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What every aspiring investment banker needs to know about Wall Street

QuantNet

Staff member
By BEN LORICA
When my friend Steve Hsu linked to a review of Karen Ho's recent book (Liquidated: An Ethnography of Wall Street), I was a bit skeptical. An anthropologist writing on the results of her thesis fieldwork about Wall Street? That's got to be a dry and tough read. To my surprise (most of) the book was engaging and hard to put down. Ho mostly covers investment banking, but she does have some sections that pertain to trading and investment management. Given that investment banking is less familiar to me, I enjoyed her systematic study of the profession.

She opens with a chapter describing the recruitment practices of (the major) U.S. investment banks. While investment banking groups target graduates of all elite U.S. universities, they especially go after Harvard and Princeton students. Recruitment events at Harvard and Princeton take place throughout the academic year, with alumni dazzling their Harvard and Princeton "family" members with investment banking stories. I asked my nephew about this (he's a class of 2009 Princeton engineering grad) and while he was aware these recruiting events took place year round, he was surprised to learn that the investment banks went after Harvard and Princeton students regardless of their academic majors. The banks believe that their training programs will prepare humanities and social science majors for the rigors of investment banking, just as well as engineering and science students.

The next chapter covers what the new recruits do once they enter the investment banking world. The work schedule (brutal hours over months) is bad enough, but the actual work doesn't seem that appealing. Most of what they do is help prepare deal pitch books, but the hierarchy of the profession means that recent graduates (i.e. the "analysts") and MBA's (the "associates") are at the beck and call of VP's and Managing Directors. When you factor in the long hours, the compensation (base salary AND bonus) isn't that great. But even if the salaries were even more astronomical, these recent graduates give up their personal lives for months on end.

How do banks continue to recruit graduates from elite universities? Surely there are enough stories from these white collar sweatshops to frighten off future students. First, banks and management consulting companies are relentless in targeting graduates of the top schools.

Other industries recruit at the elite universities, but banks have specific recruitment numbers they set for each of these schools, and they go all out to meet their numbers. More importantly, it turns out banks have figured out how to appeal to students' desire to maintain a measure of their elite status. The recruitment campaigns are peppered with references to how "smart" their co-workers will be and how they will be among other members of the Princeton/Harvard "family". To students at top schools this appeals to their desire to maintain the "elite" status they occupy as students of prestigious universities -- working at investment banks will allow them to be among fellow alums, in positions occupied mostly by graduates of other elite schools.

In fact Ho recounts that it wasn't uncommon for her interview subjects to refer to co-workers by their schools ("we have 2 Harvards, 3 MIT's, and 5 Princetons"). Contrast that for example with the technology sector where most companies don't care much about where a person went to college (if they went at all), no wonder finance and investment banking grab most of the graduates of elite Universities. Better yet, compare our elite schools with France where graduates of many of the top schools vie for public sector jobs!

In terms of compensation, according to Ho employees at large Wall Street banks view their employment as a "financial relationship". They embrace the risk/reward trade-off between high compensation and (for most employees) the absence of job security. Most investment bankers suffer through the ups and downs of the economy, and it wasn't unusual for Ho to come across bankers who had endured multiple periods of unemployment. What's striking about the speed with which investment banks shutter entire groups and offices is that it exemplifies a common criticism leveled against the financial industry -- the focus on short-term conditions and lack of strategic vision. Time and again investment banks close down groups only to find themselves having to scramble to hire bankers back when economic conditions change. Which begs the question, why should companies take strategic advice from investment banks, when these very banks don't really have any strategy/vision for how to manage themselves!

Speaking of strategic advice, one of my pet peeves with investment banking is the lack of metrics. Hedge fund and other investment managers get evaluated and ranked constantly. Investment bankers should be scored over how their advice and recommendations play out over the long-term. Think about the many botched deals in recent years (e.g., AOL/Time-Warner merger), and one wonders why there isn't more accountability on the part of bankers. At the very least firms should be scored, but ideally individual bankers should be as well. I wouldn't be shocked if the very bankers who took credit for initiating deals (to claim the lions share of a given year's bonus pool) are probably going to be the ones who will try to minimize their roles.
Karen Ho's book is a must-read for anyone contemplating joining one of the major global banks. I've only written about a few of the chapters dealing with investment banking, but her book covers other topics including the recent subprime mortgage crisis. My nephew never had interest in finance and I'm glad to report he is happily employed in a technology company. Another nephew is an incoming Princeton freshman, and I'll make sure he reads sections of Karen Ho's book. Actually, even faculty of our elite schools are starting to question why so many of their graduates end up in finance. Karen Ho's book should be required reading for students and faculty at these schools.

In closing, Ho's book reminded me of Matthew Crawford's book Shop Class as Soulcraft: An Inquiry Into the Value of Work. Crawford reminds us that in many cases, working with ones hands is actually more engaging than rote/routine "white collar" occupations. There are many investment bankers who feel trapped, and would prefer to do something else with their lives. Ho encounters many such people who are determined to "stay in banking" while they can find employment, because "the money is that good". If they really want to stay in banking, why not work for a smaller company, at least it wouldn't be as hierarchical and boring.

In this excerpt from Liquidated: An Ethnography of Wall Street, Karen Ho takes readers to a Goldman Sachs recruiting session at the Nassau Inn.

“So why should you work here?” asked the recent white male alumnus from Harvard. “Because if you hang out with dumb people, you’ll learn dumb things. In investment banking, the people are very smart; that’s why they got the job. It’s very fast, very challenging, and they’ll teach as quickly as you can learn.” Some speakers emphasized the access to power offered by a Goldman Sachs position. “Our analysts can go anywhere in the world,” said one of the white male vice presidents who is an alumnus from Wharton. “We’ve got Hong Kong, we’ve got Sydney, we’ve got London.” He returned, inevitably, to the presentation’s central motif; with an admiring gaze at the audience, he exclaimed, “You are all so smart!” Finally, the Princetonian managing director got up and announced, “Let’s break up, go to the Nassau Inn Tap Room; drinks are on us!” The swarm of undergraduates then bee-lined toward the panelists, eager for face time with actual Goldman Sachs executives while I was still lingering in my seat. Determined to join the fray, I surveyed the scene and realized that every investment banker was already surrounded by two to three semicircle layers of undergraduates: As the first layer moved to impress and receive the business card of the banker holding court, the second layer would quickly move into “face-time” position. The only room in the crowd for me was actually behind the speaker’s back where there was no waiting line! In that position, I mainly observed throughout the night, and the only person who turned around to talk to me was the young South Asian American analyst from the University of Chicago, and I held on dearly to her business card as a sign of my initiation into this grueling process.

During subsequent recruitment presentations, I experienced much of the same: well-suited alumni declaring, “We only hire superstars,” “We are only hiring from five different schools,” “You are the cream of the crop.” In these sessions, I was struck by how proclamations of elitism (through “world-class” universities, the discourses of smartness and globalization) seemed foundational to the very core of how investment bankers see themselves, the world, and their place in it. Representing a world of “collective smartness” and exclusivity seemed fundamentally connected not only to the criteria for becoming an investment banker but also to the very nature of what they do. What precisely were the links between elitism and the enactments of their financial expertise and global dreams, between Wall Street’s claims to smartness and their promises of global prowess? Motivated in large part by these compelling presentations, I decided that to understand these grandiose, even mystifying, pronouncements, I had to get a job on Wall Street.

About the Author
Ben Lorica is currently a Senior Researcher in the Market Research Group at O'Reilly Media, Inc. He has applied Business Intelligence, Data Mining and Statistical Analysis in a variety of domains including Financial Engineering, Direct Marketing, Consumer and Market Research, Targeted Advertising, and Text Mining. His background includes stints as the lead quant for a hedge fund, internet startups, and financial services. Besides his O'Reilly Radar posts, Ben writes on a wide range of topics on his personal blog, The Practical Quant.
An ex-academic, Ben was an Assistant Professor at U.C. Davis and was the founding Department Chair for Statistics and Mathematics at C.S.U. Monterey Bay. He has been a visiting member of the Mathematical Sciences Research Institute in Berkeley and has taught at U.C. Santa Barbara and the University of the Philippines.
 

Eugene Krel

sunmulA
Seems like the same old story to scare kids that are interested in finance.

In the end you are either cut out for it or not.
 
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