The Wall Street Brain Drain Is a Fake Crisis

By Daniel Indiviglio

Even if many top young minds pursuing finance was a real problem, we couldn't fix it if we tried

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When people speak about the joys that innovation can bring to an economy, they no longer mean to include financial innovation. Since the crisis of 2008, mathematical wizards designing complicated derivatives or other new securities have been seen as foils of economic prosperity, not heroes. So that so many college graduates from top universities flow into Wall Street after graduation has some people distressed. Why aren't they instead choosing other paths that would make the economy better off, like engineering or entrepreneurship? Even if this alternative reality would be preferable, we have no path to get there.

The Problem

This issue has been recognized before. It was paid some attention back in early 2010. Perhaps due to the Occupy Wall Street Protests, it has been resurrected this month. Last week, the New York Times DealBook ran an op-ed by a Yale English major who Wall Street was trying (unsuccessfully) to woo. This week, Amanda Terkel at the Huffington Post writes a sprawling condemnation of the well-trodden path from top school to finance. For the reasons described above, Terkel imagines how wonderful it would be if things were different:

But what if top students didn't go to Wall Street? What if, rather than creating complex financial products that collapsed the global economy, they were building bridges and creating new technologies instead?

As America struggles to create jobs and get back on its feet after the recession -- caused largely by the financial industry's recklessness -- the country is in desperate need of more entrepreneurs, inventors, scientists and other professionals, a complaint regularly made by non-Wall Street business leaders and members of both major political parties.

Let's let it slide for a moment that the assertion that Wall Street caused the recession is highly controversial and assume, just for argument's sake, that the economy would be better off if its top young minds weren't so concentrated in finance. Is this really as big of a problem as these articles claim?

How Big Is the Problem?

The DealBook post states that 25% of Yale graduates enter consulting or finance after graduation. At Harvard, 20% of the 2009 graduating class was seeking jobs in consulting and finance. These statistics have a problem: they don't specifically identify Wall Street. Instead, they broadly refer to consulting and finance.

Just to be clear, consulting is nothing like Wall Street. The only similarities that the two jobs hold is that you make pretty good money out of school in both and probably live in Manhattan. Consulting is actually a wonderful job for a graduate straight out of school that wants to learn about business. Several years of this experience can provide still-relatively young adults the skills to go to another business as a low-level manager or even start their own business.

The HuffPo article later qualifies its numbers slightly (and probably inadvertently) by stating that 18% of Cornell's engineering graduates go into financial services. Of course, that's just one of the school's seven undergraduate programs. If its percentage is that low -- and these students specialize in quantitative reasoning -- then you can bet that the overall percentage who ends up on Wall Street is in or around the single digits.

Why Top Grads Go to Wall Street: A First-Person Case Study

Although this "problem" may suddenly look far less alarming, a fair few of the nation's brightest minds clearly do end up on Wall Street. Why are these young people choosing a career in high finance? I happen to have great personal insight in answering this question. I graduated from a top school with an ambitious and diverse course of study and first worked as a consultant to financial companies. After doing that for a couple of years, I became an investment banker. Let me explain how I got there.

When I was in high school, I thought I wanted to be a patent lawyer. I was always good at math and liked technology but also enjoyed debate and writing. It seemed a natural fit. Then I took a pre-law class in college and realized that I had approximately zero passion for law. The idea of a career where I toiled through statutes and wrote about laws each day sounded like residing in an outer ring of hell. So as a college sophomore I was faced with a question that so many undergraduates ask themselves: "What am I going to do after college?"

At the time, I was a double major in physics and philosophy. Both subjects cultivated unparalleled problem solving skills. Physics provided the best quantitative training imaginable, while philosophy required a great deal of challenging reading and writing. But as good as they were, few companies were looking for Bachelor's degree candidates with degrees in either discipline.

But clearly, I needed a job after college. I had tens of thousands of dollars in student loans to pay back. My parents weren't wealthy enough to provide the capital for me to start my own business -- so entrepreneurship was out. I had no intention of getting a PhD, as the life of a professor never appealed me. I dabbled in computer programming but found it entirely too boring and tedious to make it a career.

I also toyed with becoming a high school physics teacher, but surely my parents didn't scrimp and save for decades to help pay for an expensive university education so that I could earn even less money than they did. My passion was writing, but everybody assured me that nobody could make a living as a writer.* Then it occurred to me that I was rather good at math, so maybe I should look into finance.

So the following year, I declared a third major in economics. That was the closest thing to finance that my arts and sciences college offered, and most banks wouldn't look at you without it on your resume. Compared to physics, it was a breeze. And the plan worked: I managed to get a job with one of the biggest financial services firms in the world shortly after graduation.

This doesn't necessarily encapsulate everyone's profile who goes from a good college to finance or consulting, but I suspect that my story is not totally unique. In reality, few jobs exist that 22-year-olds can get with no practical experience and a degree that doesn't provide some immediately useful skill set like engineering or architecture. Finance provides one of the few open doors to the job market for young people who are looking for an ambitious career that both justifies and helps to pay for the education they just endured.

This Isn't a Solvable Problem

So what can we do about this supposed problem? Very little.

These Motivations Can't be Changed

You can simply wave a wand and cut education costs to reduce college debt burdens. You also can't easily change societal norms to make teaching high school seem as sexy and prestigious as flying around the country advising Fortune 500 companies. You also can't force companies in other industries to hire and train young adults without relevant work experience. Finance and consulting are a natural fit for many smart graduates.

College Recruiting Is a Small Factor

Still, HuffPo sees a problem. The article notes that at top schools banks and consulting firms obtain preferential treatment at university career centers. These companies even donate money to college career centers to ensure that they're given a more-than-fair shot at their brightest grads.

While the idea that companies are paying universities for such preferential treatment certainly seems ethically questionable, stopping the practice might make all parties worse off. Without these contributions, colleges would need to charge even more for tuition to offer the same services. And by ensuring that their graduates get high-paying jobs in finance or consulting, colleges also help to ensure that their alumni will have lots of money to donate in future years. Moreover, without these firms having a prominent place in these career centers, graduates might end up in jobs that don't provide as much money or as useful skills -- particularly if these firms chose to recruit from other schools more open to their contributions instead.

But even if this practice is outlawed, I remain entirely unconvinced that anything would change. The HuffPo article recognizes this. It tells the story of one career office manager at a prominent engineering school who refuses to post investment banking or consulting jobs. His strategy doesn't much help:

But despite his office's best efforts, he said, the recruiters from finance and consulting firms find ways around him, either by going through the career service centers of other departments at the school -- where they can also donate money for extra access -- or to the faculty.

And besides -- if there are other great jobs that these students should be pushed towards, where are those firms? Even if finance and consulting firms are given better access, certainly other firms are not denied access. For example, Google has fairly deep pockets -- isn't it eagerly pursuing Stanford grads too? These graduates are not stupid people. They can make decisions for themselves. As long as all companies are given access to post job openings, students are free to decide which opportunities to pursue.

Regulate Banks Like Utilities

As a sort of bizarre solution to this problem, Terkel suggests that we should regulate banks like utilities. Perhaps if they didn't make so much money, then graduates wouldn't pursue jobs on Wall Street. Unfortunately, reality isn't so simple.

For starters, there are only about a dozen or so Wall Street banks that recruit heavily at colleges -- and that's not all of Wall Street. Regulating these handful of big banks as utilities would not make Wall Street poor, it would possibly cut salaries of employees at those couple of banks. Straight-out-of-college analyst jobs would still be highly coveted, however.

Analyst programs are generally only two or three years in duration. After that time, a handful of the best workers are promoted straight to investment banking associates. The rest either go to business school, move to a job in corporate America, or go to some other Wall Street firm. So that experience would remain invaluable. It isn't about the initial money for those few of years -- it's about the doors that working at a bank opens due to the experience you get on the job. And all of those other Wall Street jobs in hedge funds or private equity would still pay very, very well, since those firms would not be regulated as utilities.

Entrepreneurship Isn't for Everyone

The HuffPo article also laments that so few graduates become entrepreneurs and pursue non-financial innovation. Indeed, it would be totally great if every brilliant college gradate could just take their best idea and make a company out of it. But this just isn't realistic.

Entrepreneurship isn't for everyone. For starters, you must have a high tolerance for risk. A huge portion of start-ups fail. If that happens, then what? You've probably blown your opportunity to work for a bank or consulting firm by then, so you'll be faced with much worse options since you've got little practical work experience. And few opportunities before you will provide a big enough salary to allow you to pay back your student loans.

And that assumes you have lots of money laying around to begin with: starting a business is expensive. Unless you have wealthy parents or an idea so incredibly good that strangers are willing to throw lots of money at you, entrepreneurship is pretty much out of the question.

So really, finance and consulting are pretty good options for college graduates. They get the comfort of working for a company with a good benefits package and some job security. They probably make enough money to make a dent in their student loans. They also receive some training and cultivate skills that are transferable. And remember: many don't stay in consulting or finance. Some eventually do pursue entrepreneurship. Others find a place at a Main Street company. A few may even take a completely different route and end up in a completely different industry, like journalism.

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* As you can see, I have discovered that there are exceptions to every rule. But I remain doubtful that I would have had as much (or any) success in journalism if not for my banking/consulting experience.

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This article available online at:

http://www.theatlantic.com/business/archive/2011/11/the-wall-street-brain-drain-is-a-fake-crisis/248660/