Wall Street’s Brain Drain Defense(nytimes.com)
nytimes.com
Wall Street’s Brain Drain Defense
http://www.nytimes.com/2009/02/22/weekinreview/22gillen.html
40 comments
My dad always wanted me to be a finance geek
When 'managing' is valued higher than creation, we have problems. Big problems.
A case in point: when I moved to London I needed to pay a deposit on a flat. Unfortunately I had no bank account set up, and no pounds to my name. When my father had the same issue forty years ago he had to go to great inconvenience and cost arranging an unsecured short-term loan to cover himself. He was aided because of family links between the people he borrowed from and friends in his own country. Whereas I just put the transaction on my credit card and the problem went away. Less management fee, no credit checks (on that part of the transaction), zero hassle. When I was contracting over here years ago I didn't even bother getting local currency, I just lived off the card. Internationally recognised short term credit isn't even a status symbol these days - it's a commodity item.
There is a popular idea that unless something is physical and produced with sweaty work it doesn't have value. Manufacturing is considered to be inherently better than office work. Farming is the holiest pursuit of all. It's all a fallacy. See Galbraith, _The Age of Uncertainty_ for a more thorough treatment.
If you find a creative way to do a neat hedge that solves risk problems for a bunch of customers...
I definitely understand where you're coming from but "creative financial instruments" sounds awfully familiar. And hedge funds closed doors at record rates in Dec. 08. Computer models will only get you so far when COMPLEX (read: disguised) financial instruments rely on past history, not future performance.
The idea that one can CREATE LASTING VALUE through exploits, arbitrage, and 'creativity' in bloodlines as important as the financial markets seems reckless.
There is a popular idea that unless something is physical and produced with sweaty work it doesn't have value.
That's not the argument I was making, and I agree with your counter-point.
I definitely understand where you're coming from but "creative financial instruments" sounds awfully familiar. And hedge funds closed doors at record rates in Dec. 08. Computer models will only get you so far when COMPLEX (read: disguised) financial instruments rely on past history, not future performance.
The idea that one can CREATE LASTING VALUE through exploits, arbitrage, and 'creativity' in bloodlines as important as the financial markets seems reckless.
There is a popular idea that unless something is physical and produced with sweaty work it doesn't have value.
That's not the argument I was making, and I agree with your counter-point.
Computer models will only get you so far when complex
financial instruments rely on past history, not future
performance.
Regular downturns is the only thing I can think of to keep things sensible. Without them the dynamic chases the sensible people out of banking. (I don't hold with the theory that the current crisis is a result of banking liberalisation decisions by the US gvt - the US regulators relaxed the rules to stop US banking from being outplayed by the Europeans who were already consolidating.)
> Computer models will only get you so far when COMPLEX (read: disguised) financial instruments rely on past history, not future performance.
What do you have that relies on future performance?
(Actually, there are many contracts, such as "10% of next year's revenue, rely on future performance in a pedantic sense, but I take the above to be something different because there are plenty of computer models that satisfy the pedantic definition used in this comment.)
What do you have that relies on future performance?
(Actually, there are many contracts, such as "10% of next year's revenue, rely on future performance in a pedantic sense, but I take the above to be something different because there are plenty of computer models that satisfy the pedantic definition used in this comment.)
What do you have that relies on future performance?
It's not a matter of what's available but rather how one treats risk. I expect experts to have more sensibility than to bet the entire financial well-being of a company, employees, and public investors when dealing with 'invented' high-risk assets just because a computer said "Okay".
Less than a decade ago everyone was freaking about because banking software might cause a financial melt thanks to a Y2K bug, little did we know the real impending crash was user-error. :)
Just a thought.
It's not a matter of what's available but rather how one treats risk. I expect experts to have more sensibility than to bet the entire financial well-being of a company, employees, and public investors when dealing with 'invented' high-risk assets just because a computer said "Okay".
Less than a decade ago everyone was freaking about because banking software might cause a financial melt thanks to a Y2K bug, little did we know the real impending crash was user-error. :)
Just a thought.
> I expect experts to have more sensibility than to bet the entire financial well-being of a company, employees, and public investors when dealing with 'invented' high-risk assets just because a computer said "Okay".
That's nice, but has nothing to do with what happened. "experts" decided that a particular equation with specific inputs said something relevant about "value".
There wasn't a "computer" saying "okay". Said experts merely used computers to evaluate said equation.
That's nice, but has nothing to do with what happened. "experts" decided that a particular equation with specific inputs said something relevant about "value".
There wasn't a "computer" saying "okay". Said experts merely used computers to evaluate said equation.
Obviously! Next time I'll be sure to be more explicit.
>>What do you have that relies on future performance?
>It's not a matter of what's available but rather how one treats risk.
The stated complaint was that folks weren't looking at future performance. If doing so is impossible .....
>It's not a matter of what's available but rather how one treats risk.
The stated complaint was that folks weren't looking at future performance. If doing so is impossible .....
This argument is terribly fallacious.
"Managing" is extremely important to value creation. A fundamental principle of capitalism is that you can use existing wealth ("capital") to invest in ways to create more wealth. Capitalism relies on people's self-interest to ensure that each investor will invest in the opportunity that has the most value-creation potential with the lowest risk.
Investors, people "managing money", aren't just sitting on the sidelines cashing in on everyone else's good ideas. Their essential purpose is to move available capital to wherever it will produce the highest returns - i.e. wherever it will produce the most wealth.
The total wealth of a nation impacts the wealth of everyone in that nation. I don't like the way republicans use the idea of "trickle-down economics", but the fact is, if you create lots of value (by putting money in the right place at the right time), that value inevitably spreads to many other people in the economy.
Managing money is not "taking a left turn into the deep end". Creation will happen in hundreds of different forms. Picking the one that works best and giving it life is extremely valuable.
"Managing" is extremely important to value creation. A fundamental principle of capitalism is that you can use existing wealth ("capital") to invest in ways to create more wealth. Capitalism relies on people's self-interest to ensure that each investor will invest in the opportunity that has the most value-creation potential with the lowest risk.
Investors, people "managing money", aren't just sitting on the sidelines cashing in on everyone else's good ideas. Their essential purpose is to move available capital to wherever it will produce the highest returns - i.e. wherever it will produce the most wealth.
The total wealth of a nation impacts the wealth of everyone in that nation. I don't like the way republicans use the idea of "trickle-down economics", but the fact is, if you create lots of value (by putting money in the right place at the right time), that value inevitably spreads to many other people in the economy.
Managing money is not "taking a left turn into the deep end". Creation will happen in hundreds of different forms. Picking the one that works best and giving it life is extremely valuable.
Good argument and I agree with you, but by my point is more focused on recent actions in regard to the socialization of risk and privatization of reward. My comment aside, I definitely appreciate the value of honest financial gurus.
To your point re: the principles of capitalism, US is still very young and most institutional investments funds are not top performers longer than a few years. They are NOT the best for picking long-term winners, ultimately their criteria is governed by a 5-10 year exit. Let's not carelessly forget where capitalism can get it wrong — self-interest has done plenty of harm in man's time.
What concerns me is that many of these "managers" are now on the 'creation' end of the "solution".
To your point re: the principles of capitalism, US is still very young and most institutional investments funds are not top performers longer than a few years. They are NOT the best for picking long-term winners, ultimately their criteria is governed by a 5-10 year exit. Let's not carelessly forget where capitalism can get it wrong — self-interest has done plenty of harm in man's time.
What concerns me is that many of these "managers" are now on the 'creation' end of the "solution".
I wish we didn't seem to have a spcies wide blind spot when it comes to adopting risk. when people rail against successful money managers they are never looking at all the failed ones, thus ignoring the amount of personal risk involved. sure there are a few winners, but why do you want to penalize them for their success?
The real problem is a systematic inability to tell good managers from bad managers - the people who are leveraging up bull runs, or betting on 30 numbers on the roulette wheel, versus those actually generating excess returns. So really, most of the smart people in finance, especially quants, are just there to signal intelligence rather than having testable skills. This is the waste. Otherwise we would need much fewer money managers.
most of the smart people in finance, especially quants, are just there to signal intelligence
This is exactly it. Hedge funds want to tell their wealthy but not terribly smart clients (e.g. heirs, etc) "we have PhDs managing your money". That it is quite literally not rocket science, they never know. The danger came because the fund managers started to believe they were 10x rather than 10% smarter than average.
This is exactly it. Hedge funds want to tell their wealthy but not terribly smart clients (e.g. heirs, etc) "we have PhDs managing your money". That it is quite literally not rocket science, they never know. The danger came because the fund managers started to believe they were 10x rather than 10% smarter than average.
My Ph.D. advisor wanted the same thing for me. This was the mid-90s. Perhaps I should have listened.
Quoting:
> Up and down Wall Street, financial types are grumbling that their industry’s highest highflyers are getting their pay capped. Many Wall Streeters say this would be disastrous. The sharpest financial minds will up and quit, the argument goes, and take their smarts with them at the very moment they’re needed to re-engineer their companies and restart the economy.
If they're really good, and they go into industry, won't that actually be better for the economy? It's hard to see what Wall St types actually contribute to the economy.
> Up and down Wall Street, financial types are grumbling that their industry’s highest highflyers are getting their pay capped. Many Wall Streeters say this would be disastrous. The sharpest financial minds will up and quit, the argument goes, and take their smarts with them at the very moment they’re needed to re-engineer their companies and restart the economy.
If they're really good, and they go into industry, won't that actually be better for the economy? It's hard to see what Wall St types actually contribute to the economy.
It's hard to see what Wall St types actually contribute to the economy.
It's really unfortunate that people see things this way.
Somehow, the fact that I can -- in seconds -- convert money I earned at my job into a stake in one of thousands of businesses, many of them operating in multiple countries and offering multiple product lines (and the fact that the cost of converting my dollars into this stake costs less than, well, a good steak) is incredible. It's jaw-dropping.
It's stunning that someone in Florida can live off of the profits of mines in Madagascar, fast-food restaurants in California, steel mills in South Korea, and insurance companies in Connecticut, all without spending more than half an hour a week reading brokerage statements.
It's astounding that an entrepreneur can take a business whose future profits can't be estimated to within an order of magnitude, and sell a portion of that business for a specific amount.
Finance is an incredibly valuable industry. Getting even some of this stuff slightly right creates a lot of wealth, and helps other industries create a lot more wealth. There have been excesses and there has been incompetence, but that doesn't change the fact that finance, in the aggregate, has been very beneficial.
It's really unfortunate that people see things this way.
Somehow, the fact that I can -- in seconds -- convert money I earned at my job into a stake in one of thousands of businesses, many of them operating in multiple countries and offering multiple product lines (and the fact that the cost of converting my dollars into this stake costs less than, well, a good steak) is incredible. It's jaw-dropping.
It's stunning that someone in Florida can live off of the profits of mines in Madagascar, fast-food restaurants in California, steel mills in South Korea, and insurance companies in Connecticut, all without spending more than half an hour a week reading brokerage statements.
It's astounding that an entrepreneur can take a business whose future profits can't be estimated to within an order of magnitude, and sell a portion of that business for a specific amount.
Finance is an incredibly valuable industry. Getting even some of this stuff slightly right creates a lot of wealth, and helps other industries create a lot more wealth. There have been excesses and there has been incompetence, but that doesn't change the fact that finance, in the aggregate, has been very beneficial.
It's really unfortunate that people see things this way.
It's also quite unfortunate that the wave of anti-banker populism seems quite lively on HN too. I thought we were better than that.
It's also quite unfortunate that the wave of anti-banker populism seems quite lively on HN too. I thought we were better than that.
Its not anti-banker populism. Its the bailout mentality that these bankers have that's disconcerting. A startup that fails disappears the way its supposed to, but when a big bank fails we all pitch in the bail them out. That's the problem.
It's not anti-black racism. It's the welfare mentality that these black people have that's disconcerting. White people work for their success like they're supposed to, but when black people want to succeed we have to help them out with minority protection laws and quotas and such. That's the problem.
Whenever you generalise something to a large number of people, you commit some sort of anti-? ?ism. "Bankers" are not a singular entity that can have a "mentality".
Whenever you generalise something to a large number of people, you commit some sort of anti-? ?ism. "Bankers" are not a singular entity that can have a "mentality".
When people are forced to patronize a service, they generally resent it.
These are important things for our society, but they were all done by retail bankers and brokers, not by investment bankers, hedge funds, PE firms, etc. Investment banks and PE firms actually help destroy value (most M&A deals lose money for shareholders).
In making such massively outlandish claims, data is required.
"The survey found that 82% of respondents believed the major deal they had been involved in had been a success. However, this was a subjective estimation of their success in achieving the deal objectives (see figure 2, on page 8), and less than half had carried out a formal review process. When we measured each one against our independent benchmark, based on comparative share performance one year after deal completion, the result was almost a mirror opposite. We found that only 17% of deals had added value to the combined company, 30% produced no discernible difference, and as many as 53% actually destroyed value. In other words, 83% of mergers were unsuccessful in producing any business benefit as regards shareholder value."
- http://www.imaa-institute.org/docs/m&a/kpmg_01_Unlocking...
- http://www.imaa-institute.org/docs/m&a/kpmg_01_Unlocking...
Lose money != destroy value. If you bought something that earned $1 million/year, and the next year it earned $900K, your acquisition may have destroyed $100K in value -- but it's still making nine times that.
I said that the acquisition loses money, not the company itself. In your example, the acquisition loses $100K, even though the company still makes $900K.
To my limited understanding, financial types on Wall St are not the ones providing the valuable services to which you are referring. It appears to the innocent bystander (if such a thing exists) that the Wall St Types (WSTs) are effectively trading in shares and futures for the purpose of making money primarily for their institutions. They then appear to get vast sums of money for being better, or luckier.
Yes, this is related to how well my investments do. Except that it isn't. I invest in companies that actually make things.
What I personally object to is people who confuse the word "bonus" with the word "entitlement". Bonuses should be awarded for people making things better for everyone.
But we all know the problems with measurements affecting processes. Perhaps the WSTs need to learn that lesson.
Yes, this is related to how well my investments do. Except that it isn't. I invest in companies that actually make things.
What I personally object to is people who confuse the word "bonus" with the word "entitlement". Bonuses should be awarded for people making things better for everyone.
But we all know the problems with measurements affecting processes. Perhaps the WSTs need to learn that lesson.
> It's stunning that someone in Florida can live off of the profits of mines in Madagascar, fast-food restaurants in California, steel mills in South Korea, and insurance companies in Connecticut, all without spending more than half an hour a week reading brokerage statements.
Precisely.
Spending a half hour reading machine-prepared brokerage statements isn't adding value to the process. Said investor has little knowledge of the actual operations of the mines, restaurants, mills, and insurance companies. Their gains have come from general market trends, hidden risk, and luck.
Basically, over-abstraction has encouraged investing based on market conditions rather than company fundamentals.
Precisely.
Spending a half hour reading machine-prepared brokerage statements isn't adding value to the process. Said investor has little knowledge of the actual operations of the mines, restaurants, mills, and insurance companies. Their gains have come from general market trends, hidden risk, and luck.
Basically, over-abstraction has encouraged investing based on market conditions rather than company fundamentals.
> Computer models will only get you so far when COMPLEX (read: disguised) financial instruments rely on past history, not future performance.
Actually, their gains come from providing an exit for folks who did all the things that you value.
How do you propose to let the people who do things that you like make money without letting them sell out to someone who won't do a damn thing?
Actually, their gains come from providing an exit for folks who did all the things that you value.
How do you propose to let the people who do things that you like make money without letting them sell out to someone who won't do a damn thing?
erm, you quoted someone else, and aren't really addressing what I said.
I certainly don't have a problem with someone making a lot of money doing very little. However, I do think the idea that someone can "invest" without ongoing in-depth research is a scam.
The financial industry exists to make money by allocating resources to where they are most effective. If you aren't adding to market intelligence but just investing based on already-known financial data, you're essentially gambling.
I certainly don't have a problem with someone making a lot of money doing very little. However, I do think the idea that someone can "invest" without ongoing in-depth research is a scam.
The financial industry exists to make money by allocating resources to where they are most effective. If you aren't adding to market intelligence but just investing based on already-known financial data, you're essentially gambling.
No, you are putting more money into the pool --- for the people who do the data-finding to investigate and earn a share of.
I wasn't aware that amateur investing is done out of benevolence.
It does not need to. The invisible hand works much better with greed.
It's stunning that someone in Florida can live off of the profits of mines in Madagascar, fast-food restaurants in California, steel mills in South Korea, and insurance companies in Connecticut, all without spending more than half an hour a week reading brokerage statements.
Really, now, is that all it takes? Well, then, we all know what to do from here on out.
Really, now, is that all it takes? Well, then, we all know what to do from here on out.
The problem of finance isn't that its results are intangible, they are tangible. So I agree with you on this point. Its that it's an industry with strong political ties, like automakers, that is simply not allowed to fail and is propped up unnaturally by taxpayers. Failure must be part of the way we do business, bailouts cannot.
There are a few issues here. When you get paid, that money probably gets deposited into a bank. When you start a family, you probably take out life insurance to make sure that if something happens to you, your family will be financially stable. When mortgage rates fall, you can refinance the mortgage on your house. Those are all financial services provided to you by private industry, and since people use them extensively, I think its fair to say that they are real contributions to the economy. Now you can argue that Wall St. guys are overpaid, have bad incentives, etc. But it is much tougher to argue that politicians should be arbitrarily limiting pay in certain currently-unpopular industries. That introduces distortions, and it does it at the worst possible time. Can you imagine if there were legal limits on startup profits in response to the dot com bubble? Do you think we'd have all of these great enterprises like Facebook, Twitter & YC? And the idea that it was done through a late night ammendment to the stimulus bill by an ethically challenged senator such that congressmen and congresswoman didn't even know that they were voting for these limits is just terrible.
Don't get me wrong: It is also terrible that for the last two decades a lot of our best engineers have gone into finance, rather than building cool stuff, but it sure looks like that is unwinding on its own.
Don't get me wrong: It is also terrible that for the last two decades a lot of our best engineers have gone into finance, rather than building cool stuff, but it sure looks like that is unwinding on its own.
Let's keep a sense of perspective here. The pay limits only apply to companies that accept government aid. He who pays the piper calls the tune; there's nothing wrong with that.
You also need to understand that these policies are set based on factors beyond pure economics. The various financial sector bailouts are hugely unpopular among US citizens. If ordinary people don't see bankers sharing some of the pain then we could actually see riots in the streets at some point. Look at what has already happened in some parts of Europe.
You also need to understand that these policies are set based on factors beyond pure economics. The various financial sector bailouts are hugely unpopular among US citizens. If ordinary people don't see bankers sharing some of the pain then we could actually see riots in the streets at some point. Look at what has already happened in some parts of Europe.
http://en.wikipedia.org/wiki/Finance
An interesting comparison about various industry contributions to the economy: the highly-debated $20 billion bailout for auto companies versus the quickly-resolved $800 billion bailout for financial companies.
An interesting comparison about various industry contributions to the economy: the highly-debated $20 billion bailout for auto companies versus the quickly-resolved $800 billion bailout for financial companies.
>> If some Wall Streeters move on, perhaps other, more innovative professionals will take their place and build something a bit more durable..."You might get down to the core group that actually likes finance, and lose people who are coming just for the money,"..
Is this not precisely what happened when the last big bubble burst, the dot com era? People who had no real business being in technology or had no passion about programming left the industry leaving behind the ones that actually cared and were much more motivated and driven leading to greater innovation.
Taking a page from history, I say this is a good thing for Wall Street in the long run.
Is this not precisely what happened when the last big bubble burst, the dot com era? People who had no real business being in technology or had no passion about programming left the industry leaving behind the ones that actually cared and were much more motivated and driven leading to greater innovation.
Taking a page from history, I say this is a good thing for Wall Street in the long run.
And where will they go, exactly? Corporate America isn't hiring either.
When 'managing' is valued higher than creation, we have problems. Big problems.