Don’t Fear the Brain Drain
Mainstream Media is still worried sick about the brain drain of top-talent from Wall Street. My advice: don’t lose any sleep over this one. A re-balancing of our workforce is a crucial step towards recovery. Financial firms should not provide 40% of the S&P 500’s earnings, as they did at the peak. Besides, calling it a brain drain is a stretch.
You see, most of the “talent” on Wall Street are really just Sales Guys. They have fancy titles, and may prefer to think of themselves as deal makers, strategic thinkers, or sound boards (like Larry Summers, who earned $5+ million working as a sound board for a year, only 1 day a week). Anyway, the point is that the stuff they’re selling doesn’t actually contribute much to the economy. And it frequently does serious damage, as we found out in this most recent bubble.
Traditional loans play an important role in helping the economy grow. But do we need debt frenzies that wind up funding stock-buybacks, huge bonuses, and unsustainable dividends (think GE)? Trillions of dollars in exotic acronyms? The sale of complex derivatives to local governments, which is costing them dearly now? No, no, and no.
What about the traders? Yes, they do provide liquidity to markets. But that benefit is rather small when weighed against bubbles, corruption, and increases in our taxes to pay for bailouts and service the deficit. Don’t get me wrong, there are many honest bankers out there, and we need to support those guys, and make sure they don’t have to keep subsidizing the bad ones.
Examples
A cynical person might ask, aren’t we being blatantly ripped off by these dudes? Do you have any examples? Why yes, I do. JP Morgan, for example, sold a LOT of derivatives and complex contracts to local municipalities. According to Bloomberg, they did not fully disclose the fees involved. Deals like this probably contributed to Moody’s downgrade of ALL local governments in the US to negative. There are countless other factors involved, but JP Morgan demanding these non-disclosed fees from local govs right now can’t be helping. And Moody’s would never be as crass as to mention that. Anyway, the Bloomberg piece on the local government debacle is a must-read.
Disclaimer: None of this information is investment advice. If anything posted here is inaccurate, please use the contact button at the top of the page to let me know. I will change any incorrect facts or inaccuracies ASAP.
8 Comments
It’s true. Wall Street repeats the following patter. Find a product that works and makes sense. There is nothing wrong with the IPO, the mortgage REIT, the CDS, the CDO, M&A, hedge funds, etc. All have their place, and all had a logical start.
Here’s where the problems set in. Once discovered Wall Street takes the product or service, packages them, and sells them. Large profits are made generating ruinous competition. The media supplies the hype.
Once the products or services have been sold to all logical buyers things don’t stop. It’s the job of Wall Street to keep supplying past the point of where things makes sense. This can be applied throughout the financial services really, and is best summed up with loans. Once you make all the good loans, then you make all the bad ones. Packaging and selling is what they get paid for, sensible restraint is not a goal.
By the way, I meant no offense to salespeople. I worked in sales for 4 years, almost all of it doing cold-calls (briefly as a Financial Advisor for American Express Financial Advisors).
Anyways, I wasn’t trying to compare the morals of salesmen with sketchy bankers. There’s nothing wrong with Sales People! Sorry if I even associated them with corrupt bankers.
Just wanted express that there’s no amazingly priceless talent that these guys possess. They just know how to sell and manipulate, yet they get bailed out because of their wealth and political connections.
I very much agree with your point about the bloat in finance, and how many people who work in finance don’t actually bring much to the table. But it really detracts from your point to mention Larry Summers, an incredibly brilliant guy, and his work at D.E. Shaw, one of the most technical and quantitative hedge funds around. He and the rest of the Shaw employees (including the part-time ones) are pretty much guaranteed to be top notch, and are certainly guaranteed not to be the “useless finance salesmen” type. (They don’t even hire MBAs!)
Hi Matt,
Could you explain more about what Summers has done, specifically, to merit the immense praise he constantly receives? I’m not trying to be a jerk, am honestly curious.
What’s impressive? His time at Harvard? Any papers that were really impressive? What about his time at DE Shaw impressed you? I’m not saying they’re not a great firm, but you have to admit they may have hired him because of his political connections.
He might be a genius, but I just haven’t seen proof of it yet. That’s all. He has a Greenspan-like aura to him, but before Greenspan’s bubble popped.
I would love to be wrong here, and read a fantastic paper he wrote. But I keep coming back to this statement of his about derivatives:
“The parties to these kinds of contracts are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies.”
http://www.bearishnews.com/post/271
[...] much of the damage from this collapse, they created more than their fair share, in my opinion. See this post for more on that [...]
[...] Bank activity is currently a net-negative in the U.S. Responsible lending, the sort that actually provides value to economies, makes up an increasingly small part of the banking sector. The vast majority of banks’ “financial innovation” has a parasitic effect on the economy: derivatives, selling swaps to naive investors, flash-trading, usury-level CC interest rates, front-running, bonus-madness, etc. Also see Don’t Fear the Brain Drain. [...]
[...] Wall Street ‘talent’ leaves?. It looked an awful lot like something I wrote in April, Don’t Fear the Brain Drain. The dozen or so readers I had at the time may remember [...]
[...] Wall Street ‘talent’ leaves?. It looked an awful lot like something I wrote in April, Don’t Fear the Brain Drain. The dozen or so readers I had at the time may remember [...]