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Taking Sides: Do too many Brown graduates go into finance?

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Friday, February 15, 2013

Lattanzi-Silveus ’14: Yes

I’m not going to argue that you in particular should not take a job in the financial industry. Nor am I going to judge those who do. The banks are one of the few places hiring — in fact they are eagerly recruiting — and many of us do need to pay off student loans or have some source of revenue as soon as possible after college.

The question is not individual but structural. Why are so many of the people who are given the most educational resources being streamlined into banking and consulting? There are many problems much more pressing than a lack of complex financial instruments to make profits for banks. What about climate change? Or the lack of adequate education in countless communities both here and abroad? Or major diseases like AIDS or malaria that kill millions every year?

Banks are supposed to provide loans to businesses. They are supposed to make capital readily available — usually for large corporations. This action is certainly not what we need most desperately right now. Nor is it why finance and consulting companies are hiring 20 percent of Brown graduates. The reason banks need so many well-educated people is to help invent and use complicated financial instruments to cheat the system. In other words, the banks want you in order to make more money for the sake of making money.

Collateralized Debt Obligations, Credit Default Swaps and many other complex assets that banks trade are a large part of the financial sector’s activity. Not only are the bankers who trade those assets not helping society, but they are actually harming it, as the 2008 financial crisis showed all too clearly.

The prevalence of college graduates going into banking is one of the many examples of the messed-up priorities of the market. Banking pays well because banking and risky trading are very profitable. Meanwhile, there is little to no money in inventing sustainable sources of energy or cures for diseases primarily affecting poor people. And the government is actively cutting education jobs because of the financial crisis.

But this is not how it has to be. In response to the financial crisis of 1929, the size of U.S. banks was reduced as a result of curtailing their ability to do all of this risky trading. With a large popular movement, such a reduction could happen again. But this would only be a partial victory and one that would seem likely to eventually get repealed just as were the regulations of the mid-20th century.

Ultimately, the only way to fully do away with the misplaced priorities of the market is to create a radically different society — one based not on the market and short term profit but on fulfilling societal needs.

Luke Lattanzi-Silveus ’14 is a member of the International Socialist Organization and would love to be contacted at luke_lattanzi-silveus@brown.edu.

 

Dreschler ’15: No

I understand, in theory, why Brown students shy away from the financial services industry. Wall Street has a reputation for being cutthroat, ruthless and cold-blooded. Wall Street is seen as caring only about money and profit, without creating social value. It is also commonly blamed for bringing down the global economy through risky financial trickery during the financial crisis.

Regardless of whether the above-described reputation accurately depicts life on Wall Street, I propose that more students at Brown should seek employment in the financial services industry.

If, for argument’s sake, Wall Street is a place of money-hungry, careless investment bankers, then Brown students have the opportunity to change this culture. The financial services industry is an important ingredient in the global economy — as the 2008 meltdown driven by the financial crisis shows. If Brown students truly believe there exist problems on Wall Street, they should do what they do best — act to improve the industry in the image they think is most appropriate.

Wall Street does provide an important service, whether or not we believe the environment is the most conducive to quality. Many American and global companies rely on financial services to provide capital to fund new or existing projects or to perform risk-management services. Many endowments and pension plans, which allow students in universities to acquire better educations or the elderly to live comfortably in retirement, rely on Wall Street to manage portfolios.

Even the U.S. government relies on the financial services for much of its tax revenues. We might disagree with the way in which Wall Street is run, but it is ignorant to believe the services provides are not important for a functioning U.S. economy. As Brown students, we can change the environment on Wall Street and improve its ability to provide these services.

Even if this reputation turns out to be false or exaggerated, I believe many Brown students would thrive in the financial services. For the entrepreneurs among us, we can work to help new and growing companies find capital. For those who like working closely with colleagues to create social value, we can work with individuals or institutions to manage their portfolios and increase revenue. Many Brown students would find the problem-solving and team-building skills we have learned through higher education are well suited for the challenges faced by major banks today.

It is essentially a win-win situation regardless of the environment on Wall Street for Brown students to enter the financial services, where there exist any number of opportunities for them to do what they do best: effect change and improve the world.

Alex Drechsler ’15 will see you at the next Goldman Sachs recruitment event.  He can be reached at  alex_drechsler@gmail.com.

 

Lattanzi-Silveus’ Rebuttal:

Drechsler is correct in pointing out that finance and all of the problems that come with it are indispensable to a capitalist economy. But this is an argument that says we need a financial industry, not that there aren’t too many Brown students going into it.

The one argument that Drechsler does provide to address the topic is that more Brown students should go into the financial industry in order to change it. This is based on the rather odd idea that a few Brown students can simply walk in and change an institution that employs millions of people.

First off, there are simply not enough Brown students in existence to make a significant impact. Second, being a Brown student does not automatically make someone liberal. Those who enter the financial sector are usually those who either want or need to make money, not relatively wealthy idealists with something of a social conscience. And third, Brown students who go into the financial sector will still face the same pressures everyone else does. They will have bosses who make them do whatever it takes to make more money, including trading in risky assets. If they somehow happen to end up running the bank — in spite of the fact that they are not looking to make money for investors but are in fact on a crusade to make banks more ethical — they will have to adopt this same mentality. If they do not, then they will not make enough money to remain competitive with other banks and their banks will go under.

If you want to change the financial industry, you need to fight to limit its power and its ability to do all of the socially destructive trading that it does. This can only be done from the outside, through political action. But if you agree with me that there are much better pursuits we could be putting our minds to than lending money to multinationals, then the only way to no longer be sending our most educated minds into what is a very profitable industry is the end of capitalism.

 

Drechsler’s Rebuttal:

My colleague’s arguments are rooted in ignorance, inaccuracies and a straw man fallacy. My colleague argues investment banks are “supposed to provide loans to businesses,” which we don’t need now. This declaration understates the many services banks provide and the significance of these loans. Money from loans — and stocks — allow companies to invest in new projects, which create better products, new technologies and more jobs. Banks also manage the portfolios of individuals and institutions, such as pension funds or university endowments. They provide risk-management services. They underwrite mortgages to millions of Americans. Even if we believe these services can be improved, they cannot be disregarded — without them the global economy would collapse.

Even more absurd is my colleague’s fixation on the structured finance market. He reduces a bank’s need for students to the “use [of] complicated financial instruments to cheat the system.” This is a straw man argument considering collateralized debt obligations are a small part of the work of investment banks. Someone going into finance has a great chance of never dealing with a collateralized debt obligation. By September 2012, $30 billion of CDOs had been issued in that year.  At the time, the corporate debt market alone, which, as I mentioned above, is only one part of financial services, was valued at $2 trillion. Accordingly, CDOs represented only 1/66,666 of the entire corporate debt market. That’s not a typo. Now add to that the equities markets, wealth management services and commercial banking. I am not trying to justify or laud CDOs. I am simply pointing out there are many opportunities at investment banks that steer clear of them.

On top of that, it is important to note the ways in which bankers can address the world’s problems. Bankers help health care companies raise money to invest in new medicines. Energy companies raise money to invest in green energy. “[Providing] loans to businesses” may not seem as glamorous as running a green energy startup. But startup businesses are desperate for money — by helping these companies raise funds, you could take part in improving the future.

 

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3 Comments

  1. Banks crashed the economy, Drechsler! They crashed it! The Coburn-Levin report listed as one of the four major causes of the crash the bullshit RMBS and CDOs that Moody’s was giving perfect ratings to. Your description of them as “1/66,666 of the entire corporate debt market” is misleading and dead wrong. And you know as well as I do that it’s not like CDOs are some solitary landmine the aspiring banker can avoid. They’re emblematic of the whole culture.

    And you’re telling me half a million a year in Manhattan is less “glamorous” than getting paid next to nothing on a hopeless environmental crusade? Get down off your super weird cross, man.

  2. Alex Drechsler says:

    @c30502a99ea8828fd9d0dac9221be857:disqus, again I’m not arguing the merits of CDOs. Whether or not CDOs brought down the economy is irrelevant – to use it as an argument to not go into finance at all is misleading. Financial services is a huge and diverse industry – there are many many career options other than trading CDOs. Someone going into classic investment banking or wealth management will never once come into contact with a CDO – especially after the crisis.

  3. Future Consultant says:

    Luke’s conflation of finance and consulting shows little understanding of the consulting industry. Easy mistake to make, but I’m sure an editor at the BDH is going into consulting and should have caught that.

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