Why investment banking?

<p>I can think of a few people that are much more responsible for economic woes than investment bankers; most of them work for the government like Barney Frank who wanted to "roll the dice" on Fannie and Freddie and have them give a majority of loans their loans to people who would be denied them under normal circumstances. If anything investment bankers are good because they get investment and interest in promising/growing/emerging businesses.</p>

<p>


</p>

<p>quants support traders, not bankers</p>

<p>Openedskittles </p>

<p>The vast majority of the American public disagrees with your assessment. Take, for example, this recent opinion piece published at the Atlanta Constitution-Journal:</p>

<p>Income</a> ladder a tough climb for U.S. worker | ajc.com</p>

<p>Quoting from the article:
The knee-jerk impulse to excuse fat cats their misdeeds remains so strong that some conservative commentators have tried to blame the financial meltdown on working-class home buyers. Not a single mainstream economist agrees with that assessment.</p>

<p>Calcruzer...
It's sad to see that you and very few others are only voices of reason left in this board...</p>

<p>Interesting article, especially here on CC where we see many kids from modest backgrounds headed for the ivy league. We know that they reach out to low income, first generation kids as in the 80's they reached out to the Obamas as did the elite prep school he attended. </p>

<p>I grew up in a small lower middle class CA town and found my way to Wharton, a school no one in my home town had heard of. I sit on the board of an elite NYC prep school that has sent kids from poverty to ivies for decades.</p>

<p>So I'm a great believer that education does let folks take great leaps and believe the question is, why we are we in the US not raising education oriented kids to the extent people in far poorer countries are? Why do our K-12 schools not teach math well enough for us to produce the engineers we need among other things?</p>

<p>The international board is full of kids from Nepal, India and China raised in poverty who want Harvard. Can we blame lack of mobility here on fat cats?</p>

<p>"quants support traders, not bankers"</p>

<p>Most quants support traders
Some "quant" types support bankers though; not as many but some.</p>

<p>Possibly these days bankers are supporting traders, financially, but the profit center powers vary . {insert smiley-face}</p>

<p>Many people on the banking side develop and use financial models using spreadsheets.
These are quantititive activities, but in many cases require only a spreadsheet and low-level arithmetic ; functions more in line with the work of conventional business financial analysts, rather than what most would consider "quants".</p>

<p>
[quote]
Many people on the banking side develop and use financial models using spreadsheets.
These are quantititive activities, but in many cases require only a spreadsheet and low-level arithmetic ; functions more in line with the work of conventional business financial analysts, rather than what most would consider "quants".

[/quote]
</p>

<p>True, but some of the models require more than just financial analyst skills, especially when you get into structuring and analyzing mortgage pools. When I was in I-banking, we had about a 1 to 10 ratio between the people who really knew the numbers vs. the rest of the bankers. We handled the very complex deals. On one transaction, I produced a 3 inch thick book of numbers that had to be verified by an accounting firm for accuracy.</p>

<p>Agreed, that's why I said,
"Some "quant" types support bankers though; not as many but some."</p>

<p>You are referring to the "some".
I specifically had in mind the pooled loan types financings, and debt refinancings, in mortgages and munis when I made that comment. But I'm sure there's other stuff I don't know about too.</p>

<p>I guess I was trying to say we are a different type of quant. The vision I have of a quant that supports trading is a person that pours through data and does a lot of statistical analysis looking for aberrations, relationships between various securities, etc.</p>

<p>The type of quant that does debt and mezzanine fianancings, is one that primarily works with cashflows, and is knowledgeable about the rules, regulations, and law, on how the $'s flow, and modeling it. A much different set of skills.</p>

<p>There are undoubtedly people looking for aberrations, but most of the quant work I was exposed to were people valuing positions relating to options and derivatives. There is some squirrely thing being offered, or created, for purchase,and the question is how much should you pay for it. Or what is it worth, How can we hedge our exposure to it. How much risk does this position add to our book. Valuation, and value at risk. There may be statistical analysis involved, perhaps simulation, but certainly a detailed knowledge of options, derivatives and finance theory.</p>

<p>In fixed income the origination side is often most concerned with cash flows, modeling per indenture provisions, rating agency stress tests. While the buy side is often more focused on trade value, proper market pricing of a position, which may involve valuation of embedded options.</p>

<p>I agree that the required knowledge bases and skill sets can be different, for these various groups of people doing quant work of differing natures.</p>

<p>I'd like to respond to hmom5's post #45:</p>

<p>Hmom5, it may be true that the elite schools reach out to non-elite students in some cases, but to quote someone who recently sent me a private email:</p>

<p>40% of the class [at these elite schools are students] who are "hooked"... With 17% being athletes, 20% URMs, 10% legacies/development, even accounting for overlap there is at least 40% who are admitted with considerably lower standards [than the average]. </p>

<p>That leaves the remaining pool [of unhooked applicants--that is, those coming from a school without connections] to bring up the stats. Therefore, an unhooked candidate is likely to have (need) stats considerably above the median/average.</p>

<p>You may recognize the above quote, since you are the one who wrote it. So, yes it may be true that the "fat cats" from the business schools aren't all connected--but using your statistics, 60% are connected--and the other 40% are required to have much better qualifications in order to get admitted. </p>

<p>Look at the recent AIG bonuses--the person who got the largest one, Doug Poling, is the son of the former president of Ford Motor. He got his law and business degrees from top schools largely thanks to his connections. </p>

<p>Yes, it is possible for a small group to be the exceptions, but we all know that the politicians and top executives all get first shot at the prime admissions--whether it is one of Bush's daughters (Yale), Clinton's daughter (Stanford), the Gore's kids, or the children of the executives from Goldman Sachs, Exxon Mobil, or Trump International (Wharton and Georgetown).</p>

<p>Calcruzer, you are under the impression that all "hooked" kids have lower qualifications -- blatantly false.</p>

<p>I have to disagree that the 60% who are not hooked are connected. If fact, those who are connected are part of the 40% that are hooked--legacies and development. 60% of kids at most ivies are on aid and many full pays are far from wealthy.</p>

<p>And as any parent who sent their kids to elite private 'feeder' schools can tell you, it's a myth that top colleges seek out their grads. The large numbers that attend top colleges reflects legacies and recruited athletes more than anything else. There is a higher bar to get into an ivy if you're a wealthy non legacy. </p>

<p>And even legacies are rejected in large numbers these days at ivies and company. Over 70% of legacy applicants are rejected on average.</p>

<p>So yes, there's is no doubt politicians and entertainers can often get their kids in, but they make up a very small part of the student bodies.</p>

<p>PureAdvisory,</p>

<p>I don't mind people disagreeing with me and making valid points as hmom5 has done, but I do mind it when people try to quote me as saying something I never said.</p>

<p>The comment in my post above (and it was hmom5 that made it, not me) was that overall the non-hooked applicant pool will generally have higher qualifications than the hooked applicants. Of course, there will be odd exceptions within the hooked applicants (and undoubted there are some non-hooked applicants who have lower than average qualifications as well). But my post and the comment hmom5 made didn't deny that, so I would appreciate it if you would please not misquote me here.</p>

<p>Hmom,</p>

<p>I think you said it best in your two lines:</p>

<p>"The large numbers that attend top colleges reflects legacies and recruited athletes more than anything else. There is a higher bar to get into an ivy if you're a wealthy non legacy." </p>

<p>Okay--so if your parents went to the school you have a better chance than those who didn't--but of those others, the wealthy who send their kids to "elite" feeder schools do so to have the better chances, but you feel that the bar is higher for them. Possibly true--unfortunately, however, I don't know if there are any statistics to back up this contention. It would be interesting to see the numbers on this.</p>

<p>P.S. In the case of many unhooked applicants, "non-hooked" also means "unable to afford"--and many don't attend the elite schools, even if they are accepted, for financial reasons. The ability to attend on grant money has only recently been made available (like in the past 2 years).</p>

<p>Calcruzer, I don't suspect anyone publishes info on who gets into ivies from feeder schools. My evidence is anecdotal, but it's considerable. Because my 3 kids all fell into the non legacy applicant from elite high school group at their top choices, I made it my business to take a hard look over the eight years they applied from three different high schools. And I've looked at the scattergrams from private high schools all over the Country at this point.</p>

<p>The result isn't surprising. With colleges reaching out to low income students, URMs, first generation, the middle class, kids from 50 states and internationals, who are they cutting in this diversity effort? Quite simply, it's their historical core group.</p>

<p>The days of the head master calling HYP to let them know which boys they would be sending are over. Legacies make up 10-12% at ivies today, a fraction of what they did 30 years ago.</p>

<p>The rest of the hooked group are athletes (about 17%) and URMs (15-20%), not connected kids.</p>

<p>You can make the argument that the balance of the student body at elite schools tends to be a lot of wealthy kids and poor kids. This is by and large true because so many middle class can not afford their EFC's. And now the top colleges are addressing this by giving much better middle class financial aid. With kids at three elite colleges, It's also clear to me that there are many families making enormous sacrifices to have their children there.</p>

<p>So, in sum, lots of the arrogant guys on Wall Street were not born rich and the young employees are even less likely to have come from wealth. And as a Wharton grad and long timer on The Street, I've always believed my peers who came from more modest backgrounds as I did, did better and had more staying power. They were hungrier and more focused. Lots of the heirs I started out with fell out within a few years.</p>

<p>In my experience, it's quite easy to become arrogant and entitled overnight. When you get to the elite school, the message is clear from day one: you are the best and brightest and will go on to lead. It is almost an indoctrination. I felt this even more in my MBA program than my undergrad. So IMO, the monsters have often been created before they hit job one, and it has little to do with where they started.</p>

<p>
[quote]

In my experience, it's quite easy to become arrogant and entitled overnight. When you get to the elite school, the message is clear from day one: you are the best and brightest and will go on to lead. It is almost an indoctrination. I felt this even more in my MBA program than my undergrad. So IMO, the monsters have often been created before they hit job one, and it has little to do with where they started.

[/quote]

I almost took that 2nd sentence out of context with respect to the 1st sentence.
I agree that many elite schools send that message, and I feel it's often reflected in their students. They are indeed among the best and the brightest but not the only ones.
However, I only do not completely agree with the actual message they send out: you are the best and the brightest and will go on to lead. Being bright does not mean that one will go on to lead because being an exceptional leader takes more than just being bright. A great leader has experienced failure and defeat and has many sobering experiences. They don't come from protected and sheltered backgrounds. They are more than just numbers and letters.
And this is why I can see where you're coming from:

[quote]

who came from more modest backgrounds as I did, did better and had more staying power. They were hungrier and more focused.

[/quote]

Basically, these people were able to suck it up and kept on driving on.</p>

<p>I'm actually kind of surprised to hear people coming out of Penn, or Wharton undergrad, in the 70s developed those kind of impressions of themselves. Because, to be perfectly frank, these colleges were not that highly selective back then. The year I applied to colleges, the college book showed Penn CAS had recently accepted 43% of its applicants. Versus Columbia 34%, Cornell 36%. SAT medians at Penn were also lower. Wharton was probably yet less selective, since at the time business in was in disrepute.</p>

<p>Not knocking the schools, but at that time the student body,as a group, at Penn and at Wharton- though highly accomplished- was not necessarily the absolute epitome of "the best and the brightest", by objective standards, so its kind of surprising to read that they felt they were.</p>

<p>I guess that says something about what they teach there.</p>

<p>The Wharton undergrads who worked for me as analysts, later than this, didn't seem to exhibit any such tendencies at all though. To be honest, they were not the sharpest needles in that particular haystack, more like glorified accountants in temperament; the liberal arts grads there exhibited far more leadership tendencies. Just a small sample though. But evidently not all of them feel, rightly or wrongly, that they are budding masters of the universe.I worked with some who didn't, and weren't.</p>

<p>In our department, while I was there, we had many Wharton MBAs. But I can't recall any MBA hires there who'd attended Wharton undergrad. Frankly I don't think they thought, at the time, that most undergrad business majors were good enough. The best liberal arts majors were, on the whole, thought to be better. Back then. Though average capability levels have obviously changed since then.</p>

<p>Go figure, but even back then, Wharton was the most selective part of Penn. I recently listened to my son's freshmen welcome speech by the President of Dartmouth and was struck by how the 'best and brightest' and 'leaders of the future' keynote message sounded remarkably familiar to those I listened to 30 years ago.</p>

<p>
[quote]

Yes, I'm upset that my taxpayer's money is used to pay bonuses for Wall Street criminals who destroyed this economy.</p>

<p>Why should i pay taxes to support the crooks on wall Street who have ruined this economy?

[/quote]
</p>

<p>I wholeheartedly disagree with this statement. Unfortunately, our media has to pin the nail on some donkey, and the prevalent opinion out there is that "Wall Street" is to blame for our current economic environment.</p>

<p>However - if you actually understand what is going on and how the collapse began, you'll see that consumers (e.g. the average American consumer) leveraged the hell out of himself / herself and purchased a house that he / she most certainly could not afford. In turn, the ignorance (stupidity, greed, etc. - whatever you want to call it) of these consumers to take on more debt than they could handle (and subsequently, the home lenders that idiotically gave them these loans) is what started the financial mess. Had American consumers not purchased houses that they could not afford, more than likely, we would not have been in this mess.</p>

<p>Well, what role did the investment banks (or any other financial institution here - broadly speaking, Bank of America, Citi, Morgan Stanley, Lehman Brothers, Merrill Lynch, BSC etc.) play in this? I would argue that these banks were nothing more than financial intermediaries - repackaging and dealing to other institutions securities that should not have been issued in the first place. Sure, these institutions are to blame, but not for the collapse of the financial system. More broadly speaking, these institutions are to blame for the consumers, shareholders who have lost money (and thousands, if not millions of dollars) because these institutions not only wheeled and dealed instruments they some did not fully understand, but also because they took on enormous risk. But I guess one could also argue that that risk was implicitly priced into the market. If you think back to 06 and 07, one share of Goldman Sachs could be had for $200 (Morgan Stanley for $50+, BAC - $40+), and if you are a student of finance, one of the first things you are taught is that with reward comes risk. Investors were rewarded (handsomely, at that) for their appetite of risk.</p>

<p>So, to say that Wall Street "destroyed" the financial system, in my opinion, is not only a statement that has been pounded into the average American's mind (because there is no way that the media could blame you, the average American), but is also a very incorrect and premature statement to make. The largest financial institutions that encompass Wall Street were merely responsible for all of the equity lost in their stakeholders' investment, which again, is the risk you take in investing in a highly complex institution.</p>

<p>And also - to those who don't know, the taxpayer isn't "paying" for these Wall Street crooks. The "bailout" was probably misnamed - the Government LENT financial institutions money in the form of bridge loans, to repayable in the next several years (with interest, if I can recall correctly). So again, before consulting the media, I would check my facts before making a heinous statement that you are paying for Wall Street crooks' mistakes. The money they receive is simply a LOAN, which will be repaid in a number of years, if not in the next few months.</p>

<p>I have no qualifications at all to talk about this but here goes.</p>

<p>I think that the reason for the entire bust of the economy was not due to the investment banking divisions per say. The majority of the blame should be put on CEOs and the bank executive management for allowing millions of people loans that they couldn't afford. The investment bust was a result of the credit crunch and the burst of the credit bubble. </p>

<p>I think everyone just presumes if that economy is bad that I bankers are to blame.</p>