If I was ever asked how bad do you see it getting, I would have said ” It will get bad , real ugly ” . But never even in a nightmare scenario did the current level of wealth destruction ever enter the null hypothesis.
Wall Street has gotten smarter over the years in the way it hires its people. They have targeted recruitment programs from a diversified bunch of schools and countries as well as going from Undergrads all the way up to PhD students. Some of the “quant” skills were ( and still are ) used to run various statistical analysis and stress tests on market scenarios to build products that even “in the worst of times” would still be “safe”. But clearly we are now beyond a 5 sigma event scenario.
So how should the current batch of students reorient themselves? Firstly, they must understand, all is not lost.. Wall street will exist and will rebound as it has always done. Money can be made in Wall Street both in markets headed up and those headed down. It only feels better(responsible? Believable? Trustworthy?) in up markets. The wide variety of derivatives instruments allow people to hedge, and even profit in bear(headed down) markets. You just need to get your view and trend right. Its true for equity, fixed income, foreign exchange and for commodities.
Secondly there will be a huge demand for talent coming out of the debris: distressed mortgage, distressed credit, treasury asset liability management, foreign exchange and market risk management areas will boom. Back to basics will be the new mantra. Even corporates will hire more people for Foreign exchange risk management. Given the stresses in the markets, a lot of people from the industry will just retire and manage their own money creating room for the next generation to step in.
Thirdly, students should prepare themselves for careers beyond finance. Consulting and legal professions will boom although a lot of the consulting and legal work will be related to the finance industry. There will be a satellite industries developing just to service them as it did for Wall Street. Manufacturing will get back its glitter as it will occupy a slightly larger share of the world’s GDP.
The “end of the world scenario” never really plays out, although this time around it is getting pretty close. And after a sharp bear market (on an average 18 months of recession), we often see a prolonged bull market.
Where did the money go ? :
Firstly there was a lot of “paper wealth effect” created based on inflated housing and stocks. That has disappeared. Secondly real money has flown out of foreign markets into home markets. As a country that depended on capital flows to balance the trade deficit it has gotten impacted. Every country will have to lead in both fiscal prudence ( spend what you earn) as well as prudence on account of trade / capital ( import as much as you can export).
What is your view on a Career in the financial sector and timing ? :
The financial sector continues to require massive brainpower and also enjoys consistently high operating margins. However it is also a cyclical industry. If you have a 20+ year view to one’s career (and that is difficult to have) one will come all right. But, it is also a very meritocratic industry and the talented most often come out at the top.
In terms of timing: campus students’ demand for a particular area is often a leading indicator of a bubble about to burst. 1999-2000 it was almost impossible to lure students into anything but internet / technology startups. The same was holding true in 2006-2007 when demand was mainly in “structured credit”.
So, this time around, if one does get into an area that is worst affected it may not be a bad choice.
What will be the timing of slowdown and how long it will take to reverse? :
Average recessions last about 18 months in the US. This time it could be deeper. But it always looks as if there is no light at the end of the tunnel, and there always is.
What do you expect to be the effect on the Indian economy ? :
While India has seen benefits of the ” flatter world”, this time around it will be impacted. Any economy that has relied on foreign capital or some form of overleveraging will see its after effects. Foreign repatriation has already seen its currency impacted. Deleveraging in financial firms will impact cost of funds for corporates and that will impact overall GDP growth. The Indian consumer sector has also shown signs of leveraging up through housing / car/ personal loans that will haunt India for the next few yrs as asset prices deflate both for real estate and the stock market.
But the deflation of the bubble may be good for India in the long run as India has set itself as a cost cutter in the services sector. More services may be outsourced to India as long as India keeps up its relative wage competitiveness.
Is there trimming going on globally? :
Yes, across our industry there is a slimming exercise going on : in asset prices, business sizes , risk appetite , as well as headcount. But these phenomenon do not last long. Human nature is typically to try to grow, and that will come back soon.
Is there a difference in hiring from IITs vs.. US universities ? :
Personally I don’t differentiate. One always looks at the best athlete with the best fit.
Ranodeb Roy is the Head of Morgan Stanley, Asia, Fixed Income Division. He is also the founder of Utsarga Charity which is involved in charitable activities.