8:11am

Thu January 17, 2013
Planet Money

Ask a Banker: Why Did Bankers Destroy The World? Also, Are You Hiring?

Originally published on Thu January 17, 2013 11:14 am

Hi! It's Ask a Banker! A little secret that we have here is that not every "question" that people "ask" a "banker" is actually a question that someone has asked in the comments or tweets or what have you to these posts.* Also I'm not exactly a banker, currently, though I was once. So what I'm saying is, the whole premise is a bit off.

But there are two questions that have actually been asked a lot by actual people - more, I'd guess, than any other questions - so I suppose it is worth answering them, though be warned that (1) they're hard and (2) since they've been asked so often I'll reduce them to paraphrased composites. And they are:

Q1. Why did a bunch of banksters destroy the world's economy and steal people's houses and shouldn't they all be in jail?

and

Q2. How do I get a job in investment banking?

My hunch is that at least some people asked both of those questions. You know who you are.

Let's try answering them both. Second question first.

There are many routes to getting a job in investment banking. Asking some guy on the internet is for the most part not one of them, though; sorry. The main route, these days, is pretty much:

  1. Go to a fancy college.
  2. Have no idea what you want to do for a living.
  3. Interview a lot for investment banking jobs.

And that's pretty much that. Step 1 is crucial; the normal path into banking involves applying straight out of college (or business school), and if banks recruit at your school, that is a good sign. Step 1.5 is like "major in economics or applied math" but you can skip that if you lack better ideas intensely and do a lot of interviewing.

A variant on step 3 is "have a parent who is a managing director at or major client of an investment bank, then do a little bit of interviewing." OH WHAT YOU'RE SURPRISED THERE'S NEPOTISM? But actually not that much, as far as I can tell from my limited vantage point; investment banking is a pretty good grades-and-school meritocracy compared to, for instance, I don't know, real jobs.**

Also there's a variant on step 2 that is like "really, really want to be an investment banker." This used to be rare: in my college days, when jobs were plentiful and dot-coms were bubbling, investment banking was pretty much where you interviewed if you owned a suit and didn't have anything you were particularly passionate about and couldn't stomach law school.

When I last interviewed applicants at my alma mater a couple of years ago, they all wanted to be investment bankers. They all majored in economics and had internships at five banks and were president of the investing club and vice-president of the networking club and asked me what my favorite financial models were. Honestly it was a bit much.

This is not because investment banking got more attractive, but because it got much less attractive. You may have heard: people hate bankers! Now if you're smart, prestige-hungry, not particularly computer-savvy, averse to law school, and out of better ideas, you apply to Teach For America or whatever. Investment banking has lost its cachet, and the only people applying to do it are people who want to be investment bankers.

It may be worth pondering that. Every generation of aimless Ivy League graduates has to have some job that it flocks to out of a hunger for prestige and avoidance of adulthood, and it's hard to imagine that that job will be, y'know, done well. And it's genuinely weird that investment banking was that job for a while. A tumultuous while, it turns out. You might ponder whether the flight from banking and into Teach For America is entirely good news for our inner-city schools.

Now the other question is, I don't know, it's something like "why are you such jackasses and why did you steal everyone's house and why aren't you in jail?"

Here I suppose I could tell you that bankers aren't all, or even mostly, jackasses, and that most of the bankers I know are ethical and smart and kind and funny and just generally human like anyone else, but you won't believe me, and you're within your rights not to. If all bankers are untrustworthy jerks, and I was a banker, then I'm an untrustworthy jerk and there's no reason for you to listen to my defense.

So listen instead to this piece of logic from Yale business school professor Gary Gorton: "If greedy bankers caused crises, we would have a crisis every week."

Right? If your theory of the financial crisis is that it was caused by bankers being always and everywhere evil, then that doesn't explain why there was a financial crisis in 2007-2008 and not, for the most part, now.***

So you need a better answer. A better answer starts from recognizing that bankers, like all people though perhaps more so, tend to look out for themselves and so it's best for society if they're in some sort of system where their self-interest is channeled toward positive rather than negative ends. And, contrariwise, it's terrible if they're in a system where their energies are channeled in bad ways. So you'd think about what's channeling things where.

Sadly, people who think about this often come to contradictory answers. One popular answer is "banks were strictly regulated until recently, then they weren't, and deregulation led to disaster." There's undoubtedly some truth to this, though it's a bit unsatisfying. It's not like banking deregulation is really all that recent, and a lot of the favored deregulatory culprits - like allowing banks to engage in "proprietary trading" - are demonstrably unconnected to the crisis.

Another, opposite answer is "banks would be fine if they were unregulated, but meddlesome regulation led to the crisis." There are unsophisticated versions of this - "the crisis was caused when the government forced banks to lend to lower-income homeowners!" - that are, well, unsophisticated, but there are also legitimate complaints about some kinds of regulation. One weirdly compelling book on the financial crisis blames it largely on the specific details of bank capital regulation, which drove banks to hold excessive amounts of certain kinds of favored mortgage-backed securities.****

Neither "more regulation" nor "less regulation" has to be the right answer, of course; there are other systemic approaches. Gary Gorton has one of the more widely believed theories of the financial crisis — that it was caused by a "shadow bank run" as formerly "information-insensitive debt" suddenly became "information-sensitive" - which you can read about in his book or in the excellent interview I linked to above. I'm also partial to this paper (PDF), in part for its parody-of-an-economics-paper title ("Why Did So Many People Make So Many Ex Post Bad Decisions?"), but also for the evidence it musters against "the popular story that the crisis resulted from finance industry insiders deceiving uninformed mortgage borrowers and investors." The banksters, it seems, were more dumb than malicious. Maybe not even dumb.

But even if everyone's home was taken by, like, The System, and not a bunch of greedy bankers, surely a lot of bankers did some illegal stuff, right? Something that should land them in jail? Like ... selling derivatives that were designed to fail? Surely that was a crime, right? Why are practically no senior bankers going to jail?

Well there are lots of cynical answers to that; a good one starts with the fact that the Securities and Exchange Commission's chief enforcement officer for the last four years spent the crisis era as the general counsel of a bank with a particularly dodgy record of securitization and derivative practices, so he wasn't exactly well situated to go after the sorts of abuses that he once presided over.

Maybe! I dunno, I think of all those aimless Ivy Leaguers who ended up in investment banking. What attracted them to it? Money, yes, but it seems unlikely that they were all rubbing their hands together and cackling gleefully about stealing people's houses. Rather, the attraction was the perennial attraction of the prestigious default career: generically, the chance to work on interesting problems, with smart people.

What were those interesting problems? We talked a while back about how much of the work that banks do is building derivatives for various flavors of regulatory arbitrage, to optimize tax or accounting or securities law regimes. That is often the value (or "value") that banks can add: harnessing complexity for economic ends, and coming up with a structure for a trade that solves a client's tax or legal or accounting issues. (This was especially true for the securities involved in the mortgage crisis, which were in large part structured to game credit-ratings and bank-capital rules.)

That's the game that a bunch of smart bankers were hired to play. So of course they were good at it. They came to work not with the goal of "let's screw some customers," but rather "let's find a way through this thicket of rules to get the result we want." And they did. I mean, sort of. They lost a lot of money, for themselves and others, and I imagine most of the people involved are genuinely sad about that. But the result they wanted most was to be able to sell complex products to customers without, y'know, going to jail. And so far that's happened.

* But, y'know, if you have some, send 'em our way. To planetmoney@npr.org with "ask a banker" in the subject line, or ask on Twitter (@planetmoney).

** Though one thing you might ponder is whether grades and schools are the right thing to structure your meritocracy around. Investment banking is part hard analytical work, the sort of thing for which a 4.0 at MIT is a decent proxy, and part soft-skills salesmanship, the sort of thing for which it isn't. At the beginning it's mostly hard analysis, at the end it's mostly salesmanship, and so the career path basically takes smart hard-working people of various levels of social comfort and over time fires all of the ones with bad people skills. That may seem inefficient, and in fact you'll sometimes see a prominent political macher type appointed to a senior job at a bank, the idea being that he or she will be able to do the salesy thing well, and that his or her lack of financial-analytical background won't actually be a serious hindrance.

But mostly it's people who are good at spreadsheets and rise through the ranks of being least-bad at people skills, and that's kind of weird. You could imagine instead a meritocracy of salesmanship where like the best door-to-door knife salesmen got to be managing directors at Goldman Sachs. I have imagined that. I remember once buying new shoelaces and being talked into getting a shoeshine in the shoeshine throne of the little shoe-supply-and-shine place. A shoeshine like that has negative value for me: if you offered it to me for free I would say no, because I find it unbelievably awkward to sit in a tall chair with someone rubbing my feet. But the guy sold it to me anyway, because he was a good salesman. (Helpfully for him, he had someone else to do the shining; he was just the pitchman.) And I walked back to my office to sell derivatives thinking that, really, he'd be better at my job than I was. And now I blog.

*** Oh there are crises now, but not crises of the financial industry, which is mostly doing okay and not defrauding anyone more than the usual amount. The crises now are mostly explicable through the lens of "politicians are jerks," which is universally true, as you can tell by the fact that we pretty much do have a political crisis every week.

**** For a flavor of this line of argument, consider CNBC's John Carney's argument that new capital regulations are likely to engender a "financial monoculture" and repeat the mistakes of the last crisis.

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