The End of Wall Street As They Knew It | Hacker News Reader

The End of Wall Street As They Knew It

nymag.com

120 pointscdwhite65 comments

“If you’re a smart Ph.D. from MIT, you’d never go to Wall Street now,” says a hedge-fund executive. “You’d go to Silicon Valley. There’s at least a prospect for a huge gain. You’d have the potential to be the next Mark Zuckerberg. It looks like he has a lot more fun.”

Best quote in that article, by far. I just gave up trying to fit that in a tweet.

Yes but problem seem to be that a surprising relative small number of academics start companies around the globe I hear.

In Denmark it's less than 5%.of those who start companies. I wonder what number is in the US.

Starting a company is about 1% interesting stuff, with the rest going to grunt work, marketing, meetings, etc. ad nauseum.

Staying within academia is up to about 25% interesting stuff, sometimes more, with the rest going to teaching / outreach / departmental involvement / begging for grant money. If you enjoy teaching, interesting stuff can be 40 or 50 percent, sometimes more.

If anything, the IP workflow for collaborations bridging the gap out of academia needs to be improved. Take the horror show that is the US patent system and convolve that with university bureaucracy - it's not pretty.

Don't get me started on that. Academics snub their noses at 'businesses', that's for slimy 'business people', academics don't stoop to that level. Maybe if it's called a 'spin off', and if they're guaranteed to receive a salary for a part time position for at least a few years. At the same time of course, that grant money needs to keep coming in! Those cheap alumni should donate more, with their fat paychecks, and of course the government should spend more on research! Just tax companies more, they don't do anything useful anyway!

(Yes I'm bitter, sometimes. And yes I know that there are exceptions. And things are changing - even if very slowly.)

heh

Yeah well I don't have any specific grief with academics, but it does strike me as ironic that those who are supposed to be the beacons also often seem to be the most risk averse.

I can of course only speak for Denmark and a little for the US (having worked there), but there doesn't seem to be any correlation (nor causation) between high academic merits and entrepreneurship.

Which I guess once you think hard about what entrepreneurship really is makes some sense.

It's about time. That's what should have happened immediately after the crash several years ago, but the bailouts stopped it.

This is one of the benefits Iceland's prime minister claimed came from letting their banks fail -- more physicists, programmers and engineers moving from finance into technology.

Hmm. What kind of industry does Iceland have that requires 'physicists, programmers and engineers'? With a population in the hundreds of thousands, smaller than even medium sized cities in most countries, how much opportunity is/was there for these people? It's not even big enough to sustain a serious university, let alone a real r&d environment. Using Iceland as an example for other countries is usually fallacious, because it's so unique.

if you like me believe that physical borders mean less and less, then I thinks it's easy to see why the parent commenter said what he said.

Well yes, they do mean less and less, but in the context of the quote, that's exactly what makes the argument moot. To be more concrete, Iceland didn't benefit from having bankers and quants in Reykjavik become programmers in Silicon Valley. Actually quite the contrary. His claim only makes (some) sense in a global, moral context - i.e. when one starts with the assumption that bankers don't add value, then defaulting meant getting rid of the bankers, hence a net positive. But pragmatically, from the point of what was better for Iceland, I don't get it.

Perhaps because the change in attitude benefit because some of those people will stay home and not go to SV.

In fact most people most probably wont go to SV.

The argument makes a lot of sense economically: patronage of banking vs resource reallocation.

This tells us, of course, that bankers didn't add (enough marginal) value. Which was probably true, given that they defaulted. Iceland profits from not calling with a shitty hand (i.e. bailing out stupid banks). No "bankers are evil" morality needed.

Presumably, there's whatever opportunity they make for themselves.

I'm an Australian. There's bugger all opportunities here, because there's no VC. There's no VC, because the domestic market is too small, and the nearest international trade partner worth speaking of is on the other side of the Pacific Ocean. Oh wait, there's also Japan, and now China and India, but they are kind of emerging, and there's cultural differences. (Note the sarcasm).

VC won't come to smaller markets until startups start proving that they can operate in a globalized environment, and they won't do that by sulking, hoping the government will give them all cushy subsidized finance jobs.

They smelt aluminium and generate electricity from geothermal sources. Because of abundant source of energy, Iceland is potential location for many power-intensive industries.

But not at such a scale that they can suport a lot of new profesional level jobs.

Yes there are not that many jobs in the Geothemal Energy that you can transition to - which is about the only physics/engineering Based industry that Iceland has.

Your assumptions are understandable, but let's have a closer look:

* What kind of industry does Iceland have that requires 'physicists, programmers and engineers'?

The same kind of industry that requires physicists, programmers, and engineers anywhere else: R&D, software engineering, tech sector in general. (See next answer.)

* With a population in the hundreds of thousands, smaller than even medium sized cities in most countries, how much opportunity is/was there for these people?

The population size doesn't define the size of the economy - the natural resources and infrastructure do. Iceland is a pretty large island that controls a huge swath of ocean around it that has valuable fisheries in it. Plus there's geothermal energy etc. etc., so the country is very rich.

* It's not even big enough to sustain a serious university, let alone a real r&d environment.

That's simply not true. Iceland has pretty significant research output in biology, genetics, computer science, geothermal and hydropower engineering, etc. etc.

* Using Iceland as an example for other countries is usually fallacious, because it's so unique.

:) That's certainly true. In a way. But people are people, nations are nations, good ideas are good ideas, and pitfalls are pitfalls.

> What kind of industry does Iceland have that requires 'physicists, programmers and engineers'?

Eve Online. No, really. It's Iceland's third-largest export. (See e.g. http://www.eurogamer.net/articles/2011-04-04-eve-online-real...)

Right, that confirms my point - if a niche MMORPG is the third-largest export, that means that opportunities in science and r&d are scarce.

What I meant is that the opportunities are at Eve Online. If you're the third-largest exporter, you do make up a large part of the employment market. Sure, it's a small market - but it's still a large chunk of that market.

And Eve is more than just a bunch of hackers - heck, they employ a lead economist. (http://www.scientificamerican.com/article.cfm?id=virtual-wor...)

Yes, I understand what you meant, but your example doesn't scale. OK so there is one (1) position for an economist at a game company. There were hundreds if not thousands of positions at banks before the collapse. How can this minister say that letting the banks fall over was good for employment, or at least that the people who had to go looking for other jobs could now go do more meaningful ones?

I wasn't "using Iceland as an example for other countries" or trying to imply that the Americans should have let their banks fail. I was simply relaying a quote which suggested that the expected result of declining pay on Wall street had also been observed in another country.

I'll believe it when I see it. There is an uproar because the cash portion of bonuses are being capped at "just" $125,000 a year. Presumably, that is in addition to the regular salary, and excluding stock bonuses, which now make up about 75% of bonuses. So a $500,000 a year combined cash and stock bonus will not be unheard of. That's a total compensation package of $600,000 - $700,000 a year.

YC founders probably have the highest chances of success as startup founders, given YCs connections and alumni network. What percentage of founders make over $600,000 a year in total compensation, once exits are added back in, and averaged over the years the founder works on the company? What percentage makes under $125,000 a year? What percentage of engineers that aren't founders or within the first five employees make over $300,000 a year? The money is in Silicon Valley, Google's 2011 net income was $299,874/employee [1], but the vast majority of engineers aren't going to be the ones to get it.

How many finance people are actually going to give up the higher pay, lower cost of living, shorter hours, and structure of Wall St for Silicon Valley? Have a bad year on Wall St, make a Silicon Valley engineering salary, have a bad year as a start-up founder, make nothing and go bankrupt.

[1] Goldman Sachs 2011 net income was $162,913 per employee. Average pay was $367,057. It's harder to get data on Google, but it looks like the mid-career median salary is $141,000.

From what I got, Wall St./NYC has a similar or higher cost of living and very insane hours even at large finance firms for at least for the first 5 years. 14 hour days are very common.

I just looked it up, and you are correct about the cost of living. Manhattan seems to be about 38% higher than San Francisco.

Cost of living in NYC is pretty insane. Housing is consistently high. Food prices are nuts ... think > $7 for a box of cereal. For taxes, you've got Federal tax, state tax, and city tax, plus some exciting new taxes like MTA taxes for the mismanaged transit authority you're already paying your fare to use. Want to own a car? Either park on the street for free where you'll need to move your car no fewer than three times a week due to street-cleaning, or you can get a parking garage for anywhere from $300/month to $550/month depending on the type of car you're trying to park. The list goes on and on.

It's an expensive place to live. The upside is that anytime you take a vacation elsewhere it feels like you're stealing because everything is so comparatively inexpensive.

$7 cereal? $550/month parking? Yes, if you're referring to the most chic organic cereal you can find at Whole Foods and you're parking a Bentley.

Alternatively, you can shop at C-Town or Costco and find any number of parking spots for $250/month. Zipcar is prevalent everywhere as well if you don't want the overhead.

Don't get me wrong, NYC is expensive, but you don't have to make it out to be more than it really is. If you don't make the money to live in a certain neighborhood, think about moving.

absolutely, you are so right. NY'ers are so spoiled and are used to overspending. "I like to take my girlfriend out to eat.. taxi here and there.." Please.. learn how to budget and spend wisely. Eat at home. Take the subway.

This strikes me as similar to the common explanation of why Whole Foods "appears" so expensive when apples-apples comparisons can show prices there to be similar to those of Safeway; yes, the apples cost the same, but Whole Foods gives way more prominence to the super-expensive rare varietal organic local apples that cost 3x as much.

Net result: whatever the absolute price comparisons say, it takes more mental effort to shop cost effectively at Whole Foods.

You're talking about Manhattan. NYC is a big place. A lot of people live in outer boroughs (and I don't mean Downtown Brooklyn), where it's a yes, one hour commute to work, but you can rent a house with a driveway, or find parking with absolutely no problem (street cleaning once a week). And if you live in Manhattan, you don't need a car anyway.

If you work in finance, then not living in Manhattan means you're not "serious" and will be passed over for promotions, etc.

Basically, high rollers are expected to live a high-roller lifestyle. If you display signs of frugality it means you're still thinking like a poor person.

Not that I disagree, but there's also the practical angle: if you spend 2 hours commuting every day, that's cutting into the hours you can show that you devote to work.

That's not true at all. I know plenty of people working in upper echelons of finance companies that live in outer boroughs, New Jersey, Long Island, Westchester, etc. I would actually say most are.

The east bay is also similarly cheaper.

Manhattan is very expensive, but the parking example is a bad one. Manhattan is a different point in the design space of cities than say Houston. You don't have a car on Manhattan, because the city is configured so you don't need one. There are lots of people who make $1m/year in Manhattan that take the subway, bus, or commuter rail to work (or walk!).

Food is also, on the whole, cheaper than in many large cities. You pay somewhat more for groceries, but can often get away paying a lot less for eating lunch/dinner out, because of the prevalence of cheap ethnic food options.

Housing of course blows all of those advantages away in terms of its impact on your budget.

I think it's time to dust off the pg essay on wealth. Wall Street pay skyrocketed because of measurement and leverage: basically, you can trace millions of dollars of revenue to the actions of a single individual with a high degree of certainty. Does that opportunity exist in Silicon Valley? Yes, it exists in spades. The engineers at issue are not as sophisticated as Wall Street employees about extracting that value or taking advantage of a very fluid employment market, but they also didn't get where they are by being stupid, and if you're not stupid and your weekly reports are routinely sounding like "Oh BTW I made us two million bucks" then people are going to start giving you whatever it is you care to get out of the relationship. There just doesn't seem to be any a priori reason to me why $120k is the correct price for competent engineering in a world where productivity directly associated with software is measurably exploding. (That gets no less true at $240k, $360k, or $1024k.)

I don't know if I'd pick early startup employees as the likely beneficiaries of this dynamic, though. Some will end up working for the next Google and end up rich as kings, but that has a poor median-case outcome for individual engineers since they don't get to "invest" working years in 100 companies in parallel. If you want measurement and leverage there's a fairly good case to be made for going to work for the current Google (or AmaBookSoftEtc) and just engineer your transfer onto the pointy bit of the spear.

This is indisputably a big part of why people on wall street get paid so much. It doesn't explain why the opportunity exists in the first place, but it does explain why the top players get so much money.

As long as we're careful not to associate "bringing in revenue" with "creating wealth", I'm in agreement. My big problem with wall street isn't that top players get money - that's fine by me. It's that they acquire wealth without creating it, and in many cases inflict real wealth destruction on the rest of the economy.

In general, I'd say that in a a good economic system, wealth acquisition correlates closely and positively with wealth creation. When it does, people tend to value and admire the wealthy. When the correlation becomes negative, well, you get the French revolution.

This is a big part of why wall street pr types try to frame this as a general "anger with the 1% issue" rather than as an "anger with wall street" issue (and even then, plenty of banking activity is highly beneficial to the economy). This is why I was so disappointed to see the "occupy wall street" movement become so diluted ("occupy the ports! occupy berkeley!). In the early days, we could turn to the wall street people and say "hey, this is occupy wall street, not occupy google. we aren't you, don't think you get to hide behind a productive industry that actually creates some value." Now? Well, I wouldn't be surprised by "occupy silicon valley".

Your comment has little basis in reality. The actual measurements of Wall Street productivity are that hedge fund managers, etc. add zero value at all; there is no correlation between performance one year and performance the next year (cite: Kahneman, Thinking Fast and Slow). The "best" hedge fund manager in the world has the same chance of ultra-poor performance next year as the "worst" hedge fund manager in the world.

In actuality Wall Street is well paid simply because the job involves truly gigantic streams of money passing by, and it is trivial to get very very rich by siphoning off a bit from each stream.

In a similar way, companies like Facebook et al. are "rich" in data, because it's just passing by and all they have to do is siphon it off as it goes by. This doesn't mean that e.g. Facebook's head developer is any more skilled at making data than anyone else is; it just means that due to the nature of the business he has easy access to as much of it as he wants.

If you want easy access to money, work for Wall Street, if you want easy access to personal data, work for social media, if you want easy access to food, work in a kitchen, and so on. Working in a kitchen and getting fat doesn't mean you're a better food-gatherer than anyone else; it means you work in a kitchen.

> The actual measurements of Wall Street productivity are that hedge fund managers, etc. add zero value at all;

There is of course a distinction between revenue and wealth. The folks at investment banks surely were bringing in a lot of revenue, on a consistent basis, over the last few decades. The traditional investment banking functions in M&A brought in consistent fees regardless of how well the new company ultimately did. Traders also brought in a lot of revenue without creating any wealth (trading is not quite zero sum, but the value-add case is much weaker than for traditional banking functions), by transferring wealth from people on the losing sides of bets. As someone notes in the article, the explosion of public (401k, pension) money in the system meant there were a lot of less-sophisticated people willing to take the other side on these bets.

The post you are responding to is just saying drones on Wall Street make more money than drones at Google.

The problem with the pointy part of spears, is that they are very small in relation to the whole. According to Google's 2011 10-K, 96% of their revenue is derived from Advertising income. So if you want to be in the pointy part of Google, you either have to work on the Adwords team, or be integrating Adwords profitably into some other product. I'd bet that's a small percentage of Googlers, overall.

You know what I find really interesting though, the overall similarity between the Goldman Sachs and Google numbers, except employee compensation. Google's Gross Profit (Total Revenue less Cost of Revenue) was $24.7B in 2011, and GS's was $24.5B. At the same time, Google had 32,467 employees to GS's 35,700. Yet, the Google net income was $9.7B compared to $4.4B on the GS side. The difference seems to be made up entirely by the difference in employee compensation.

I think that the real reason people on Wall St are substantially out-earning people in Silicon Valley, is that they are in it for the money. Working at Google is sexy. They'll give you a free lunch for $220,000 a year, and who doesn't want a free lunch. Plus there is a ball pit, and doors that don't function. And a mythos about changing the world through social networking. If one company on Wall St starts belt tightening, the top traders will jump ship in a heartbeat. It doesn't take too many big bonuses before you can trade profitably on your own, on your own time. Grab a few other traders with their own money, and pool the risk into your own fund. Hire a few front-office sales types, and bring in other peoples money. That's precisely why outsized bonuses exist in the first place. The best traders are going to make big gains no matter what, with your money, their money, or some other firms money. If they get big pay for big gains, then they'll stay. Better to get a slice of watermelon that a whole grape for the trader, and the firm picks up the bulk of the profit. If pay is even pretty close, how many people would realistically choose Wall St over Silicon Valley. The money is there, but it seems like Silicon Valley engineers are too sheepish to actually demand it, nobody wants to come off as being in it for the money. When people hear, "I really want this job because I'm passionate about changing the world with twitter posts, or Facebook timelines, or amazing time tracking software", they think, I don't have to pay this guy.

Except that with a startup you can fail. Employed in the finance industry you make money no matter what.

Exactly. I think Ph.D.s going to Wall St. has everything to do with risk aversion.

Risk aversion is certainly one factor, but another is that Wall St. (and local equivalents) offer some genuinely interesting and hard problems to play with and are generally pretty good about letting their smart people have pretty free reign to play with those problems.

I know among my mathematician friends finance has been a popular career avenue, not because of the money, but because finance was the only industry they felt genuinely respected mathematicians and was willing to hire mathematicians to work on mathematics.

The finance industry is up or out. So, no you are not employeed no matter what.

No, but if you are employed for n months, you get at least n*salary as revenue.

Why would a PhD not get paid at a startup?

Just not as much as they pay in finance, I suppose.

It depends, only a small number of PhD's get paid a lot of money in Finance. They work primarily for quant funds if they make a lot and more than likely work for risk management which pays much less.

That's extremely true.

I remember how the banks used bailout money to pay out bonuses. There was an uproar about it, and they scaled it back, but I remember the banks arguing that if they were going to survive these turbulent times, they'd need to keep the top talent, and that meant bonuses. There was that indignant letter to the nytimes from an AIG employee (salary + bonus around 700K) who was angry that people were angry about his bonus, since he had "nothing to do" with the people who ruined the company (his analogy was that it was like blaming the plumber when the electrician burns the house down).

I worked for a startup that tanked. Lots of people put a lot of their lives into it. Options were worthless (and I knew people who had worked for 7 years or more) The startup kind of made the last payroll. We got our regular paychecks, but they failed to pay out all of the vacation time. We found new jobs, and moved on with our lives.

Nice thing about high tech culture is that the experience (even the failure) made more more employable, not less. So in that sense, you can fail in the valley.

A Ph.D. with a huge backlog of student loans is probably the last person I would expect to see foregoing a regular salary for a large amount of risk and uncertainty.

In my version of that quote, I think it would make more sense for really talented, smart engineers to leave school, with or without a BS, and start a company.

Pay to get a science or math PhD? Nice one!

Seriously, you can get funding to do a PhD in science or math almost trivially.

This quote is actually pretty representative. I have some very close friends in finance and have heard that many people are quitting or planning on quitting to join the tech/startup sector for this very reason.

Interestingly, instead of immediately quitting some people are instead just slacking until they get fired and receive lucrative severance packages.

Of course, this is only for my finance friends with technical backgrounds. I haven't heard the same from non-technical people in finance.

I would love to see non-technical finance people branch out into the real economy. Where would they go? They would make excellent CPAs, but how many more CPAs do we need? The next logical jump would be to management, but a management does require some skills and usually a lot of domain knowledge.

Some would have to try their hand at the highly lucrative software industry. I think the consensus in wall street is that it would only take them a month or two and a couple software books to be leet programmers. I would love to see them try, and I wonder how well they would do.

Interestingly, instead of immediately quitting some people are instead just slacking until they get fired and receive lucrative severance packages.

If such are the habits they've cultivated in finance, they won't do very well at those tech startups they plan to join.

This article's a complete whitewash, of course, being about as pro-Wall Street as a monocle salesman.

Notorious leftist wingnut Matt Taibbi wrote a post about it: http://www.rollingstone.com/politics/blogs/taibblog/why-wall...

I don't think the original article was particularly pro-Wall Street. It was saying that Wall Street was changing, that it would shrink and there would be less money around.

It attributed most of this to the Dodd-Frank act _but_ it didn't say that this was entirely a bad thing, it didn't state that it would be the end of the United States.

If anything I would say the original article was vaguely anti-Wall Street, the quotes chosen for the article portray the bankers as being rich, conceited and of dubious value to society.

My reading of the rolling stone article conveyed fewer facts and a significantly greater proportion of opinion.

It's not that the NY Mag article was particularly pro-Wall Street. It's that it wasn't anti-Wall Street enough. The Wall Street types quoted in NY Mag blamed financial reform for their declining revenues, when (as Taibbi points out) it's actually the European crisis that's doing it.

Taibbi writes with a fairly angry tone, but he's got the facts to back up the bombast (and those facts are plentiful in his post).

Matt Taibbi's is the only person I've encountered who consistently writes something on this subject that resembles reality, and I consider myself to be very conservative.

The mainstream media's lack of coverage (or poor coverage at best) of this subject has been shameful.

Prediction: all of this supposed austerity on Wall Street will be very short lived.

I would not bet against your prediction. The political propaganda machine is on their side.

Here's an interesting response to this article: http://www.rollingstone.com/politics/blogs/taibblog/why-wall...

The deleverage of the banks caused by the new rules will not eliminate Wall Street risk taking. As the article states many of the top proprietary trading desks are already moving to Private Equity and Hedge Funds. This will only serve to hide the risk taking from the scrutiny of the public eye. Despite the recession there are billions of dollars looking for an above market return.

Through Private Equity and Hedge Funds Wall Street will find a way to meet this demand. It will simply adapt itself to the new rules, finding new ways to take new risks.

Greed will always find a way…

  "And as the world becomes deleveraged, money has been pouring out.
  In October 2011 alone, hedge funds saw $9 billion go out the door."

  "Over 1,000 funds have closed in the past year and a half."

I guess that means the "VC bubble" is only going to grow over the next few years, huh?

Just give me some interesting data to work with, and I would gladly come to work for any of these firms for $125K flat salary just to get into the place.

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