Even among economists and finance gurus, there is disagreement about the financial rescue package that the US Congress approved last week. A very well argued viewpoint, which does not agree with the Treasury’s plan, is here. But the one thing everyone agrees upon is that Wall Street is going to change forever.
While legislators and companies look at what this means for the economy and for their businesses, most people, particularly students who are looking at a career in Finance, wonder about what this means for them. What follows in this post applies more to developed markets like the US and Western Europe. In developing markets like India, the same trends will manifest but I expect that the effect of the underlying economic growth on the financial sector can more than compensate for it.
In the near term, lasting at least two years but possibly more, employment in the Capital Markets will shrink. The accompanying chart is from a paper by Kemal Dervis. Those two lines in the chart are going to come down, quickly and painfully. The number of employees working in the Financial Sector is going to come down sharply. There will be a surfeit of experienced talent looking for jobs that aren’t there. That’s not good news for a graduate or MBA who’s looking to enter the workforce.
There are going to be changes that are more long-term as well. First, let’s look at the things that aren’t going to change.
In an earlier post The Worth of a Job, I had hypothesized that
If the person in a job can directly impact the company’s profit in a significant, measurable way that job will get paid more than someone in a job that doesn’t.
A finance job in the capital markets still fits this to a T. The advanced skills – in math and logic – are always going to be in short supply. So there’s no danger that finance whizzes entering the workforce won’t be able to make enough to move out of their parents’ house.
But some things are going to change. The focus is going to shift to fee-generating businesses – asset management, corporate advisory, trading on behalf of clients. Banks and publicly traded companies will not have anything close to the size of their own portfolios that they have today. Deleveraging and new regulations are going to take care of that.
Over the counter derivatives will shrink as banks and companies prefer exchange-traded instruments. That’s another big chunk of jobs that employed some of the smartest quants.
Outside of the banks it’ll be interesting to see how the less regulated hedge funds respond to these changes. Will they step into the vacuum and take on the mantle of financial innovation from yesterday’s investment banks? I doubt that. Leverage is certainly going to come down in hedge funds as well. And while they don’t have depositors, they do have pension funds as investors. I don’t think regulators will allow their current highly leveraged, black-box, lightly regulated status to continue. In this interconnected world of finance, size, by itself, determines the damage you can do if you fail. You don’t have to be a bank or a public company to hurt Main Street.
But the biggest change is going to be just the total number of jobs in capital markets. If the share of the EVA of the Financial sector comes down from the nearly 15% to say 10%, that could, all else remaining the same, bring down the number of jobs by a third. That kind of compression will seriously impact the intake of new employees into the industry.
So if you are thinking of a career in high finance, my advice will be to either get very, very good at it. Or keep your options open.