“They’re closing down
the textile mill
across the railroad tracks
Foreman says these jobs are going, boys
and they ain’t coming back…”
from “My Hometown” by Bruce Springsteen
With graduation approaching for the Class of 2009, college seniors nationwide are scrambling to find jobs by the spring. Let’s hope they don’t have their hearts set on Wall Street. By the time the big unwind is through, The financial services industry (and peripheral sectors) will probably have lost more than a quarter of a million jobs. Unlike ’87 or ’01-’02, most of these jobs won’t be coming back.
The business of Wall Street used to be effecting transactions and facilitating investment, but over the last few decades it became more about inventing products than anything else. Selling products of one’s own making was the path to higher profit margins, so Wall Street firms focused on making products for their sales forces.
When there was demand for a way to invest in the internet and the high tech boom 10 years ago, The Street (conspiring with venture capitalists) met that demand by launching a thousand purposeless dot com IPO’s, some were just domain names with a handful of employees. During the bear market of 2001-2002, scores of mutual fund companies pumped out “principle protection” funds, essentially a way to buy a stock index with a guarantee against losses. The catch was that your upside was limited to only 1% of the S&P 500’s gain per month; a joke, because most of the move an index makes happens in short bursts, within a month, for example.
In a dramatic shift of cause and effect, however, the latest crisis was actually created by Wall Street products. The Street wasn’t just a victim of the crime, it was the perpetrator as well, both the seller of toxic mortgage and debt products and the buyer. Money was cheap, everyone had too much of it, and boy, you can sure make a fortune by levering up $100 million 20-to-1 and then taking your “management” fee on the $2 billion you’ve created.
That was then, this is now. No one is going to be able to get leverage like that again, and so fees will be coming down on whatever products still exist, once Wall Street has finished shutting down entire lines of business outright. The big investment banks have all either disappeared or become regular banks. Regular banks don’t pay the way the Lehman guys were accustomed to. The hedge fund industry will probably shrink by at least 50%, if not more. The biggest or best performing funds will still be around, but will probably not be able to justify 2 and 20 fees. Mutual fund families will remain under siege by the ETF industry as individual investors continue to prefer the index to the manager, the simple to the opaque. Sell side research departments will continue to disappear as traders and investors keep ignoring their discounted cash flow analysis, which, as everyone knows, has no bearing at all on where stocks will trade.
All of this adds up to a shrinking pie which will, in turn, lead to less need for expansion and hiring. Once hiring freezes thaw, it will become a buyer’s market for talent and compensation will become more rational in light of the new-found austerity of the banking community.
Successful risk taking will still be rewarded, but over longer periods of time and in smaller denominations. Now that the US government and the American taxpayer are part owners of many of these companies, the compensation of executives and employees will undoubtedly come back to Earth (or at least in-line with the rest of the corporate world). Wall Street is the only industry that pays its employees over 50% of it’s revenues, and this will probably be a thing of the past.
College students need to face a few realities about the future of Wall Street. There will always be opportunities for the hardworking and intelligent on The Street, but the days of just showing up and becoming a multi-millionaire because your uncle is a VP are over. As long as people have money, there will be a need for guidance from an advisor, but the price of this advice will (and should) be commensurate with it’s actual value. If recent graduates are willing to come here and actually earn the money they make, there is a place for them, but the days of big, easy money for everyone, have come to a close.