Sorry for the delay on this one, guys. Yesterday was pretty nuts. As promised, here are the ways I think Wall Street will benefit from the coming reforms and actually emerge stronger. But first, this all hinges on the assumption that the reform is based on some return to the Glass-Steagall Act, or the Volcker Rule, or whatever you want to call it. Obviously, if that doesn't happen all bets are off.
First, it's easy to take a dim view of the proposed reforms and look at it from a glass-half-empty perspective. This view was best articulated by Michael Barone a week ago when he pointed out that the Dodd Bill will only serve as a cash pipeline to reward the very guys who are responsible for this mess in the first place.
He has a point, and institutionalizing the notion of "Too Big To Fail" is a mistake of colossal proportions in my opinion. If you remove the very real consequence of failure from the equation, then moral hazard rules the day. There is not a single bank in this country (or any other, for that matter) whose failure today would bring an end to life as we know it.
With that in mind, I'm only slightly more comfortable with the establishment of the proposed "safety fund" (funded by member banks and not taxpayers, thank you very much) than I would be with a permanent. It still encourages bad behavior to a great extent but, at this point, we can't make the perfect the enemy of the good.
Here is what I think the reform will mean to those bankers with boots on the ground and college students contemplating a career on the Street. Obviously, this doesn't apply to the ivory tower types who are calling the shots, because those guys will be okay regardless.
- Compensation at the lower levels will experience further declines. The proposed reforms are going to cost the banks money in the short term (because they won't be able to profit from certain activities that will then be prohibited). Shit rolls downhill. The guys at the bottom will take the biggest pay cuts (percentage-wise) because there are more of them to spread the impact and the banks will be in a frenzy to retain rainmakers. If you're an analyst, you don't make it rain. The benefit to you as an analyst or college student is that this will make the pretenders disappear pretty quickly. The truly hungry and the truly motivated will be the only ones applying for Wall Street jobs.
- Layoffs lean out the banks and separate the wheat from the chaff. Someone commented on my previous post that it's ridiculous to consider the government a driver of efficiency, and I don't disagree. But look around you. If you're working on the Street, there are probably a dozen people in your immediate field of vision who don't belong there. If the banks are forced to scale back, those guys are gone. No one can say that the banks aren't bloated. Just look back at 2008 when all the shit blew up and there were out-of-work bankers everywhere. How long did the talent have to look for work? The benefit to leaner, meaner banks is that the people who really belong there will no longer have to contend with those who don't. That means faster promotions, bigger bonuses, and real opportunities to move up the hierarchy.
- Transparency increases market participation. Over the past decade, we've seen a market run amok. Systematic deregulation combined with caveat emptor-style moral hazard ran the world's economy into a ditch. Some would say that the derivatives market in was a necessary innovation, others would not. However, establishing a transparent clearinghouse for derivatives puts everything out in the open. Bond traders will hate this, because they've gotten away with underhanded shit for decades. But the time has come. Transparency restores faith to the various markets. I can't point the finger at any one entity and say the crisis was their fault. The consumers, the banks, the ratings agencies, the government, everyone had a hand in the mess. But cleaning it up and shining a light on all the dark corners of the market makes all of us more money.
The takeaway from all this is that you'd better be serious about your career and you'd better be at the top of your game. Half measures and knowing the right people aren't going to help as much anymore. If you even think you might not be cut out for this line of work do yourself and everyone else a favor and go do something else.
There is massive upside in the coming financial reform for the guys who make the most of it. If high finance is your passion (and you shouldn't be anywhere near it if it isn't), you can only benefit from the coming changes. People are still going to get rich working on Wall Street. The difference is, now it might be more of the people who actually deserve to get rich. And I hope you're all among them.