Wall Street may free the world’s brightest minds according to Daniel Roth. Having studied finance at McGill, I can’t be more optimistic about the prospects of seeing the best students working on non-financial innovations.
One question still puzzles me though. If Wall Street is down and capital isn’t flowing as it should, then which interesting and innovating startups will have enough financing to hire these best minds? Who else than governments have money to hire when investment banks and VCs don’t invest in risky projects? Unless govts start betting on startups…
Walking around Wall Street these days is like being trapped inside the videogame Resident Evil. There are the dead (Lehman Brothers and Bear Stearns), the undead (AIG, which survives only as long as the government needs it to), and the living scared (every suit who still has a job). Even with the occasional announcement of a good fiscal quarter from one of the banks, it’s hard to see anything but neutron-bomb-like decimation. The glory days of Wall Street’s dominance are done.
No one likes to see an industry die, but there is an upside: Often, smart cubicle refugees will seize the opportunity to pursue their entrepreneurial dreams, unleashing waves of innovation upon society. The death of Big Steel in the 1980s gave birth to nimbler, more competitive mini-mills. The decline of the Hollywood studio system in the ’60s gave us independent films. And the current demise of print media is giving us new sources of information, as journalists band together to reinvent news coverage. Wall Street’s turn is next, and we should all be praying for one thing: that many of those liberated innovators seek playing fields outside of finance.
A new flowering of creativity on Wall Street would be a very bad thing. We tend to think of innovation as always and everywhere desirable—it has brought us printing presses, artificial hearts, and shoes that mimic barefoot running. But Wall Street’s creations too often devolve from enriching us all to enriching a select few (while sending the rest of us ducking for cover). Bundling mortgages into securities made home ownership possible for many. Then bankers figured out how to go from “many” to “nearly everyone”; foreclosures exploded and the economy imploded. Credit default swaps initially made it easier for companies to finance growth—until they were leveraged, tweaked, and sold to excess, cratering the financial system. Not all Wall Street innovation is bad. But the worst of its labs areThree Mile Island-style dangerous.
Such inventions do produce fabulous paper wealth, however, attracting many of our sharpest math and science minds. At MIT and other top schools, investment banks recruited hard and early, skimming the cream from each graduating class. Until the mid-1990s, college grads with bachelor’s degrees could earn more in engineering than finance; that flipped in 2000, and it hasn’t come close to parity since. A survey of Harvard alumni found that 5 percent of men graduating in 1970 went to Wall Street; by 1990, the proportion was 15 percent. The same trend was also apparent among women.
But the big paychecks came with what economists call opportunity costs. Instead of spending their days searching for exotic trades, some of these Wall Street wizards could’ve been creating drugs, imagining software, or solving energy problems. Capital markets need geniuses, too, but it’s hard to cheer such a massive money-chase.
“If I invent some superb method for quantitative trading, it puts money in my clients’ pockets and my own pockets. Is society any better off?” asks Michael Coen, a former Wall Street quant who now teaches and researches artificial intelligence at the University of Wisconsin-Madison. “You could argue that having healthy capital markets helps society, but it’s not particularly satisfying. My work in machine learning gets incorporated into medical applications. Does that make a difference? I can say that, in some humble way, it does.” Plus, he adds, his research will no doubt be picked apart by folks looking for ways to apply it to finance. But Coen will never see the results of that analysis. “It doesn’t go in the other direction.”
He’s right: On Wall Street, work in the lab never leaves the building; after all, a trading strategy’s value disappears when it goes mainstream. An innovation might strengthen capital markets, but the possibility of that research benefiting another industry—the kind of cross-pollination that turned Velcro from a NASA oddity into a modern staple—is eliminated.
Now’s the chance for other sectors to get their hooks into the young and brilliant, while Wall Street is distracted and busy rebuilding. This past spring, MIT held a job fair and saw a surge from companies that had never set foot on campus before—newborn startups, nonprofits, hospitals, and government agencies. A few years ago, these promising players didn’t stand a chance against Lehman andGoldman Sachs. Today, their recruiting could mean that out of the financial industry’s decay will bloom a thousand innovations far away from Wall Street.
Senior writer Daniel Roth (email@example.com) wrote about why Wall Street needs transparency in issue 17.03.