Why investment banking?

Career Opportunities & Internships Investment Banking
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<p>I issue bonds for a living, so I am well acquainted with the rating agency process. The Rating Agencies did not have enough information to rate the CMO/CDO's, yet because they were looking at the big rating fees, they compromised their standards. That's why the all the rating agencies are in the process of revising their rating process.</p>

<p>In this instance, they did not have repayment/delinquent history with the sub-prime mortages being put into the pools. Their history with 5% sub-prime showed that a 5% level was ok (rest of the pool was able to cover the 5% regardless). When the IB's wanted to increase the amount to 20%, the rating agencies said they didn't have the info. So what did they do? The IB's gave them some history. That's like the fox guarding the hen house. They gave them limited history during a favorable period. The Rating Agencies should have refused to rate the transactions. If that had happened, then this whole sub-prime mortgage mess could have been contained to Fannie Mae and Freddie Mac being pressured to buy the sub-primes by Barney Frank. With the Rating Agency blessing, everyone else started buying the junk as investment grade bonds.</p>

<p>The police looked the other way and let the drug dealers take over the neighborhood.</p>

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<p>mhmm,</p>

<p>What does Madoff have to do with IB's? Madoff took advantage of SEC regulations and created a hedge fund. That has nothing to do with IB's.</p>

<p>If anything, blame the "advisors" (who are glorified salesmen, that couldn't even explain the concept of present value) for getting their clients into the Madoff funds. BTW: I also use to be an "advisor", so I know what advisors are like.</p>

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<p>madoff - nothing, but the anecdote illustrates how people are looking for others to blame, not themselves</p>

<p>rating agenicies -- 15 yrs ago, they all testified before the sec in support of tougher requirements and stronger regulation, which the sec did not choose to implement.</p>

<p>All I am going to say is dont be so eager to blame an industry for something that came out of many</p>

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<p>He's just expressing the common feeling across the country right now--although I suppose the profanity isn't required:</p>

<p><a href="http://www.nytimes.com/2009/02/03/business/03bankers.html?pagewanted=1%5B/url%5D"&gt;http://www.nytimes.com/2009/02/03/business/03bankers.html?pagewanted=1&lt;/a&gt;&lt;/p>

<p>As someone who lost $163,000 in the 2000-2001 downturn by investing money with a Wall Street brokerage firm--and therefore was smart enough to avoid it this time around (I actually have made money in the market last year and so far this year by doing my own investing and avoiding Wall Street advice), I do understand where he is coming from.</p>

<p>And it's not like the Wall Street community or the government wasn't warned that these things could destroy the world economy:</p>

<p>"The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while not latent, are potentially lethal."
—Warren Buffett, Letter to Berkshire Hathaway stockholders in 2002</p>

<p>The latest estimate is that there are 62 trillion dollars in derivatives/credit default swaps still in existence that have the potential to be worthless.</p>

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<p>Warren Buffet is a great example of how everyone is individually responsible for their own gains and losses. He made $8 billion last fall when the market crashed by buying great stocks in companies he trusted when they hit unprecedented lows. When the hysteria cleared after a week or so the good companies rebounded and like magic Buffet came through with an incredible victory over the incompetent heard of traders.</p>

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<p>"When the IB's wanted to increase the amount to 20%, the rating agencies said they didn't have the info. So what did they do? The IB's gave them some history. That's like the fox guarding the hen house. They gave them limited history during a favorable period. The Rating Agencies should have refused to rate the transactions."</p>

<p>That's not all. The origination bankers knew, or should have, that their methodology was spurious and could blow up. Their quant guys knew. The buy-side has credit analysts who should know enough about when they need to dig deeper than the rating agencies. A number of people in this food chain must have either looked the other way or completely overruled the internal credit people. Or made irresponsible business decisions.</p>

<p>I'm not sure why you blamed politicians, finance credit people do not look at government to assess for them how certain it is that their bonds will be repaid from the given revenue streams. The federal govenment does not conduct their due diligence, they do that themselves. In my experience. Whether politicians wanted more loans originated, this should not have been able to happen if these bond issues were not financable from a credit standpoint, politicians be darned. It's the street that dopped the ball here. seems to me. I don't know what exactly should happen to all the people involved in this chain, but something should. Their bonuses were extracted from our collective blood.</p>

<p>One problem has always been that the rating agencies, and the experts who give consulting/ feasibility reports, are not putting up their $$. They are being paid by originators for doing a deal, not by buy sde. Historically not that much has happened to them when they have been humongously wrong. But then, after a little while, everyone goes back to relying on them again. Nobody in the origination food chain gets paid to not do a deal.</p>

<p>And a lot of the buy side is not directly putting up their own $$, it is mostly Other People's Money. On whose behalf they accept lower standards of diligence than they would for themselves, if they were spending their own money.</p>

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<p>"One problem has always been that the rating agencies, and the experts who give consulting/ feasibility reports, are not putting up their $$. They are being paid by originators for doing a deal, not by buy sde"</p>

<p>that nails it.. but it's not going to change anytime soon :/</p>

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<p>
[quote]
I'm not sure why you blamed politicians, finance credit people do not look at government to assess for them how certain it is that their bonds will be repaid from the given revenue streams. The federal govenment does not conduct their due diligence, they do that themselves. In my experience. Whether politicians wanted more loans originated, this should not have been able to happen if these bond issues were not financable from a credit standpoint, politicians be darned.

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<p>The politicians put pressure on Fannie Mae and Freddie Mac to buy the sub-prime loans so non-credit worthy constituents of theirs could get loans. Hence Fannie Mae and Freddie Mac made a market in the loans, thus making them "financable". The more loans Fannie Mae and Feddie Mac bought, the less pressure the politicians put on them (or took off) and overlooked their other problems.</p>

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<p>ok, thanks, hadn't read up. These people should also pay.</p>

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<p>Reallocate a portion of the blame to the people who bought beyond their means and defaulted on their mortgages, to the banks who lowered their lending standards to allow people like such to buy homes, and to investors themselves. No one was complaining when they were making tons of money because of the IBankers. </p>

<p>I hate when people proclaim that the "bonuses" are SO unnecessary etc. On the top end, many of the executive's bonuses are definitely excessive. For many of the IBankers, however, the "bonus" accounts for more than half of their income and taking that away would be like slashing a Taco Bell employees by more than half. It is just a part of their income. True, bonuses for the executives at banks that received bailout money should be cut but bonuses in general are a part of IBanking. It is an incredibly competitive field and most of the people in it did something right for themselves to make the amount of money they do, so stop *****ing.</p>

<p>If anything I said is completely off-base, please correct me.</p>

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<p>
[quote]
Reallocate a portion of the blame to the people who bought beyond their means and defaulted on their mortgages, to the banks who lowered their lending standards to allow people like such to buy homes, and to investors themselves. No one was complaining when they were making tons of money because of the IBankers. </p>

<p>I hate when people proclaim that the "bonuses" are SO unnecessary etc. On the top end, many of the executive's bonuses are definitely excessive. For many of the IBankers, however, the "bonus" accounts for more than half of their income and taking that away would be like slashing a Taco Bell employees by more than half. It is just a part of their income. True, bonuses for the executives at banks that received bailout money should be cut but bonuses in general are a part of IBanking. It is an incredibly competitive field and most of the people in it did something right for themselves to make the amount of money they do, so stop *****ing.</p>

<p>If anything I said is completely off-base, please correct me.

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<p>Oh excuse me? Ibanking doesn't require ANY skills. All you need to do is know how to use f***ing Excel, and you can do ibanking. Ibanking is something ANYBODY can do. If you can do Excel, you can do Ibanking.</p>

<p>explain why a f<strong><em>ing ART HISTORY major or MEDIEVAL STUDIES major from an Ivy League school or Dook University can get jobs in ibanking? I doubt that Art History majors have any quantitative skills. And don't give me that crap about "Ohhhh, he got into Harvard!!! THat's sooooo hard!!!" Just b/c you got into f</em></strong>ing Harvard doesn't mean you have the right to be an entitled, spoiled p*ick who thinks that the world owes you everything on a silver platter. </p>

<p>I hope this economic crisis deepens so that you elitist p*icks would crash down to reality. IF the whole country goes down, I wouldn't mind as long as we bring down all these elitist ibankers with the rest of us.</p>

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<p>Father, you don't have a clue. There's lots negative you could say that's warranted. Yet what you write is ill informed and ignorant.</p>

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<p>Appearances may be misleading.</p>

<p>At entry level, there may be relatively few skills specifically required. However that does not mean nothing is needed to get such a job, or to be any good at it. The complete package of abilities & aptitudes required may in actuality be in excess of what is needed for most jobs in the world .</p>

<p>Entry level personnel do not require many specific skills because they will be trained on the job.</p>

<p>You can train a really smart person to handle some accounting principles, as they may be relevant to a particular job.</p>

<p>However, by contrast, you cannot train a particular accountant who doesn't have the requisite abilities to:
be smarter, have better interpersonal, leadership, presentation skills, be able to conceptualize/ see the big picture beyond some immediate calculations, write a brilliant and persuasive proposal, have a personality profile of "restrained audacity", be skilled at getting clients, and others, to trust you, be able to take command of a working group, etc.</p>

<p>There are liberal arts majors at the nation's most elite schools who have truly outstanding innate quantitative/ analytical abilities, they just prefer to focus their studies elsewhere. These people are well represented at the banks, and many of them have equal or greater ability to conceptualize quantitatively as people there with engineering-type backgrounds.</p>

<p>But beyond that, it is many of the personal abiltites referenced above that complement very high general overall intelligence in leading up to a great banker. Differences in potential and abilities in these areas may be less evident to outsiders looking at the hiring process from afar, but they are nonetheless real, deemed to be highly important, and are selected for.</p>

<p>As one moves up, specific skills are most definitely developed and required. You are not being hired at that point for your pretty face (mostly), you are being hired because you are better able to convince a major corporation that you have better ideas for their financing, and your firm is the best at handling the project. And then making good on those promises. There is a great deal of developed specific knowledge and skills that go into such a process, and the innate abilities needed to get hired at entry also continue to play a role.</p>

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<p>Yes, but the problem is that most of these "better ideas" were a bunch of worthless rubbish. Leveraging of 35 to 1 so that you can get 30% returns into perpetuity? Did anyone really think that this was going to go on forever? Markets go up and markets go down--and the same applies to housing when the prices are outrunning the average income of the population by a factor of 3. But none of the models took this into account. People with good accounting skills or IB skills should have known that these ideas were rubbish.</p>

<p>Yes, Wall Street made money by selling a bunch of "better ideas"--but when these ideas are just a bunch of junk, then people do have to wonder why a bonus should be paid. I think this is IamYourFather's point--although the articulation is a bit rough, I admit.</p>

<p>Look, I know that bonuses are normally about 70% of the total income for a year at IB firm--but they are called bonuses for a reason--which is that they are not guaranteed. I have no problem paying small bonuses to people who brought in money at these firms (like municipal bond traders or on small business loans), but to pay bonuses to mortgage traders or derivatives repackagers who lost more money in one year than some of these companies made in 20 years just defies the imagination. </p>

<p>Oh, and you need to know that the main reason that the general public is so mad is because many of their companies are going broke because of this manipulation. </p>

<p>FACT: Twenty thousand people a day are losing their jobs in this country--twenty thousand. There are more people out of work in the US than reside in the entire state of Pennsylvania. Now multiple that by a factor of 10 to get the effect across the entire world. For someone to complain that they didn't get their $100,000 bonus this year as the US taxpayer loans their bankrupt company another $40 billion seems a bit much for most of the public to take. There is a large contingent of the population who would say "Our companies didn't get a bailout, so I'm going to lose my job. Maybe we shouldn't bail your company out either, especially since yours is much more to blame than mine. Then you can go ahead and lose your job, too--and not only the bonus, but even the regular salary".</p>

<p>This is the prevaling opinion out there, and like it or not--Wall Street has to consider this when dealing with the general population and when talking about bonuses this year.</p>

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<p>My take on investment banking is it is what it is. Quite frankly I could care less on how they are involved in the current economic crisis. I don't share IAmYourFather's disdain for investment bankers nor do I share hmom's enthusiasm about the industry.
As they said in "Thank you for Smoking", everyone has a mortgage to pay and how you pay it is your business. If you like long work weeks, then that's your preference. However, it should be noted that in any field if you aspire to rise to top, you'll be working long weeks regardless and it's not applicable just to ibanking.
There are upsides and downsides to everything. Ibanking is a great way to make money for people who went to a target school and wanted to make a decent amount of money in as short of a time as possible with higher risk. Is it a great experience and do you learn a lot...

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As one moves up, specific skills are most definitely developed and required. You are not being hired at that point for your pretty face (mostly), you are being hired because you are better able to convince a major corporation that you have better ideas for their financing, and your firm is the best at handling the project. And then making good on those promises. There is a great deal of developed specific knowledge and skills that go into such a process, and the innate abilities needed to get hired at entry also continue to play a role.

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Absolutely and I don't disagree.</p>

<p>Personally, I went the pharmacy route and in the future I want to go to law school to get into patent law. The field is exclusive, pays really well, offers as many exit opportunities, but again like ibanking it has its upsides and it's downsides. It's less risky but the price for that reduction in risk is an increase in the length of formal schooling to enter into a field where it is much more exclusive due to the barriers of entry.</p>

<p>At the time, I felt it made perfect sense for me since pharmacy and law school would cost me nothing due to my service in the Army National Guard and I knew that realistically an ibanker's schedule would never accomodate a dual career in the military until retirement.</p>

<p>How lucrative a field is 10 years out depends on many things such as: your persona achievement, your willingness to sacrifice, and luck as well, etc.</p>

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<p>Many people, including me, are very uninformed about the U.S economy. Although it is important to realize one's ignorance, IamYourFather (and others in this thread). Watch the Daily Show (with Jon Stewart) with the CNBC segments and the Jim Cramer interview - that'll give you an easy, populist example of the uncertainties within the market.</p>

<p>But if you're a little more serious about finding out the mess we're in, read <a href="http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?pagewanted=all%5B/url%5D"&gt;http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?pagewanted=all&lt;/a> and then possibly 'Against the Gods: A story of Risk' by Peter Bernstein. That should give you a good enough synopsis about complex financial instruments. Also checkout Nassim Taleb and Nouriel Roubini, two people I've actually been able to meet recently. These guys have extremely deep knowledge about this stuff.</p>

<p>If you want to pin this crisis on one thing, however (which it is most certainly not), don't blame the I-Bankers. Although already infamous, look up mortgage-backed-securities and credit default swaps which pretty much interconnected every bank in the world and added unmeasurable risk. </p>

<p>I hope this helped.</p>

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<p>One,</p>

<p>What the article you cite leaves out is almost as important as what it includes.</p>

<p>It states that "early in 2007, Goldman Sachs realized it had a problem and started to take steps to limit their risks"--but it doesn't say what Goldman Sachs did. Let me fill you in on that. Goldman started buying credit default swaps as insurance for the mortgage loans they felt were risky.--particularly from AIG. What they should have been doing is to stop writing such loans--but no, instead, they just attempted to transfer the risk to some unknowing other entity that was part of the local Wall Street financial group.</p>

<p>So now what was the problem in 2008 that made people concerned that Goldman Sachs might go the way of Lehmann Brothers?--it was the concern that AIG might go out of business and thus default on these credit default swaps owed to Goldman.</p>

<p>What happens next--let's look at the timeline--Our Treasury secretary at the time Paulson--who used to be CEO of Goldman before he took the Treasury Secretary position demands that AIG replace their CEO with someone who can better run the company.</p>

<p>Who do they choose--gee, what a coincidence, they choose Edward Liddy, who just coincidentally had given up his directorship at Goldman Sachs just two weeks or so earlier.</p>

<p>What happens next--less than two weeks later, right after Liddy takes over, AIG gets a total of $80 billion in new funds--bringing the total for AIG to $150 billion in total. And what do you think Liddy had AIG do when it got the bailout money. Surprise, surprise--they paid off $37 billion in credit default swaps owed to the largest banks within the first two days after receiving the money--and the vast majority of this, coincidentally, went to Goldman Sachs.</p>

<p>As pointed out in the following Bloomberg article:</p>

<p>Goldman</a>, Merrill Collect Billions After Fed's AIG Bailout Loans - Bloomberg.com</p>

<p>"An AIG bankruptcy would have forced these counterparties to stand in line with other creditors and wait for perhaps years to be paid through the courts."</p>

<p>Of course, Hank Paulson wasn't going to let his own firm get into trouble. So, excuse me when I say that thieves that steal millions aren't the biggest crooks in this business--it's the ones stealing billions that should be first in line for the jail cell. Personally, I'd put Paulson in the cell right next door to Madoff.</p>

<p>Even Jim Cramer in his discussion on Thursday with John Stewart made the statement that he thought Paulson was a crook and needed to go to jail. Somehow, the fat cats seem to be able to protect their own houses, though.</p>

<p>So, I guess what I'm saying is, yes, VaR and its creators are partly to blame--but there is also blame based upon the actions of certain insiders that is completely unrelated to the models. For example, why couldn't Goldman Sachs stop bundling their mortgage-backed securities at all, instead of still bundling them, but then insuring them with AIG.</p>

<p>Also, if the models are bad--then it is up to the people using them to understand them--and not just blindly follow something they don't understand. Otherwise, maybe they aren't such "geniuses" as they think they are.</p>

<p>And I guess I don't understand your comment--don't blame the I-bankers. Weren't the I-bankers the ones using the VaR model, and weren't they the ones bundling the mortgages and selling them off as packages--and weren't they the ones creating other derivatives--and then flooding the market with credit default swaps needed to cover the toxic securities (items the insurance companies didn't understand). Don't you think this implies at least some complicity in the whole problem?</p>

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<p>do ibankers really use excel that much</p>

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<p>The US is a hierarchical cult of greed. Greed is good here. **** the little guy. Intellect and humility are incompatible here. Money and stuff fill our vacuums and make us happy. If you want an ethical society, move to Canada you ****ing commie.</p>

<p>[/American hat off]</p>

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do ibankers really use excel that much

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<p>the quants that support the ibankers do.</p>

<p>I remember when I first saw Supercalc and thought: Interesting. What would people use it for? I could program models in BASIC just as easily.</p>

<p>123, and now Excel, are ways that you can quickly build models. Yes there are specialty software for specific task, but there is nothing else right now the beats the modeling flexibility that spreadsheets provide.</p>