End of an Era

New York Magazine recently published a feature on the state of New York’s finance industry, somberly titled The End of Wall Street As They Knew It. Much of the article focused on how new regulations, such as Dodd-Frank and Durbin, have dramatically changed how investment banks can continue to operate. 

At the boom’s peak, banks like Lehman and Bear Stearns levered up 30, even 40, to 1. Under the new rules, banks would only be able to borrow $12 for every dollar they spend. In Europe, the rules are even stricter: British regulators have indicated that banks may have to hold as much as 20% on their books.

Inevitably, these stricter conditions will put pressure on the bottom line: 

[Y]ou’d see that these are institutions that need to build up capital and that they’re becoming lower-margin businesses. So that means it will be hard, nearly impossible, to sustain their size and compensation structure.

Belt tightening isn’t only restricted to investment banks – it also extends to the rest of the finance world. 

We used to rely on the public making dumb investing decisions, but with the public leaving the market, it’s just hedge funds trading against hedge funds. At the end of the day, it’s a zero-sum game. […] Over 1,000 funds have closed in the past year and a half.

And all of this shouldn’t really come as a surprise; in the world of hedging and financial vehicles, real value is rarely created for Main Street or the greater economy. Finance was always meant to be the means to an end, to fund other projects and enable economic growth, and never as an end in and of itself. 

So, what comes next?

To a certain extent, Wall Street will never die. Bank executives are always clever enough to adapt to this new, albeit more difficult environment. The Managing Directors of Wall Street will still retain their “masters of the universe” title, with their years of expertise with public transactions and the breadth of their rolodexes. 

Sadly, those who will hurt the most from these changes are the new entrants who have never even tasted the glory of Wall Street. Recruitment stats are a trailing indicator as analysts and associates still flock to Wall Street with hope for high bonuses and a stepping stone to even more competitive positions in hedge funds and private equity. These mis-perceived incentives, along with the changing landscape of the finance world, further commoditize young talent and reinforce the hierarchical nature of the workplace.

Before the crash, when compensation slid, the banks risked seeing their top talent run for the doors to rival firms or hedge funds. Now, with a glut of hedge funds and an industrywide belt-tightening, bank chiefs are calling their star traders’ bluffs. “If you’re really unhappy, just leave,” Morgan Stanley CEO James Gorman bluntly told Bloomberg TV a few days after his bank announced its meager bonus numbers.

So, where should they go? 

While there isn’t a clear-cut answer, the article does offer a glimmer of hope for those disenchanted with Wall Street. A hedge-fund executive said, 

If you’re a smart Ph.D. from MIT, you’d never go to Wall Street now. You’d go to Silicon Valley. There’s at least a prospect for a huge gain. You’d have the potential to be the next Mark Zuckerberg. It looks like he has a lot more fun.

This piece of advice isn’t anything we haven’t already heard. Columbia professor Chris Wiggins, co-founder of HackNY, has been trying to keep students offthe Street” since early 2010. Today’s tech startups are indeed enticing for bankers – it has the same face-paced environment and cut-throat sense of competition. Several NYC tech startups, such as Yipit and Savored, were founded by bankers who left their day job before it became the sexy thing to do.

What troubles me about that quote, however, is not the advice, but the way it’s positioned. "Go to Silicon Valley, because there’s a prospect for huge gains.“ Not, "Go to Silicon Valley, because you can build and create real value.” Or even, “Go to Silicon Valley, because Tech is a huge economic driver.” The advice given here has none of the qualities that made Silicon Valley the beast it is today. Instead, the focus remains on greed and personal gain, simply shifted from one geography to another. Ultimately, going to the Valley with the same Street mentally won’t get ex-financiers very far. As Mark Zuckerberg simply stated in the Facebook S-1,

we don’t build services to make money; we make money to build better services.

So, start building. 

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