I enjoyed Young Money so much that I couldn’t put it down, literally. I can’t remember ever reading a book in one day, especially one with 285 pages, but this Memorial Day (albeit a dreary, rainy day in SA) I devoured all of Young Money.
Kevin Roose in Young Money writes about eight college grads who, despite the 2007-2009 earthquake in the financial-services industry, decide to start their careers on Wall Street, primarily as investment bankers.
The subject of investment bankers has always been a mystery to me, ever since reading about Tom Wolfe’s Masters of the Universe in Bonfire of the Vanities. Among the mysteries to me was what do these masters do and how does someone get to be one. After reading this book, I finally have a basic understanding of these matters.
Investment banking contrasts with commercial/retail banking. While commercial banks deal with individuals and small businesses, investment banks deal with big corporations. An investment bank will provide whatever financial services a big corporation needs, such as loaning it capital, hedging against price changes in essential supplies, taking it public or private, or helping it buy or sell assets, divisions, or other companies.
To become a junior Master of the Universe for an investment bank, it helps immensely to attend an Ivy League school. According to Roose, the major investment banks on Wall Street recruit primarily at so-called Target Schools – the Ivies, plus Stanford, Duke, NYU, and U of Chicago. Each year, thousands of these kids following their junior year in college are brought to Wall Street as summer interns and, assuming they perform adequately, they are offered two-year employment contracts following their graduation.
The business model for young hires at investment banks is remarkably similar to that at major law firms. The young hires are paid lavishly, with young lawyers being paid as much as $150k a year and young bankers being paid $70k, plus an annual bonus ranging from $20k to $75k. But they all work like slaves, and following their apprenticeship, only a small fraction of them are retained by their company for careers. Two major differences, however, are (1) the best young lawyers stay with the major law firm, whereas the best young investment bankers are hired away by private equity/hedge funds, and (2) young lawyers actually bill clients for their prodigious hours of work, whereas young investment bankers merely provide unbilled documentation (Excel spreadsheets and book-length Pitch materials) to the senior investment bankers in selling various financial products to large corporations.
Although many of the kids have backgrounds in business, this is not required. All of the new employees start with a 10-12 training course that prepares even liberal-arts grads to performing the job.
The book’s eight profiled subjects are as follows:
- Arjun Khan was an Indian-American from Fordham who was hired by Citigroup into its Mergers & Acquisitions division. After his two-year gig, he joined a private-equity company in Brazil as an Associate.
- Chelsea Ball was from Georgetown and was hired by Bank of America Merrill Lynch into its public-finance division. After her two-year gig, she took a huge pay-cut to work for a small financial-services company and then recently launched her own start-up.
- Derrick Havens was from the U of Wisconsin and was hired by Wells Fargo’s Chicago office as an analyst before getting a job on Wall Street with a private-equity company, where he remains employed.
- Jeremy Miller-Reed was from Columbia and was hired by Goldman Sachs into its commodity division. He hated his job and left after his two-year gig to work for a Silicon Valley start-up.
- Samson White was from Princeton and was hired by Goldman Sachs into its mortgage division. He hated his job and left after his two-year gig to attempt a start-up technology company with a friend.
- Soo-Jin Park was from Wellesley and was hired by Deutsche Bank into its risk-management division, which is considered a middle-office position (like legal) because it doesn’t generate income. Deutsche didn’t provide a track for her to move to a front-office position, so she eventually left Deutsche and found a front-office position at a commercial bank (not an investment bank).
- J. P. Murray was a black from Temple who was hired by Credit Suisse as an analyst in its health-care investment-banking division. He was laid-off due to cut-backs prior to his two-year contract expiring.
- Ricardo Hernandez was an Hispanic from San Antonio who went to Cornell to become a doctor, but was lured by J. P. Morgan into its Mergers & Acquisitions division. He was eventually funneled into the company’s Latin American division, where he thrived. He is currently an Associate, which means he makes more, works less, and has a career path.
One of the major themes propounded by Roose is that investment banking is guilty of draining some of America’s best brains from doing something beneficial. I first heard this pitch many decades ago by Harvard president Derek Bok with respect to the legal profession, and Roose makes essentially the same point by classifying work as either creative or distributive:
- Creative work involves bringing something new into the world that adds to the total available to everyone.
- Distributive work only carries the possibility of beating out competitors and winning a bigger share of a fixed-size market.
Capitalism, unfortunately, provides outsize rewards to some distributive work (e.g., investment bankers, lawyers), and the best way to combat this financial incentive is to reduce the prestige associated with the work. While some smart people are called to certain jobs with high prestige despite low pay (e.g., teachers), Roose would like for more smart people to be called away from investment banking with high pay because of low prestige.
Maybe that works, maybe it doesn’t. The percentage of the Ivy grads going into investment banking since the crash of 2007-2009 has dropped, but we will have to wait to see whether this change is permanent.