Just because Goldman Sachs recruits from this pool doesn't mean that that therefore people who enter it intend to get recruited.

And to just to quote from the article, the guy said, "Investment banking was never something I thought I wanted to do." So, you know, Ezra's presumption was correct.

Re: visionbrkr
I think you're missing the point of the article. Few people would claim that Harvard students are somehow more anxious or worse off than other people. This isn't a who has it worse - it's about how so many Harvard students end up in investment banking.

Something like 40% of the Class of 2002, for example, went to Wall Street, so there have to be some pretty large systemic pressures involved in getting them there. Everyone's anxious when graduating from college and I'd imagine that most people take the easy and/or safe option, be that joining Dad at his work or going to graduate school or whatever. The peculiarity for Harvard students is that investment banking is one of the easy options.

Posted by: hrf_02 | April 24, 2010 1:09 AM | Report abuse

A polite, non-judgmental description might be that college kids are just chasing the American Dream seeking financial security and stability. The first job tends to establish expectations -- as does performance by peers.

A harder assessment would simply be that there's a sense of entitlement that develops around a set of expectations and experience -- even if the experience is based on some really quirky factors.

In the 90s boom, I remember acquaintances who made their first million at AOL within 5 years of leaving undergrad. Sure they put in ridiculous 80 hour work weeks from year one, but in four to five years they made more than parents who were more highly credentialed, and more highly skilled. There's an element of our compensation structure that has everything to do with timing.

I also remember firms like Arthur Anderson recruiting the hell out of people from our business school. These people were making over $40K in their first year, which seemed like really good money for a kid out of college! Of course they were working ridiculous hours too. 80 hours a week which took some of the luster of the compensation. And then the business went bust when the truth about the business model came to the fore. Their jobs may have required hard work and some skills, but the work was also a net negative on the overall economy.

It's hard to reduce this to any kind of moral. One might be that big returns are often a byproduct of dumb luck combined with opportunity and hard work – with the “dumb luck” accounting for a larger share of the equation than many can even admit to themselves. Another is that our compensation structures don't necessarily have any correlation to real social value. Maybe this is not always the case, but it certainly is true now.

With respect to justin84, I'd say with respect to teachers the differences become magnified over time. By year 5 and beyond the differences become exponentially larger. Odds are someone with 8 years of experience in finance at a big firm was probably pulling in something closer to a 10 to 1 compensation level compared to a peer who went into teaching at the same time. Of course there are people like the then 27 year old VP at Goldman Fabrice Toure who was probably pulling in 100 times the typical teacher salary.

The thing that probably rubs most people the wrong way about this isn't that investment bankers are lazy; it's that their jobs don't provide any social value. A person might say: Well neither do elite entertainers or athletes. Arguably this is true. On the other hand, most of the effects of their socially useless activity tend to be more benign (at least from the perspective of financial stability). The same is not true of large financial firms who operate in an environment with perverse incentives to engage in socially destructive activities.

Posted by: JPRS | April 24, 2010 1:45 AM | Report abuse

Oh, I have no doubt that Ezra carefully pre-screened a student who fell backwards into investment banking.

So it proves *nothing*, and certainly adds no validity to his erroneous and ignorant presumption.

Social sciences, including economics, is exactly what students aiming for Goldman tend to study. Ezra, apparently, imagines most Ivy League universities have, what, bachelors of business administration, accounting and finance? ROFL.

But again, it's fun to watch the spin. So many drool for the latest pronouncement by the sagacious Ezra on healthcare ...

Posted by: lsm47 | April 24, 2010 2:08 AM | Report abuse

lsm47,

The former Harvard grad stated upfront that he didn't have a degree in finance. Maybe you know differently.

hrf_02 points seem to hold as well (e.g. that a large percentage of Harvard undergrads went into finance; and the fact that Goldman recruits undergrads with social science focus. The fact that Goldman recruits people doesn't preclude the possibility that a lot of these students fall into investment banking rather than actively pursuing it the minute that they get into Harvard).

Like a lot of college undergrads my sense is that there are probably a lot of people at Harvard who change directions over the course of their time in undergrad (e.g. I know a friend who went from pre-med to English simply because the pre-med track was burning her out -- she opted for a different career path). Only a few people that I know knew EXACTLY what they wanted to do with their lives the minute that they finished high school and then stuck to a 10 year plan. The overwhelming majority of people that I know -- college grads and otherwise -- have fallen into careers that they probably didn't anticipate entering when they were seniors in high school.

I'm not really clear what the controversy is here, or what your point is.

Is your assumption that people who get degrees in social science from Harvard must **really** want to go into finance.

Are you basically calling this one guy a liar?

If so, where's the evidence to support your position?

Posted by: JPRS | April 24, 2010 2:36 AM | Report abuse

Correction: The former Harvard grad stated that he did not have a degree in economics -- which is a concentration within the social science curriculum.

Posted by: JPRS | April 24, 2010 3:00 AM | Report abuse

I suspect ISM47 is speaking from the perspective of someone who is working on Wall Street and who was recruited from an Ivy League school (a number of my classmates - we were not from an Ivy League school - told me about how impossible it was to even get an answer from an investment bank without an Ivy League background) and is quite content with the system as it is and that the system meets his expectations.

Most people who are reading this article - and most people in the world outside of Wall Street - do not realize how closely tired Wall Street and an Ivy League education have become. Nor do most people think that a graduate of Harvard or any other high caliber school would be necessarily drawn to investment banking barring other options - since graduates of most other schools do not enter any single industry (and, specifically, the investment banking industry) at such a high proportion.

However, it's a system that has clearly damaged the country's economy and that has led to behaviors that are characteristic of a system run by people who have been largely trained to operate it rather than build it (and, therefore, to question it and to question the assumptions that built it and - even less - to question the significant financial benefits that they are gaining from it).

Answering a call at 2am after an 8am start the morning before is certainly not unique to investment banking and is not rewarded in nearly the same way in other jobs. And there are few other jobs where pushing an entire economy into a recession would actually yield significant rewards. Fortunately, the rest of the world and the rest of the economy is starting to realize that it no longer considers that acceptable.

Posted by: za2008 | April 24, 2010 3:31 AM | Report abuse

za2008,

Point taken. Although I'm not really sure how lsm47 is building a case to support or refute any position. It seems like a pretty uncontroversial proposition that there are a segement of Ivy League grads who end up in finance without envisioning themselves as investment bankers when they first apply to Harvard.

Basically, the interview is one person's take on the recruitment process. Undoubtedly Ezra could have found a graduate who always wanted to be an investment banker and who did it purely for the love of money. Of course that's a different story -- it doesn't negate this other equally true proposition that some people stumble into a line of work. This seems uncontroversial to me. Stunningly obvious.

Another angle here might be to look at the Harvard grad who was tempted to go into finance, but opted to go in another direction. That's a different story too.

There's some value in determining which story is a more accurate picture of the times, and then digging into motivations -- that seems to be part of the purpose of the interview.

We seem to agree on the larger point. I was also struck by the audacious notion that getting a work related call at 2 AM and then having to get up for work a few hours later is justification for a 6 figure salary. Speaking from experience I've been in that exact situation many times before, but as much as I would have liked to have netted a $200K bonus for all my trouble, I never felt that I was entitled to that kind of compensation as a birth-right.

Frankly we'd be better off as a nation if the Wall Streeters worked less, for less, and were less corrupted by a system of bankrupt incentives. That much too should be stunningly obvious. Unfortunately, it looks like this one is going to require more heavy-lifting.

Posted by: JPRS | April 24, 2010 4:24 AM | Report abuse

BarrytheD & JanusDaniels,

Unfortunately, what you claim to be lies and shocking is just basic economics.

I had a very strong qualifier, in that given bailouts (and for that matter other interventions in the finance sector), that's less demonstratably true. It's entirely possible that a finance sector without FDIC insurance, and a Fed, and a government prone to bailouts would never have grown so large and profitable.

In addition, fraud is theft, but most Wall Street value creation isn't outright fraudulent.

At the end of the day, Wall Street bankers get paid the most because they are able to convince their clients to part with their money without the use of force or fraud. Presumably, these clients value the services of investment bankers at or greater than the amount they paid, otherwise your economic model assumes people tend throw away money.

Are you in favor of the bailout? If so, then you must believe Wall Street creates so much value that they deserved hundreds of billions of dollars and trillions in federal guarantees in order to be proped up. If you think it was a bad idea, well then I'm in the same boat.

The problem in finance wasn't that every person on Wall Street was somehow stealing money. The problem was that failing instituitions are bailed out - so that risk created by Wall Street was socialized. In other words, private profits should mean private losses.

Posted by: justin84 | April 24, 2010 8:54 AM | Report abuse

JPRS,

Just to clarify, when the guy says he answers his Blackberry at 2am, it doesn't mean that the investment banker has been in bed since 9:30 and is getting woken up to come into work in a few hours.

Often times, they are still in the office working, ~ hour 18 for the day. Investment bankers absolutely work way longer hours than the 'on-call' utility guys.

These guys work incredibly hard, and so I'm sympathetic to analysts (the young guys killing themselves who aren't making millions) who feel screwed if their compensation isn't commensurate. In addition, the vast majority of bankers weren't the guys structuring subprime MBS deals - they do a whole lot of different things, most of which had nothing to do with the financial crisis.

Posted by: justin84 | April 24, 2010 9:03 AM | Report abuse

"The idea is that once you pass the test at Goldman, you can do anything. You learn Excel, you learn valuation, you learn how to survive intense hours and a high-pressure environment."


you can do anything????
you can learn excel??? couldnt a harvard student, like, figure out excel in a weekend, or at a community college night class?
and if they already got into harvard, dont the know how to survive intense hours and high pressure?
are their any families left, who when these kids came home to tell their proud parents what they were doing, might say.....wouldnt you rather follow your bilss?
make a difference in the world?
isnt that what you went to harvard for?
.........didnt any of these kids sit across the table from their parents before they took the job....and someone looked them straight in the eye, and said,"is this what you really worked so hard for since you were young? didnt any parent say, "dont make your life about money. with a harvard degree, you wont be unemployed....follow your bliss...make a difference with your life."

i guess they didnt have that conversation.

and i disagree. lloyd blankfein, winkelreid and paulsen....they were out to screw the world. and that is exactly what they did.
the personal attacks make people defensive?
what....were they "just doing their job?"
didnt they stop to think about what they were doing to other people? not only should they be personally held accountable, it is a wonder that they are arent in prison.

Posted by: jkaren | April 24, 2010 9:30 AM | Report abuse

"In the midst of anxiety and trying to find a job at the end of college, the recruiters are really in your face, and they make it very easy"

this sounds like pinnochio, on the way to pleasureland.
gosh, shouldnt the real gift of an education at harvard, be about critical thinking, make right choices......do you really need to take "the easy road" at the age of twenty?
if this is how easy it is to lure a harvard student, then i think the professors there, are not doing a very good job.
very sad.

Posted by: jkaren | April 24, 2010 9:38 AM | Report abuse

""and if they already got into harvard, dont the know how to survive intense hours and high pressure?""

Definitely not.

Speaking of following my bliss. My bliss at the moment is to live near the center of DC in an apartment that's bigger than a bread box. I can see how someone following a similar bliss in NYC might decide that banking and finance is a good way to go about it.

""These guys work incredibly hard, and so I'm sympathetic to analysts (the young guys killing themselves who aren't making millions) who feel screwed if their compensation isn't commensurate.""

As I'm sure you and everyone else with a basic knowledge of economics understand: "hard work" does not necessarily mean you are entitled to lots of money. Otherwise, medical residents would be some of the highest paid people in the world and dermatologists some of the lowest. And landlords even lower than that. It's clear to me that banking doesn't add a lot of value and that the domination of the financial sector of our economy is putting everyone else at too much risk.

Posted by: tyromania | April 24, 2010 9:45 AM | Report abuse

"The problem in finance wasn't that every person on Wall Street was somehow stealing money."


the problem in finance is that there are many people working on wall street for whom making money became a faustian bargain.
when people like jon winkelreid walked away from goldman sachs with 71 million dollars, what do you call it?

Posted by: jkaren | April 24, 2010 9:46 AM | Report abuse

@justin84,

"Finally, one issue with the top line - outside of government interference such as the bailouts - money goes to its most productive uses. If wall street bankers are paid the most, then they add the most value. If talent provided a great dollar value of output in another use, why isn't the manufacturing firm or the consulting firm stealing that productive worker by offering a higher wage?"

Maybe I'm being to obvious and heavy handed here but...

The "add the most value" part of your statement gets uncomfortably close to a claim that people who make the most money are the most valuable. But the value add here is to Goldman, not to society as a whole. Compensation relates to lots of things other than the value you add to the world. That's the problem people have with the financial industry right now -- they are absorbing resources far out of proportion to the value they are adding to the country/society.

Posted by: BHeffernan1 | April 24, 2010 9:51 AM | Report abuse

," I deserve this money -- I'm answering my BlackBerry at 2 a.m."

what an unbelievable comment.

there are people making little money, by comparison, changing bandages on infectious wounds on patients at two in the morning. people taking away bedpans and handling very ill people with infinite gentleness at two in the morning.
there are teachers working day after day, with autistic children with bright spirits and hopefulness....there are infinitely patient people caring for alzheimer's patients and keeping them safe and maintaining light in the darkest of places.

what do these people deserve for their work?
what does a nurse in a large emergency room really deserve for her work at two in the morning....when lots of times, she is even a single mother, with her own complicated life, and is there serving others, with a smile and calm spirits.
i think these people deserve the 55 million dollar house on nantucket, and a stable filled with showhorses.

Posted by: jkaren | April 24, 2010 10:00 AM | Report abuse

jkaren--it is a curious thing, how we decide what to do with our careers; if you are in the crowd that sees the big picture and tends to believe our lives are ultimately leading towards more spiritual enlightenment then from that perspective the Harvard/GS folks perhaps should be pitied...

Posted by: Texican1 | April 24, 2010 10:19 AM | Report abuse

"if you are in the crowd that sees the big picture and tends to believe our lives are ultimately leading towards more spiritual enlightenment then from that perspective the Harvard/GS folks perhaps should be pitied..."


i dont know if people feel pity, or more....shrug their shoulders, and resign themselves to the fact that the material rewards in life are not always fairly distributed, nor are they they the most important thing. (but they certainly help to pay the bills.)
it is not clear that a person trying to care for a family as a single mother, and working a night shift in an emergency room, is pitying the harvard graduate heading off to goldman sachs....i imagine she might be wishing for a bigger piece of the pie also.
and might be wondering, as she watches paramedics wheeling in someone on a rainy night, at two in the morning, about the priorities in society.
i dont know that the paramedics would think much of the inconvenience of answering a blackberry at two in the morning.
but, i also imagine that their life ultimately holds many more rewards than the guy attached to the blackberry.

Posted by: jkaren | April 24, 2010 10:36 AM | Report abuse

justin84,

I understand that the 2 AM call tends to happen after getting home at 10 PM or 11 PM.

Talk to people who work in TV production, or as property managers, building maintenance workers, or some areas of corporate litigation, or in any number of professional fields.

It is not unusual to work 60 hours right out of college and to effectively be on call 24 hours, 7 days a week. The only reason that it might be a little unusual these days is due to a crappy job market. However, that's a separate question.

With respect to the vast majority of bankers on Wall Street, the bottom line is that their firms destroyed trillions of dollars of wealth. Any individual good clearly did not sufficiently offset against the enormous harm that that their firms as a whole created.

Posted by: JPRS | April 24, 2010 3:15 PM | Report abuse

@justin84

"Are you in favor of the bailout? If so, then you must believe Wall Street creates so much value that they deserved hundreds of billions of dollars and trillions in federal guarantees in order to be proped up. If you think it was a bad idea, well then I'm in the same boat."

Maybe some people believe that Wall Street actually "deserved" the money. I suspect most people who supported the bailout out saw it as necessary to prevent wider contagion.

e.g. If a person lives in an apartment complex and sets his apartment on fire, would anyone look at the arrival of the fire department as a sign that people in the building think this guy is so important that he "deserved" to be rescued?

No, it's not about that guy. The fire department shows up in order to prevent the harm that that guy created from impacting everyone else in the building.

Now maybe in the future it's possible to reduce the costs of amoral bastages by installing a localized sprinkler system within the building, so that the harm is limited. That costs money though and usually is done as the result of regulation.

"The problem in finance wasn't that every person on Wall Street was somehow stealing money. The problem was that failing instituitions are bailed out - so that risk created by Wall Street was socialized. In other words, private profits should mean private losses."

It's a lot more complicated than that. The problem is that finance is at the heart of our capital structure. Financial panics tend to spread harm across other sectors of the economy.

There are a number of other questions that proceed the "moral hazard" issue.

If we had restraints on certain banking activities and limitations on growth, a built in system of insurance, and so on, then the question of taxpayer intervention never enters the discussion.

Posted by: JPRS | April 24, 2010 3:37 PM | Report abuse

justin,

don't bother trying to make sense. To many on here if you work in an industry that's seen to blame for something its more than appropriate in their eyes to spread the blame to whoever is in that industry.

its amazing that they're so upset about the "profiling" that's about to go on in Arizona (and rightfully so) yet they feel its just fine to profile an industry that they don't agree with. I'm guessing we're going to demonize the part-time bank teller who works at BofA as well. Obviously that's ridiculous but so is a lot of the discussion going on here. Might as well throw them all out.

Posted by: visionbrkr | April 24, 2010 4:07 PM | Report abuse

"Wall Street has constructed a very intelligent recruiting program that speaks to the anxieties of the students..."

I'm surprised you came to that conclusion, Ezra. I went to an Ivy League school (not Harvard) for undergrad, and it was pretty accepted that in fact, it was the school that had designed a very effective recruiting system to pipe graduates on to Wall Street and into consulting jobs. The colleges are the ones inviting these firms on campus, setting up "career fairs" and telling all the students to go to them. Nowadays, there are also "alternative" or "public service" career fairs - but it's still implicit that the default is to go do finance or consulting.

Posted by: slyc | April 24, 2010 4:11 PM | Report abuse

He shouldn't flatter himself that we think he and other bankers are "evil." Evil would require they be a lot more interesting than they are. No, we don't think you're evil, just an unthinking, unselfaware clown. It's not that you're bad, you're just not particularly good. There's a big difference. You've ruined tribeca, most of the west village, and we see you out at night in the village, the meat-packing district and chelsea. Mostly by accident, of course, since it's the goal of most new yorkers to avoid any establishment once it's overrun by you. And no, it's not because we think you're "evil." It's because you're unpleasant, embarrassing, unthinking and obnoxious and banal.

Posted by: richard47 | April 24, 2010 5:01 PM | Report abuse

visionbrkr,

Right, you work in the insurance industry, and you are still upset about the mean things that people said about the evil things that your industry does to people in the individual insurance market.

In the case of the banking industry the people who work as tellers don't establish corporate policy. They don't fight for loopholes on Capitol Hill.

The concern is with the people who create and defend excesses within the system -- even well after it becomes baldly apparent that the system is broken and in need of serious structural reform.

I suspect most people realize that the issue isn't with custodial staff, administrative staff, or a low-level associate at these firms. When the sh-t hits the fan those people tend to be among the most expendable anyways. When times are great they also only get a trickle of whatever comes down. The problem is in the executive offices.

Posted by: JPRS | April 24, 2010 7:51 PM | Report abuse

Actual Harvard student responds: http://bit.ly/aqEkQD

Posted by: sbarr17 | April 24, 2010 9:51 PM | Report abuse

Oh justin84, you're just a cute as cute can be, with your birthday dress and your golden curls. Won't you dance for us, please?

Posted by: slackerjax | April 25, 2010 2:50 AM | Report abuse

JPRS,
"Maybe some people believe that Wall Street actually "deserved" the money. I suspect most people who supported the bailout out saw it as necessary to prevent wider contagion."

I believe concern about contagion effects could also be stated as 'all of the valuable activities banks and other financial companies perform would be interrupted and that would be a huge problem'. I don't even think it is a matter of bankers deserving bailout money.

When I say bankers deserve their salaries, I mean that in a very free market sense - if banks can convince customers to exchange money for the services of the banks, then the services of those banks are exactly as valuable as the two parties in the transaction thought they were worth.

I don't think banks deserved the bailout - especially when that turned into huge Wall Street bonuses (then again, some people on Wall Street weren't involved in the financial crisis, and bonuses for them are okay, but clearly bonuses were paid to more than that subset). I think banks create lots of value, but like any other industry, individual companies should be allowed to fail.

All I'm saying is if you think directly injecting cash into the banks, bad and good (rather than letting them fail or helping banks that were solvent manage the failure of important counterparties or helping non-bank companies manage the effects of bank failure), then you would have to think keeping these banks around is valuable - valuable enough to risk several hundred billion.

Visionbrkr,

"don't bother trying to make sense. To many on here if you work in an industry that's seen to blame for something its more than appropriate in their eyes to spread the blame to whoever is in that industry."

Completely agree. There are a lot of good people who work for banks, insurance companies, pharma, etc. who are unfairly maligned by a real or perceived offense by the industry as a whole.

JPRS
"The concern is with the people who create and defend excesses within the system -- even well after it becomes baldly apparent that the system is broken and in need of serious structural reform."

I'm not defending the excesses in the system. All I've ever really said is that the analyst from the original post who was getting attacked worked really hard and doesn't get much more per hour than a midwestern school teacher. These guys do deserve six figure salaries because they actually create value. If anything I've ever said implied that senior investment bankers deserved TARP-paid bonuses, well let me state unequivocally that I oppose that.

As for structural reform, I'm in favor of prohibiting government bail outs, requiring banks to raise debt convertible to equity when they are running out of capital, and various other things. I am not in favor of a return to 2007.

Posted by: justin84 | April 25, 2010 10:06 AM | Report abuse

Wow, gotta love the comments on harvesting organs and whatever slackerjax was implying with his post (to me, it implies slackerjax doesn't have much to add to the discussion).

When I started reading Ezra, I was on the centrist/liberal side of the spectrum. I was even open to policies like single payer.

In part, it has been comments like the ones referenced above which have driven me towards classical liberalism. If you're trying to convince people to vote Democrat and support modern liberal policies, you're not going about it in the right way.

Posted by: justin84 | April 25, 2010 10:26 AM | Report abuse

"Lloyd Blankfein isn't out to screw the world. Wall Street's problems are more systemic. Individuals are behind systems and leaders have a huge responsibility."

That says it all. There are these systems in place that reward certain behavior, and it's no use to blame the individual who does what they can to live a good life within the system.

The only way to fix the problem is to blame the system itself, and then fix the system.

-> FinReg

Posted by: madjoy | April 25, 2010 11:24 AM | Report abuse

It could be much, much worse. He could end up working for one of the corporate media liars.

Posted by: bilejones | April 25, 2010 6:36 PM | Report abuse

I'm a recent Harvard alum myself, who chose to go into something other than consulting or banking. Despite the skepticism in the comments, I share this kid's assessment of why Harvard students go into finance. Let me see if I can explain it a little more clearly.

If you're genuinely undecided about what you want to do after college, as maybe half of each graduating class is, a normal process is to (1) brainstorm ideas, then (2) learn more about them, and then (3) decide where to apply. Finance and consulting have an advantage over other choices at each step:

(1) When brainstorming, the first question you might ask yourself is, "what are things which people that I know do?" Since every Harvard student knows many people who've gone into finance and consulting, these options are going to pop up on everyone's radar.

(2) When you've decided you want to learn more about a career, banking and consulting firms make it particularly easy for you to do so by actually showing up on campus. I would venture that virtually 100% of students who are curious about consulting go to an event to learn more about consulting because events are so well-advertised and because the firms hold events a two-minute walk from your dorm. But if you're interested in, say, renewable energy, it's far more difficult for you to even figure out where to find out more about what jobs are available.

(3) Now you're deciding where to apply. The e-recruitment system makes it easy for you to submit your resume to as many consulting and banking firms as you want, all of which offer basically the same job that you decided sounded fine. If you're interested in renewable energy, though, there's a substantial marginal effort involved for each job opportunity to which you apply. Many of the jobs you're interested in require experience that you don't have. You also may have to fly somewhere for an interview, whereas Wall Street firms will come to campus to interview you.

Money and prestige are mostly just helpful at convincing undecided students that the choice of banking or consulting is at least not too risky; nobody's going to look at them as a loser for working at Goldman, and they can always cash out after their two years and go do something else without having to eat ramen every night.

Interestingly, TFA has been successful at convincing students to go into teaching for many of the same reasons. TFA pursues students on campus, makes it easy to be considered for hundreds of teaching jobs around the country, and lends an aura of legitimacy and security to teaching without requiring students to commit to a career in teaching. It's no coincidence that TFA's applicant numbers in particular have surged over the last couple of years; they're competing for the same undecided, impressionable students who've been going into banking and consulting for years.

Sorry for the long post.

Posted by: jeffwacker | April 25, 2010 9:44 PM | Report abuse

Specific numbers on TFA:

http://www.thecrimson.com/article/2010/4/23/tfa-harvard-baichorova-year/

"Seventeen percent of Harvard’s Class of 2010 applied to Teach for America.

With 293 total applicants, Harvard saw the largest share of its senior class apply in TFA’s 19 year history, according to Anasstassia Baichorova, a TFA recruiter for Harvard and Brown."

Posted by: jeffwacker | April 25, 2010 10:34 PM | Report abuse

I didn't go to Harvard, but I did graduate last year from another very good liberal arts-focused university, and jeffwacker's description matches my experience perfectly. When I was confused and undecided, I even went to a few consulting info sessions (because I was a math major, and so there was hardcore recruiting) and even applied using the easy, online system and interviewed. And I'm an idealistic liberal. Who also almost applied for TFA (and applied to a different teaching fellows program that had an on-campus info session, instead).

Of course, during the 2nd round of interviews for one of the consulting job, it suddenly hit me that what my actual job would be was giving credit card companies advice on how to maximize profit - to analyzed credit card customer behavior to determine how best to keep them paying money (without going backrupt) as long as possible. When I had this epiphany (which was right in the job description, but was covered up with careful language to make it sound not quite as bad), I think it became clear to both me and the interviewer that this was not a good match. I did not get offered that job...

But it's so tempting and easy. When you don't know what to do, you're freaking out about a degree with no specific practical application, and someone holds an info session with free food telling you "Come work with us for two years! It'll be fun, you'll make some money, and it will help launch any further career you want - you can make great connections" - it's damn tempting.

Posted by: madjoy | April 25, 2010 10:42 PM | Report abuse

justin84,

In general I agree with what you say about compensation between parties. On the other hand, if those salaries occur in an environment without sufficiently robust competition, then it's not really a case where customers have the ability to shop around for the best price. The consolidation in the financial industry over recent years combined with barriers of entry have effectively limited the options of consumers, which in turn inflates the compensation levels at firms. Six firms right now hold the equivalent of 60 percent of the assets in the U.S. relative to GDP.

http://www.pbs.org/moyers/journal/04162010/profile.html

That's an awful lot of bargaining leverage -- akin to the kind that you'd find under monopoly conditions (monopolies being anathema to competitive, free markets).

We agree that a return to 2007 is in no one's interest -- except of course for the people at the top of the major firms. Even if their firms had failed and they'd lost their equity in the firms, many of the people at these firms still would have walked away with a ton of money and retired quite comfortably. The short-term incentives are still in place for them to simply repeat the most recent cycle all over again.

Increased capital requirements are part of the equation.

Although I suspect that hard caps alone won't be sufficient.

If you have 15 to 1 ratios and the banks still have short-term incentives to load their books with crap, those ratios in an of themselves probably won't be sufficient in the event of failure -- especially if the firms remain obscenely large and interconnected.

You likely need to address the size of these firms to promote greater competition and limit the systemic importance of any one firm. Increasing the transparency of activities is also vitally important so that investors are able to make judgments based on quality information (e.g. one of the arguments in favor of a centralized, public exchange for most derivative transactions).

The huge hole in the national balance sheet that the Bigs created also highlights a major problem caused by the recent financial crisis. Not unlike a major polluter who bolsters profits in a country without environmental laws by simply dumping the clean-up tab on the general public; the financial sector has also been able to insulate itself from the real costs of its financial transactions (bolstering profits and short-term compensation). This is one reason that it strikes me as absolutely necessary to create an FDIC insurance fund. Ideally the fund would be large enough to eliminate the need for any direct tax-payer support in the event of a failure.

Taxing socially useless, but high margin activities like high-frequency trading also make sense (in the absence of their outright abolition).

Posted by: JPRS | April 26, 2010 12:40 AM | Report abuse

visionbrkr,

Right, you work in the insurance industry, and you are still upset about the mean things that people said about the evil things that your industry does to people in the individual insurance market.

Posted by: JPRS | April 24, 2010 7:51 PM | Report abuse

JPRS,

I'm not upset at all. What I don't get is how people can speak on an issue they know nothing about. I'm all for ending all the practices of recision, pre-ex etc. The problem is that you can't make blanket statements like many around here do when charachterizing industries. How do you justify painting with a broad brush when MA has no pre-ex unlike other states that have it to varying degrees. How do you scream about profit motives when half of insurers are non profits?

how do you scream about insurance company abuses when a large share of those for profits are in the self insured market and thus immune to those issues?

Posted by: visionbrkr | April 26, 2010 8:27 AM | Report abuse

JPRS,

I would agree that the market for investment banking services is monopolistically competitive, as described here: http://en.wikipedia.org/wiki/Monopolistic_competition

I don't think it is anywhere close to a monopoly - if you're looking for investment banking services, there are 15 top global banks and dozens of other serious players in this space. That said, this market will never be perfectly competitive, because investment banking is very tough to commoditize.

http://en.wikipedia.org/wiki/List_of_investment_banks

As the first wikipedia article states,

"While monopolistically competitive firms are inefficient, it is usually the case that the costs of regulating prices for every product that is sold in monopolistic competition by far exceed the benefits; the government would have to regulate all firms that sold heterogeneous products—an impossible proposition in a market economy."

So in short, I agree with you that investment banking isn't perfectly competitive - it sounds much better to bring in Goldman Sachs on your deal than BB&T Capital Markets, and so even though the guys at BB&T aren't slouches, Goldman can command a better price via reputation. However, if Goldman acts too much like a pure monopolist, Morgan Stanley and Credit Suisse and JPM will eat its lunch.

Posted by: justin84 | April 26, 2010 6:10 PM | Report abuse

JPRS,

On capital, I'd actually go further than 15:1. I don't think we can figure out the best level of capital. It will be different at different times for different firms with different assets. Even using risk weighting rules for capital levels is tough, because low risk weights is probably one of the reasons why European banks went heavy on Greek sovereign debt.

I would require banks to fund partially with contingent debt that converts to equity if capital falls to a very low level, effectively becoming a private recapitalization. If a bank is appearing to take risky bets, the cost of its contingent debt will soar and push it towards reducing leverage in order to reduce its cost of funding. The appeal of this approach would be that regulators don't have to be perfect - you've got regulators, market discipline, and if all else fails a private recap built into the capital structure. It's very error prone (if not idiot proof).

If I could wave a magic wand and make this happen, I'd combine this with a law saying no new bailouts - make it a constitutional amendment for all I care, that one will probably have lots of support.

http://www.nytimes.com/2010/03/28/business/economy/28view.html

Although Krugman is against this, I'd also be okay with this (fairly radical) narrow banking proposal: http://people.bu.edu/kotlikoff/newweb/LimitedPurposeBanking1-27-09.pdf

As for a financial transaction tax, I'd be okay with a very small one for revenue purporses, as it will be counterproductive if the trading heads to Singapore or Hong Kong (after all, financial crises are global, so if the trading just moves I'm not sure we're better off).

Posted by: justin84 | April 26, 2010 6:13 PM | Report abuse

The comments to this entry are closed.

 
 
RSS Feed
Subscribe to The Post

© 2010 The Washington Post Company