By Kevin Hassett
Wall St. that survived wars, depressions, bank panics & terrorist attacks is dead, says Kevin Hassett.
For two centuries, Wall Street survived wars, depressions, bank panics and terrorist attacks. Now Wall Street as we know it is dead. Gone.
When a healthy and thriving person dies suddenly, a medical examiner may talk to family and friends to see if the deceased had recently changed behaviour in some way.
Wall Street did change radically in recent years in one notable way.
Twenty or 30 years ago, it was common for the best and the brightest to be doctors or engineers. By the 2000s, they wanted to be investment bankers. When Wall Street was run by people randomly selected from the population, it was able to survive everything. After the best and brightest took over, it died the first time real estate prices dropped 20 percent.
Are the two facts related? In other words, did Harvard kill Wall Street?
The suspect certainly had the opportunity. If you walked into any major Wall Street firm a year ago and randomly selected an employee, chances are that person would either be from an Ivy League school like Harvard University, or have an MBA, or both.
The statistics are striking. Back in the 1970s, it was typical for about five percent of Harvard graduates to work in the financial sector, according to a recent study by Harvard economists Claudia Goldin and Larry Katz. By the 1990s, that number was 15 percent. It probably climbed since then.
And the proportion of those with MBAs grew as well.
Economists Thomas Philippon of New York University and Ariell Reshef of the University of Virginia found that, in 1980, workers in finance earned about the same wages, on average, as workers in other sectors.
By 2005, financial sector workers earned 50 percent more than similar workers in other industries. Philippon and Reshef went on to explore what caused the surge in wages in the financial sector. They found one of the key reasons was the increasing reliance on highly educated workers with postgraduate degrees.
Their results accord with anecdotal evidence concerning the hiring practice of Wall Street firms. A 2008 report in Fortune said that Goldman Sachs hired about 300 MBAs in 2007 and that, last year, Merrill Lynch and Citigroup were planning to hire 160 and 235 MBAs, respectively. Is it just a coincidence that so many superstar minds arrived on Wall Street just as it died?
Perhaps not. Wall Street is gone because its firms did a terrible job assessing the risks of the positions they took. The models these firms used to evaluate risks failed. But having a failed model brings a firm down only if the firm collectively buys into the model.
To do that, the firm must be run by people who have a great deal of faith in their models, and a great deal of faith in themselves. That's where Ivy Leaguers and MBAs come in.
What do you get from an MBA? One recent study found that MBAs acquire an enormous amount of self-confidence during their graduate education. They learn to believe that they are the best and the brightest. This narcissism has a real career impact.
Psychologists at Ohio State University studied the behaviour of 153 MBA students, who were put in groups of four and asked to orchestrate a large financial transaction on behalf of an imaginary company.
The psychologists observed that the students who had the strongest narcissistic traits were most likely to emerge as leaders.
According to Amy Brunell, the lead author, the results of the study had large implications for real world settings, because "narcissistic leaders tend to have volatile and risky decision-making performance and can be ineffective and potentially destructive leaders."
Guys like John Thain (Harvard Business School, 1979) exemplify this behaviour when their sense of entitlement is so grand that they can spend a fortune renovating an office while their firm is going down in flames.
The consequences of Wall Street's reckless brilliance in many ways parallel modern day engineering disasters.
If you travel through Italy, you can't help but notice the many Roman bridges that still stretch across that nation's waterways.
How is it that the Romans could build bridges that would last thousands of years, while the ones we build today collapse after a few decades?
The answer is simple. Back then, they did not have the fancy computers required to calculate exactly how strong a bridge must be. So an architect made a bridge very, very strong. Today, engineers can calculate exactly how much steel they need to incorporate into a bridge to bear the expected load.
The result is, they are free to make them weaker. Another result is less wiggle room for design error.
Hence, modern bridges' predilection for collapsing. The same is true of the financial sector. Back when Wall Street was run by individuals without fancy degrees, they had a proper scepticism toward fancy models and managed their risks with a great deal more humility and caution.
Only when failed models became canon did catastrophe strike. Wall Street didn't die in spite of being run by our best and brightest.
It died because of that fact.
Kevin Hassett is a Bloomberg News columnist. The opinions expressed are his own.
Great article . Provides yuou with an idea abt how far arrogance and ignorance can take you..... Wall street is only place where men riding limousine go to take advice from men riding on subways. These ppl dont care abt long term growth....... greed is wide spread and the work culture is pathetic
There is nothing wrong with the education of a top class MBA program or the mentality it instills in MBA Graduates....I am one myself. What I also am, was, and always will be, is a very conservative, risk averse banker...my MBA did not teach me that, my first employer in Banking taught me that, in fact 6 months of Credit Risk & Market Risk practical training before I was sent out into the world of deal making.... Where Wall Street, London and other markets failed was that their young, highly ambitious MBA graduates where groomed to be Sales Man chasing fees, rather than Bankers' who are supposed to manage risk! MBA's did not kill Wall Street, Greed Did!
This article is written by guy that wrote in 1999, before the dotcom bubble burst: "the single most important fact about stocks at the dawn of the twenty-first century: They are cheap....If you are worried about missing the market's big move upward, you will discover that it is not too late. Stocks are now in the midst of a one-time-only rise to much higher groundâ€“to the neighborhood of 36,000 on the Dow Jones industrial average" THEY NEVER REACHED HALF THAT TO DATE!!!
as an mba holder, i think that the article is right, i always thaught that what i taught was ok but does not help a lot in real business exept for multinationals
This article does not cover the full truth about the subject. It can be one of many reasons. The main would be greed. It is a general fact that society, govt all play a big role in this downward turmoil. From my point of view real estate was exploited to such an extent that the revenue that was generated was huge and they sometimes over exposed their lending dur to greed and did not take precautionary measures. Its like the saying goes do not put all your eggs in one basket. They should be diversifing their funding schemes. Keeping the balance with other sectors of the economy is critical.
I believe we never required bright people from the Top Echelons of society, which is exactly what the Harvard's and other premium institutes targetted by commanding high fees and tailor made education for such segments. In a rapidly eveolving global economy the brightest from all segments and cultures need to be involved so that they understand the pulse of all and take their decisions accordingly. Finally Greed did it as also inequality and indifference for the poor!! God Bless The Poor and Needy Bright Students!!
I agree with Kosta. It wasnt MBA's that killed Wall Street it was Greed!! And it will happen again in another 15 years ..... people have very short-term memories.
Very well put Kosta, this is a problem of greed. I don't think it is fair to belittle the effort one has to put in to get a proper MBA. Hythem, I think you are losing yourself here. I myself am an MBA, but I take pride in my MBA, what I have learnt and what it has made me.
Greed and ego go hand in hand. Whenever there are young turks of business running amok without adult supervision this is what happens. The decade of the 90's was the real decade of greed and growth but for the wrong reasons. We experienced growth, not for the betterment of our society as a whole but rather for the betterment of self.
I am with Kosta here. It is always nice to find a scapegoat, and MBAs now make a nice one. truth is that they (we actually) just respond to market signals. it was the repeal of Glass-Steagall that created the conditions for Wall Street to become what it is, so we may question the wisdom of that act. Of course that would mean bringing to light a Government act, from the times of Bill Clinton, for those with little memories. And the bubble was fueled by the extremely low interest rates brought by the Fed to inflate economy after the dotcom bust. Finally, the people in Wall Street they just acted upon self-interest, well, like everybody else. There was a massive corporate governance failure in these companies. I have been reading about the perils of the compensation schemes since I did my own MBA (in 1999). You may want to call the shareholders of the banks on this one, and their boards So while, blaming a specific group may make for a good narrative, this story is as flawed as his previous one. And I think it is no coincidence the author was an economic advisor under the two administrations that I have mentioned... Can I smell some self-serving in writing this?