Buddy, can you spare a Banker?

A friend in finance pointed out to me today that there are probably “more than 100,000” newly-unemployed bankers (including investment banks, hedge funds, private equity) in New York City right now, trying to figure out what comes next.

This is bad news for NY-based nonprofits, who are feeling the double-whammy of Wall St. donations drying up and the Bernie Madoff madness (plus huge cuts in local and state spending).  And I suspect that 2009 will be the year where we learn how bad things really are, not the year when we’re pleasantly surprised that things aren’t as bad as we thought they were.

Nevertheless, I for one pray it is the end of an era, and not just a pause between acts.  Not because of the greed (which has always been there and always will be); and not just because of the excess-piled-on-excess that had become the norm for pay on Wall Street (though it stinks).

The gravitational pull of Wall Street has gotten so strong that it pulled in many of our best mathematicians, lawyers, engineers, you name it.  It’s an imbalance that has pulled talent away from other sectors, and one that I hope gets restored.

So what’s the upside look like?  I wonder what those 100,000+ bankers – some of the smartest, most ambitious, out-of-work Type A personalities around – are going to end up doing.

Is it possible that there will be (slowly, quietly) a huge influx of talent into the government and our healthcare system and the education system and the social sector?

Wouldn’t that be great?

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And if you haven’t seen it, you must read Michael Lewis’ essay “The End” from Portfolio.com.  Michael gives the inside story that explains what all this subprime / CDO / securitization really means — how it happened, how truly ugly it was, and how everyone looked the other way because so many people were getting so rich.

What happened on Wall Street at the end of 2008 was the music stopping after 25 years of buildup.  If you want to understand how and why, take the 20 minutes to read Lewis’ article.  It’s fabulous.

Another data point: Merrill Lynch

If you’re curious about exactly how out-of-whack incentive pay (bonuses) got in recent years on Wall Street, check out this recent NYTimes article called, “The Reckoning: On Wall Street, Bonuses, Not Profits, Were Real”, especially this tidbit that gives an order of magnitude on bonuses:

Clawing back the 2006 bonuses at Merrill would not come close to making up for the company’s losses, which exceed all the profits that the firm earned over the previous 20 years.

The article is really worth a read because it gives some more detail on how far things have gone in recent years on Wall Street (in terms of the number of people raking in millions), and also points to the core of what got us into this mess: people responding as one would expect them to to incentives that offer the potential for unprecedented personal financial gains in the short-term.

When pay systems are set up such that some of the smartest, most ambitious people stand to make enormous amounts of money if they ratchet up risk, what do you expect will be the outcome?

There’s this misplaced sense that some magical self-correcting mechanism would keep things from getting out of hand, but in retrospect it’s hard to understand why we thought the music wouldn’t stop at some point.

What strikes me is that all the watchdogs (the risk people in firms, Board compensation committees, the rating agencies, the SEC) have collectively failed in their oversight roles, and without significant change we won’t address the root of the problem.

(And while I’m no expert in executive pay, doesn’t it seem obvious that (much) less cash and (much) more restricted stock is the only way to go?  Why is this so hard to get right?)

What’s the right career move in the midst of an economic meltdown?

Take a chance.

Really, things are bad in the economy anyway.  It’s a hard time to get a job.  Why not take a stab at that wild idea you’re hoping to get to…someday?

Not long ago I was invited to speak to a career panel for college seniors and recent grads.  I find it tough to give out career advice – it feels like it devolves into “let me tell you what I did in my career” as if that’s a blueprint for anyone but me.

The backdrop for the panel was the blowup on Wall Street, which has only gotten worse in recent weeks (today’s 10.88% rise in the Dow notwithstanding).  I do think we’re in for a protracted period (a few years) of slow economic growth.  This means job losses, wage stagnation, the works.  So now is tricky time to be an eager recent college graduate with limited work experience who is looking for a job.  You’re likely competing with all the folks who have just been laid off (or are about to be laid off), interviewing with companies with very tight budgets who have people lining up outside their doors.

And my best guess is that this will be a record year of applicants to MBA programs, law schools and the likes.

Which is why I think now is a great time to take a risk.  Do you have an entrepreneurial idea?  Pursue it now.

For most everyone, the next couple of years are going to be tough going.  Why not take a risk and try that idea that’s been on the shelf just waiting for the right moment?  You have less to lose now than you did before, and since the foundation for “overnight success” takes years to build, you may as well start laying that foundation today.

Another way to address the crisis on Wall Street

Once the $700 million bailout package is sorted out, the federal government will have to roll up its sleeves and figure out what went wrong and how to fix it.  I suspect that whatever they come up with will not fundamentally address the problem.  Here’s why:

1. Wall Street has gotten exponentially more complex in the last decade

2. Most lawmakers really do not understand all of this complexity

3. Regulation and oversight is an unbelievably blunt instrument

4. Things will just get more complex and more global, and if we overregulate we’ll fall behind the Middle East and Asia’s financial centers

So here’s another idea.  What if Wall Street CEOs had real downside risk, and real chance to lose not only what they earn in a given year but also what they earned in previous years?

Right now, the income of your average top-flight Wall Streeter might look like this: $10M; $20M; $25M; $55M; $130M….   They kept on taking on more leverage and paying out more and more until the music stopped.  It’s like being at a casino and playing with the house’s money.

Imagine you have that kind of money coming in.  Then your firm goes bankrupt and you make nothing in a given year (unless you’re the CEO of Morgan Stanley).  Big deal.  Sure it hurts, and your unvested stock loses value.  But you are going to land on your feet because you’re incredibly smart and good at what you do, so you’ll start another firm or get hired by another firm.

So what about putting previous years’ pay at risk too?  Then all of a sudden the equation changes, and you really lose when the firm loses.  It could be as simple as: “Make all the money you want, but if the firm goes bankrupt or there are material restatements in earnings, you owe us everything you made in the last 5 years.”

Of course this will never happen.  But until we realize that CEOs and top management were doing exactly what makes the most sense under the current incentive structure (“go big, because you get all the upside and the downside really isn’t that bad”) we won’t get at the root of the problem.