I've been working at a very good MM PE shop for the past 6 months. My job is secure and stable. But here's one thing I've learnt: the party really is over.
If you're thinking of getting incredibly rich in finance, think again.
Or better yet, read this:
http://www.nytimes.com/2009/01/23/business/23norr…
If you're smart and have any other interest, pursue them. This industry is a waste of time, energy, and human capital.
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Dude, we get that wages may not be as high coming out of this, but I would not agree with the NYT's liberal take on the situation. We will still be able to make far more money in finance than elsewhere. It may be true that more regulation will lessen exotic investment products, leading to lower spreads and less aggregate income for firms, but these CDOs and other products were not what caused high wages in most sectors - I mean, I-banking and PE both have very little to do with those products, and are bearing far too much of the blame.
The fact is, investment banking and private equity will recover nicely, and will still create healthy profits. If you are looking to be well paid, you still will be, and the outflow of so much talent and money from the field means there are plenty of opportunities for advancement, whether in a structure towards higher compensation or by starting your own shop.
This thinking is exactly the problem with a lot of people working in the industry. Everyone thinks of things in 'partial equilibrium' but not 'general equilibrium'. This the fundamental misconception that has ****ed over 'financial analysts' over and over again.
Let me dissect:
Actually, CDO's and 'exotic products' are essential to other functions in finance. The reason 'bankers' (in the traditional sense) were so highly employed is becuase risk premia had come down, abundant and cheap debt was available for m&a transactions, income from debt underwriting subsidised their activity, and on and on. These things don't happen in a vacuum. PE firms made a lot of money because they all bought assets at low EBITDA multiples in 01-02 and sold at high multiples in 07-08. But the truth is, many of the corporate earnings that underlined those multiples were illusionary. Lower leverage in the system has a strong ripple effect: lower earnings, lower spending, lower everything. In general equilibrium profit growth is GDP growth, otherwise aggregrate corporate profits would become the entire GDP. In the last few years, their share of GDP went up considerably.
What you're failing to realize is that the marginal value of your skills is very low. You need to produce something greater in economic efficiency to be paid your wages. Traders claimed that they allocated risk efficiently, but they were wrong. They didn't deserve the money they got. Normalized returns from their activities, adjusting for later losses, are very low in relation to their compensation.
The idea that you can eke out excess profits in a highly regulated industry where risk premia is excessive is nonsense. Consumption growth needs to come from income growth (and vice-versa), not asset depletion (i.e. borrowing against your home). There's a very strong tendency to always bias yourselves towards what you know and have seen. The status quo and the recent past. By doing that, you easily lose sight of the bigger picture. If something cannot continue indefinitely, it won't. The financial sector as a % of the economy kept growing while the added value of its activities kept shrinking. Now it's going back to shrink to a level where the marginal product of labor will be compensated appropriately. For most of history, banking was a pretty staid profession. Why would you think that it's suddenly and permanently become this goldmine for Ivy league graduates to become rich with little effort? Why? How does that even make sense? I think Michael Lewis said it best: how does the ability to pass in and out of Princeton correlate with an aptitude for taking financial risk?
A very good response. I was going to include a few of those points in my original post as qualifiers but decided not to get too weighty. I do have a few responses. First, you are right that many of the deals that were consummated were done on grounds that can not be reached in general equilibrium - however, the new administration seems intent on artificially boosting aggregate demand for at least the next 8 years through keeping interest rates artificially low and pumping money in to the system. This will, according to new classical and new keynesian theory, result in high inflation and using a rational expectations model could actually lower equilibrium output, but those effects will be felt in roughly 8 years. Over the course of 8 years, if you couple in a real business cycle approach, we can hope that exogenous technological shocks will lift the aggregate supply back to natural equilibrium, but for now I'm not worrying too much about that. The thing is, Obama's plan will, in the short run, create a need for banking and many opportunities for private equity (assuming we are not unduly burdened with loathsome regulation). (All of that is very seat of my pants, so if you want to tear in to the models please do so.)
As to the Michael Lewis quote, the ability to be a succesful banker and to get in and out of Princeton may be roughly correlated, but you are right. The reason I am confident that banking will still be a prestigious and well paid profession as we move forward is because bankers hold the power to ensure it is so. This may not be a socially optimal solution, but neither are legacy admissions, and they've lasted for decades.
You are going to come out making 80k a year in NYC... if you even get a job. Finance is done for 10 years. Do what you want to do. The greed card is no longer in play. You can make the same or similar money elsewhere doing something fulfilling.
The outflow of talent and money is not going to be replaced. It is flowing out because there is no money to be made.
I still think you can make a lot more money from entrepreneurship. Although, I would do the two years of banking/trading just to get some capital.
Eh..problem is you are more likely to fail in entrepreneurship than to succeed.
Yeah, you've always been able to make more money in entrepreneurship than in finance, but finance is about maximizing the risk/reward equation. Even with the turmoil, you're still more likely to succeed as a banker than you are to launch the next google
In equilibrium, why would one profession have a better risk-reward profile than the other? Wouldn't that necessitate everyone crowding into that profession and driving down the marginal return? Unless of course there are artificial constraints: e.g. AMA restricts the number of doctors that can be certified etc.
...and will continue to be so. As for the trading/structuring side of the business, time will tell.
Legacy admissions are starting to decrease year by year and I suppose will continue to do so except in rare cases.
curiousmonkey--look at that chart in Floyd Norris' column. From 1970-1990, the wages in the financial sector were apparently not at a very large premium (or at a negative one) to the rest of the economy. but there were still enormously successful bankers and people from the best schools going into the industry (think people like felix rohatyn)...but yes, they weren't as popular as they now are.
the point is that yes, wages are going to shrink. the days of 50 million dollar bonuses are probably over. the industry as a whole is going to contract.
but that doesn't mean that it's going to be dead either.
Even in really good times most people in finance/banking won't be getting incredibly rich. I know I wouldn't be able to afford THAT much even after an analyst+associate stint (assuming I can even get past that).
Also don't forget that this blow to Wall St. will be softened by the fact that the firms that are dropping like flies are leaving their market share to be picked up by the survivors, decreasing competition, widening spreads, and increasing profits. Furthermore, those that do survive will be more lean and mean themselves. I will not be surprised if there are some desks that flourish in the next year or two because they have snatched up so much market share from all the bankruptcies. Just my 2c.
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