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Wall Street is getting smaller and dumber, and that’s a good thing

“Bankers are ruining the economy.” A lot of people have uttered this phrase or a similar iteration over the years. Usually it relates to the financial crisis or to gaudy compensation packages, but it’s always more of an inflamed opinion than some sort of fact. Well, a recent study has trotted out some numbers that are a bit more compelling than a random subway rant.

The study, launched by economists Stephen Cecchetti and Enisse Kharroubi, first looked at the economic output in 21 nations over a five-year period. They found that once a country’s finance industry grows to a certain size – specifically 3.9% of all workers – its national gross domestic product per worker declines. The faster the banking industry’s presence grows, the steeper the decline, according to Bloomberg.

The paper doesn’t argue that bankers are necessarily greedy or immoral. It simply says the prominence of the financial services industry impedes growth because the projects banks tend to invest in aren’t productive, at least from a macro-economic standpoint. The authors cite banks’ proclivity to invest in construction projects, for example, which create quick returns but don’t do much for greater economic development. Many have also made the argument that investment banking is a business that simply moves pieces around but doesn’t create any economic value.

But the authors go further. They also suggest that Wall Street’s ability to scoop up much of society’s talented youth is dis-incentivizing entrepreneurship. Essentially, banks are taking all our smart people and putting them to work in capacities that don’t spur long-term economic growth, or so goes the theory.

It seems like kind of a stretch, honestly, but if true we’ve got some good things going for us. Wall Street is shrinking – New York City’s securities industry currently employs 170,000 people, down from a record 195,000 it did a decade ago. Moreover, fewer bright minds are getting into banking, with more headed to Silicon Valley. Around 16% of Harvard undergrads will head to finance companies in 2015, down from 47% in 2007.

So Wall Street is getting smaller and dumber, and that’s actually a good thing for the economy? Weird.

How Analysts Can Avoid Being Overused (eFinancialCareers)

The investment banking power structure encourages seniors to take advantage of juniors. But that doesn’t mean you need to be one of the victims. A new experiment offers insight into making your associate less prone to overwork you.

Opportunity Knocking for Smaller Trading Firms (Bloomberg)

RBS, UBS, Deutsche Bank and most every other bulge bracket firm is either exiting or downsizing parts of their fixed income businesses. Despite the adverse market conditions, the exits have given smaller firms like Piper Jaffray, Janney Montgomery Scott and Stifel Financial incentive to double down in debt trading. They’ve been scooping up some of those who have left the banks.

RIP (Business Insider)

Former AIG CEO Bob Benmosche died last week, six months after announcing that he was diagnosed with terminal cancer. He was 70. Benmosche took over AIG after it was bailed out in 2009 and successfully turned the company around, paying back the Fed with interest.

Bridgewater Hiring More Brainiacs (Bloomberg)

The world’s largest and most secretive hedge fund is building a new unit to help create more sophisticated trading algorithms. Ray Dalio’s Bridgewater Associates is creating an artificial intelligence group that will consist of around a half a dozen staffers to start. It’s being led by former IBM star David Ferrucci, who developed the Watson computer.

Call It a Job Perk (Bloomberg)

A judge overseeing an insider trading trial was removed from the case after attorneys accused him of taking joy rides in the defendant’s $157,000 seized Porsche. He had it parked right in his building’s garage.

It Pays to Work in Private Equity (NY Times)

The three founders of private equity giant Carlyle Group took home more than $800 million in 2014, despite a mediocre fourth quarter. They amassed roughly $750 million in compensation in 2013.

CEO Training Camp (WSJ)

If you want to become a chief executive of a major financial firm, try putting in a couple decades at J.P. Morgan. Recent alums now head PNC Financial, Visa, First Data Corp. and Standard Chartered (despite the fact that guy got fired!). Oh, and Jamie Dimon’s former right hand man, Michael Cavanagh, was recently named co-president and co-chief operating officer of Carlyle Group.

Buzz Around the Office

Llama Drama (BarstoolSports)

If you missed last week’s epic llama drama, here’s a hilarious play-by-play of the chase. It was basically an hour of human beings trying and failing to form-tackle two escaped llamas in downtown Phoenix.

Quote of the Day: “I have no problem not listening to The Temptations, which is weird.” – Mitch Hedburg

AUTHORBeecher Tuttle US Editor
  • Ro
    Robert Arvanitis
    3 March 2015

    Wall St. is getting smaller and dumber. True, and indeed a good thing.

    But here's the real reason: The more that regulation grows in an economy, the greater the returns to beating the system, rather than cultivating the real economy.

    Everything that's true here about bankers, is true in equal measure and more for lawyers and accountants and life insurance agents of the estate-planning kind.

    The misalignment of incentives is caused at root by rules so dense and inherently contradictory that arbitrage opportunities necessarily arise.

    A simple example suffices. True financial innovation is having capital available as either debt or equity. That caters to the different risk appetites and time horizons of investors.

    Regulatory waste is taxing debt and equity differently (or even taxing capital twice, at corporate and investor levels). That creates "iatrogenic" innovation, such as schemes to convert equity returns to lower-taxed debt coupons for example.

    Don't blame the water for finding the hole in the bucket…

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