Sunday, February 23, 2014

The Lambs of Wall Street

Kevin Roose has taken a somewhat unlikely but thoroughly useful approach to Wall Street. Instead of looking at the balance sheets and the spread sheets he has examined the people who work there and the lives they lead.

After following eight young bankers in their first few years on the street, he has written a new book,  Young Money: Inside the Hidden World of Wall Street’s Post-Crash Recruits. To promote his book Roose has contributed an essay to the Atlantic.

As of this morning, Roose’s book has been doing very well on Amazon. Judging from the analysis he provides in his Atlantic piece, the success is well deserved.

Wall Street isn’t what it used to be. The 2008 financial crisis dealt it a body blow. The glory that was investment banking is no longer. Newly minted Ivy League grads who had believed that a job at Goldman Sachs was a ticket to untold prosperity and prestige quickly learned that the old model no longer pertained.

To be fair, the same is true of New York’s legal profession, and, in many cases to the practice of law. Whereas an associate’s position in a big New York firm used to put you on the fast track to fame and fortune, this is no longer the case. First, because the firms are hiring far fewer young associates. Second, because there is less money to divide.

In some ways, it also applies to the medical profession. For now one does not know how the turmoil in the medical profession will shake out, but it is seems clear that today’s physicians will be less likely to build lucrative private practices. They will become employees of hospitals, with their compensation controlled by government agencies and insurance companies.

As Roose points out, the status of a Wall Street job has fallen precipitously since the financial crisis. In many cases jobs at Google and Facebook have taken up the slack. They are sexier and perhaps even pay better. Besides, San Francisco and its environs have better weather.

We should add that some of the prestige that used to attach to banking has now transferred to private equity firms and hedge funds.

Examine some of Roose’s points.

He opens with the observation that the only good thing about working on Wall Street is the high pay. A young Ivy League grad will likely earn between $90,000 and $140,000 a year.

In his words:

The pay is good. Everything else is bad.

Over a few beers after work one spring evening, two junior Goldman Sachs employees started contemplating the best ways to kill themselves.

Not a very encouraging comment on their work satisfaction.

Unfortunately, by New York standards the pay is not really very good. The numbers might seem high in other parts of the country, but in New York City, that salary will be subjected to serious taxation. And New York’s rents begin at around $3,000 a month. 

How much money will these young grads have for bottle service at clubs and to date fashion models?

So, on this point I would correct Roose. For New York City the pay is subsistence. It's not cheap living in Bill de Blasio's Worker's Paradise.

The same is even more true for people who do not work on Wall Street. Recently, the American Thinker reported the case of a couple named Donna and Frank. (Via Maggie’s Farm) They were older than the demographic Roose studied—early thirties and early forties. She made a 6 figure salary and he wanted to start teaching.

Together they eked out a subsistence level existence. Until, that is, they moved to Orlando. You know what happened to their standard of living. For the details, I refer you to the link above.

Returning to Wall Street, Roose points out that long work hours make a social life difficult, if not impossible.

The demands of the job are such that young associates are forced to break appointments regularly. It is psychologically debilitating to keep going back on your word. A job on Wall Street will undermine your character.

The point is not often made. It deserves emphasis.

Roose explains it clearly:

Wall Street is notorious for the long hours it imposes on its worker bees. (One young banker bragged to me about working the “banker 9-to-5,” defined as 9 a.m. until 5 a.m. the next day.)…

What this means, in practice, is that young bankers live in a state of perpetual anxiety, and advance planning becomes impossible. Boyfriends and girlfriends get upset about broken dinner plans, friends and family members become estranged, and phones function as third limbs. This unpredictability, combined with the sheer number of hours involved, takes a toll. 

Now, Roose continues, if the long hours guaranteed future security, if young people thought that they were on track to become managing directors or partners, they might be more sanguine about the demands of the job. But, the business no longer works by the promotion model. It no longer offers the promise of untold future riches. It chews people up and spits them out.

In Roose’s words:

Once, it had been relatively certain that a young banker or trader who did well would earn much more with each passing year, and would eventually become a millionaire, probably before his or her 30th birthday. But after 2008, the golden pathway began to splinter. New regulation meant to prevent another financial crisis made banks less profitable, and the struggling markets meant that even young bankers—who had historically been immune from layoffs during downturns, so cheap was their labor compared to that of senior bankers—were at risk of losing it all. 

Let’s not overlook the fact, as Roose emphasizes, that new regulations, aka Dodd-Frank have done significant damage to Wall Street. To what extent, I do not know. But clearly, Wall Street banking no longer functions according to free market principles. I suspect that in a highly regulated market the emphasis shifts to seeing what you can get away with.

As one might suspect, and as Roose reports, young Ivy League graduates bring their own expectations to their jobs. They have been taught that their work must be meaningful. They sign up for jobs on Wall Street because they believe that it’s a good way to save the world.

Beyond what they have learned in college they are surely aware of the fact that the tech oligarchs in Silicon Valley are giving away massive sums of money to worthy and unworthy causes. The practice reminds one of the old Western Pacific Indian practice of potlatch.

What is potlatch? In it two tribal chiefs compete to see who is more wealthy by burning their goods. It does not quite feel like charity, but perhaps that is the point. It's a sign of obscene wealth.

If today’s banks were in the business of allocating capital, that would be one thing. Apparently, that is less and less the case.

If you are working in the mortgage market helping people to become homeowners you might consider it to be a worthwhile endeavor. If you are working on foreclosures and short sales, effectively throwing people out on the streets, your job will feel a lot less rewarding.

It’s even worse when you discover that what you are really doing is shuffling money around in order to remain solvent, by whatever means are necessary.


JP said...

"To be fair, the same is true of New York’s legal profession, and, in many cases to the practice of law. Whereas an associate’s position in a big New York firm used to put you on the fast track to fame and fortune, this is no longer the case."

BigLaw is a different animal than finance.

The major difference in BigLaw recently is that there are fewer new associate positions.

Everybody always knew that your chance to make partner in BigLaw was slim even before the most recent bust. That's always been true of BigLaw.

When I was in law school in the late 90's, the goal was generally to work a few years of insane hours and then go in-house.

I assume that this technique still works and it is still the goal for most BigLaw associates.

My law school roommate used this approach (he also did the I-banking for a bit) and he is now counsel for a biotech. My ex-girlfriend used this technique a couple of years ago and is now inhouse for a nice large corporation.

Both of them are under 40.

What's happening the legal profession in BigLaw right now is that the older service partners are being tossed onto the non-equity partner scrapheap.

If you want a career in BigLaw, you need the portable $2,000,000 book of business.

Or whatever it is these days.

Anonymous said...

When people think of Wall Street, they don't have low level workers fresh out of college in mind.

For the big bankers, Wall Street is hog heaven.

Let's not waste our tears on Ivy League grads in Wall Street whose problems are nothing like most real Americans face.

Anonymous said...

WSJ recently reported that Chase made 9% profit last quarter. It was expecting 14%.

In these parlous economic times, when my CDs get 0.3% APR ... how the blooming heck is Chase doing that? Esp considering it paid $13B in fines last year. I'd really like to know-- Rich Lara

Stuart Schneiderman said...

It leaves you with the impression that the game has been rigged.... I suspect, without knowing the details, that it has something to do with the Fed.

Sam L. said...

Potlatch: I had never heard of this being a competition. I have always read that it was one at a time, celebrating various things, but on further reading, I see it was expected that the big boys were expected to give back as good as they got.