Simonomics on Wall Street's Mass Exodus
WHY YOU SHOULD CARE
Because fewer smart people in finance may mean less innovation.
By Simon Constable
Simonomics: A look at the global economy from a former staff columnist at The Wall Street Journal.
For decades, many top grads wanted to be wolves of Wall Street, residing in trading rooms where vast sums of cash flowed in and out. And if they were lucky enough to land a position, they’d likely end up watching multiple blinking screens of asset prices all day while juggling two or three phones — and probably earning a hefty paycheck.
But something has changed. British bank Barclays recently published a report on how talent is becoming scarcer as traditional sources are drying up, and the industry is “losing the talent war against technology companies.” It’s also the result of the shrinking size of the banking sector, the report states, which is where hedge funds have frequently recruited. (Barclays wouldn’t comment.) Yet the bigger story is that the policies of central banks, such as the Federal Reserve or European Central Bank, have been “intentionally dampening financial innovation and reducing risk-taking,” says Joe Brusuelas, chief economist at professional services firm RSM. He dubs it “financial repression” and points to restrictions on total pay. That’s a vast difference to how things were a decade ago, when the sky appeared to be the limit on Wall Street.
Risk-taking and experimentation are off the table if you work at a bank. That means inventive, groundbreaking work is likely off the table as well.
This isn’t the first time that some of the best and brightest have fled Wall Street. In the middle of the dotcom boom, students dropped out of MBA programs to go to Silicon Valley, “because of excitement [around] this great new technology” — the Internet — “and the lure of stock options,” says Robert Bruner, professor of finance at the Darden School of Business at UVA. Back then, he adds, headlines were full of of companies founded by recent dropouts from McKinsey and Goldman Sachs. Pay was a key issue then, as well as being at the center of something new and important. Eventually, many of those who’d had outsize dreams of creating the next Microsoft (the cool kid on the tech block back then) returned to banking and strategy consulting when the startup bubble popped.
That return to finance isn’t likely to happen this time, though. “Wall Street is over as we knew it, and it’s not coming back,” Brusuelas says. At least not in our lifetimes. The reason is that the shock of the financial crisis and the resulting bailout of the banks once deemed “too big to fail” has scarred the psyche of regulators. Risk-taking and experimentation are off the table if you work at a bank. That means inventive, groundbreaking work is likely off the table as well. How so? When you develop new products, there tend to be unintended consequences. For instance, it was financial experimentation during Holland’s tulip mania of the 1600s that ultimately led to the development of futures contracts — you could buy and sell tulip bulbs before they’d grown.
Of course, a lot of people lost a lot of money, both back then and more recently, due to other financial products. It’s certainly not a popular thing to say, but perhaps that’s the price for innovation. Which is what makes initiatives to cultivate innovation at both TD Bank and its rival CIBC (a former employer of mine) seem rather sad; both, according to Canadian Business magazine, have set up tech labs to “develop new products and services.” (Neither returned requests for comment.) Rather optimistically, the story ends by suggesting that “working at a bank looks almost as cool as a gig at Google.” If only!