Is investment banking on Wall Street dead?

[hatelove]

Following the 2007 subprime mortgage crisis, I haven't seen any investment banks in the U.S. at all...as far as a career goes, is going into investment banking still a viable option for people in the maths/physics fields?

 

[twofish-quant]

Yes it is, if you keep your expectations reasonable.

Before 2005, the salaries were "totally crazy and insane", now with massive salary and bonus cuts, the jobs and salaries are "merely very good."

The jobs involved in investment banks are essentially high end programming positions. If you are expecting to get "money for nothing and the chicks for free" then you are going to be disappointed. If you just want a good job with a decent salary, then the jobs are still out there. Curiously with lower pay, banks can hire more people.

Also, because the salaries are now "decent" rather than "totally crazy" it's possible for non-financial careers to compete. You are likely to make slightly more in an IB than working at Google or Microsoft, but if you hate NYC and like SF or Seattle then the premium is not worth it.

This is the situation in 2012. No promises for what the situation is in 2015 or 2020.

 

[twofish-quant]

One big thing that has changed since 2008, is that even when people *are* making money and are hiring, they are keeping very quiet about it. In 2005, if you made a lot of money, then there was social pressure to "conspiciously consume." In 2005, the bankers were the "heroes of the new economy."

Today, anyone that makes a ton of money in finance, is going to be very, very quiet and try their best to look poor, because anyone that looks rich is going to end up having rotten eggs tossed at them by demonstrators.

 

[chiro]

One big thing that has changed since 2008, is that even when people *are* making money and are hiring, they are keeping very quiet about it. In 2005, if you made a lot of money, then there was social pressure to "conspiciously consume." In 2005, the bankers were the "heroes of the new economy."

Today, anyone that makes a ton of money in finance, is going to be very, very quiet and try their best to look poor, because anyone that looks rich is going to end up having rotten eggs tossed at them by demonstrators.

If the proverbial ends up hitting the fan in a big way financially like its happening overseas, then rotten eggs are going to be the least of their worries.

 

[twofish-quant]

If the proverbial ends up hitting the fan in a big way financially like its happening overseas, then rotten eggs are going to be the least of their worries.

On the other hand, one good/bad thing about finance is that when finance falls apart, then everything else falls apart too.

 

[chiro]

On the other hand, one good/bad thing about finance is that when finance falls apart, then everything else falls apart too.

Lol, how is that a good thing?

I agree about the fact though that when finance does its job, the world keeps going. Any kind of resource allocation is essential in a modern, advanced civilization.

The caveat though is how its done. Its still an experiment in progress where we have had complete central planning and to some degree have capitalism. The problem is when we have 'too big to fail', then it seems that some of the lessons of central planning have fallen on deaf ears.

But having said that, I agree that a great number of financial institutions do their job well by allocating resources to where its needed, and who don't act recklessly with resources like you would expect an addicted gambler to act with someone elses money at Las Vegas.

 

[twofish-quant]

Lol, how is that a good thing?

Good thing in that it's good to be on the highest point on the mountain if there is a flood.

I agree about the fact though that when finance does its job, the world keeps going. Any kind of resource allocation is essential in a modern, advanced civilization.

One thing about finance is that it's something that you can't shut off. Even when the system is obviously broken in a big way, there isn't a "reset button" which you can turn off the system and rebuild it from scratch.

One problem is that most people think of the financial system in much the same way that they think of the power grid (i.e. they don't). You put in your ATM card, little colored bits of paper come out, and you don't think about the fact that you can exchange those colored bits of paper for goods and services, and when everything works you don't *have* to think about it.

The other problem is that you are dealing with people from very different countries and very different societies who have very different views on what the lessons of history really are. There are some countries in which "socialism", "welfare", and "central planning" are considered to be good things, and one thing that makes global financial regulation interesting is that there is only one single world economy. Americans are very strongly influenced by the "cowboy mythology" in which small is beautiful and government intervention is considered bad unless proven otherwise. This isn't true with the French, Chinese, Japanese, or Saudis. If you have an idea on what the perfect banking system looks like, good luck getting China and Saudi Arabia to agree with you. The US divides things into commercial and investment banking. Germany does not, and has never made this division.

But having said that, I agree that a great number of financial institutions do their job well by allocating resources to where its needed, and who don't act recklessly with resources like you would expect an addicted gambler to act with someone elses money at Las Vegas.

But it doesn't matter if you have a system in which the weakest link blows everything up. The *big* problem that lots of people are thinking about now is how you set things up so that gross stupidity in any given part of the system doesn't cause a massive crash.

One thing that I did see first hand was "reverse darwin". There were some banks that knew what they were doing, some banks that didn't, and people "with clue" left the clueless banks which made them even more clueless.

Curiously, "greed" enhances the problem. One thing that happened was that clueless banks actually paid higher salaries (or at least promised to pay higher salaries) because they were clueless.

Getting back to careers. There was someone that asked how they could get $500K/year. One problem is that if you just think about the money and you don't think about where that money is coming from, you can get yourself into a lot of trouble.

On the other hand for me there is something more than money (although the money is good). You get see history happen.

Also, finance is great for people that like to think about deep questions. One question that seriously confuses me is "what is money?" The more I learn about money, the less I understand it.

 

[djent]

it is actually kind of dead.
you might as well be day trading.
There is literally nothign with a stable upward trend with the exception of maybe energy market, and even that not nearly as stable as it used to be

 

[chiro]

Thanks for the reply twofish-quant, that was really insightful. I guess finance is kinda like electricity and everything based on it that we just "take for granted". I won't derail the thread anymore so I'll end the discussion here.

 

[twofish-quant]

it is actually kind of dead.

It's not dead. We aren't in a "get rich quick" mode, but that may be a good thing in the long run. Something to remember is that finance is in some sense a "social parasite." Parasites need to keep the host alive, if finance takes up too many resources from the non-financial economy, then that dies and then the financial sectors die.

you might as well be day trading.
There is literally nothing with a stable upward trend with the exception of maybe energy market, and even that not nearly as stable as it used to be

You give up too easily.

A lot of banking ends up being transactional. You click on your webpage to buy or sell some stock, stuff happens, and someone that you don't see takes a fraction of that money in exchange for keeping the web pages up and running. One way of thinking of the modern investment bank is as a financial equivalent to Google or Ebay.

Also, the thing that everyone is interested in is "what happened and how do we prevent it from happening again." A lot of the new jobs are in risk. A lot of those jobs involve essentially writing thousands of pages of technical reports for banking regulators (please, please let us do X, we won't blow up the world again, we promise...) Drafting technical memos and kowtowing before banking regulators is not "Gordon Gekko" but it in fact pays quite well. (One thing that I find interesting is how extremely senior managers suddenly get quiet when they talk about meetings with government officials. It's like a kid talking about their meeting with the principal.)

Some of this work requires a physics Ph.D. In 2005, you could get away with "trust us, this equation is good." You can't get away with that today. The regulators have this big rubber stamp marked NO!, and if you can't explain what you are doing, they are going to use it.

A lot of the work now involves taking extremely complicated equations and models and then writing a document that explains in plain English exactly what the equation does or else taking information and constraints that are in plain English and translating them back into the equations.

There are also a dozen other ways of making money in investment banking.

Personally, I think its cool. When the markets are rising, any idiot can make money (or seem to), but when times are tough, that's when skill becomes important, and you have to get creative.

 

[Floid]

Something to remember is that finance is in some sense a "social parasite." Parasites need to keep the host alive, if finance takes up too many resources from the non-financial economy, then that dies and then the financial sectors die.

I like that analogy. I read a book back before the 2007-2008 problems that tried to establish a critical point of financial sector as a percentage of total GDP past which the system was unsustainable. If I remember correctly, the authors came up with somewhere in the low teens (12-14%) through historical analysis (Dutch tulip bubble, several British Empire episodes) and some quantitative analysis. Then when 2007 comes around we were pushing this limit and the wheels fell off. It would be interesting to see if there was a direct correlation.

 

[twofish-quant]

If I remember correctly, the authors came up with somewhere in the low teens (12-14%) through historical analysis (Dutch tulip bubble, several British Empire episodes) and some quantitative analysis. Then when 2007 comes around we were pushing this limit and the wheels fell off. It would be interesting to see if there was a direct correlation.

On the other hand maybe not. One thing that might have happened in the 1970-1980's is that functions that were counted as non-financial became financial. For example, in 1965, someone may have been working as a executive in General Motors or ITT making decisions about where to invest and what projects to fund. In 2012, someone doing exactly the same thing would likely be working in a hedge fund or mutual fund. The difference is that in 1965, he'd be counted as "manufacturing" whereas in 2012, she would be counted as "finance."

I don't know if this happened, but one does need to be rather skeptical of statistics. One particular problem with statistics is that in the 19th century and before, you can a crash every decade, making it difficult to tell if event X caused crash Y.