Good Intentions and Unintended Consequences of Finance Jobs

There are a number of momentous changes going on in the finance industry and job losses and job changes are part of the results.

  • Driving Forces: We can basically summarize the main drivers as “technology” and “regulation”.
  • Technology: It isn’t something that is forced on the market, it is opportunistic and it tends to make things better, whether this means lower cost (more efficient markets), faster or more choices.
  • Regulation: It’s just the opposite. It almost always adds to costs (sometimes substantially) and it tends to limit choices and be replete with unintended consequences.

Technology

In terms of technology, there are algorithm-based trading strategies, which make use of what is referred to as “Big Data” and, as a result, fewer human traders are needed. There are also “robo-advisors” to help investors make investment decisions – so fewer investment advisors and client-side brokers are needed.

On the flip side, technology is creating new jobs and some of these are particularly good jobs – for example, Google hired former Morgan Stanley Chief Financial Officer Ruth Porat as its new CFO. When we look at young Millennial lifestyle type jobs, they are epitomized by the casualness of Silicon Valley tech companies.

Good Intentions and Unintended Consequences of Finance Jobs

Now we find that it is not only young technology-focused people who are being sought after by Silicon Valley but seasoned finance professionals. News reports state that Porat’s last salary at Morgan Stanley was in the range of $8-12 million and that her first year pay package at Google will be in the range $30-40 million.

An example of another Wall Street 2015 transplant to Silicon Valley is Anthony Noto, a former top Goldman Sachs banker who left Wall Street to work for Twitter – he was given a modest $250,000 salary, but his pay package also included restricted stock, which was recently worth roughly $75 million, in addition to the ability to make a one-time stock option purchase.

Other news reports are less positive with both New York and London reporting job losses in the finance sector (according to a July 2015 article in Crain’s New York Business, back in the 1980s, 34% of all jobs in the securities industry were located in the city. That figure has since dropped nearly by half, to just under 19%).

And, while regulatory and compliance officers and staff are increasing (see “Regulation” below), other types of back office jobs are being reduced, with most global banks reporting thousands of job cuts. HSBC for example recently announced up to 25,000 jobs to be cut globally, which is almost the same number forecast by Barclays, which is forecasting 30,000 job cuts by 2017, with most of these jobs in middle and back office positions.

Regulation

This is where there the law of unintended consequences was highlighted in early August by ex-Fed Chairman Alan Greenspan on the Surveillance show on Bloomberg. In the early part of the show, Greenspan was warning about the presence of a “bond market bubble”. For more, also read the article in the Business Insider, which basically repeats what was talked about live on Bloomberg.

Later in the show, BlackRock Managing Director Jeffrey Rosenberg came on to fill in some gaps. He pointed out the untoward confluence of ‘well-intended’ Dodd-Frank regulation and the particular nature of the bond market versus the equity market. His comments reinforced what Greenspan had said earlier.

The key issue here is that as Dodd-Frank tries to reduce bank risk taking, it is also removing – or, let’s just say, very significantly reducing – that part of the bond market that acts as a natural shock absorber, which was and used-to- be the bank bond trading desks.

As regulation drives banks to close down or shutter much of their bond trading activity, with the loss of many bond trading jobs, there is no current force to fill the vacuum. Hedge funds won’t be able to do it.

This is the nature of a great deal of politically driven legislation. It creates enormous potential risks. In terms of bond trading, Tom Keene asked Rosenberg to highlight the differences between the bond market and that for stocks.

Rosenberg pointed out that ‘one share of stock is like every other share of stock for a given company’. The same is not true of bonds. Every bond issue is unique and different. Thus, it takes more knowledge and skill to trade bonds and these have traditionally been done on a more ‘person-to-person’ (i.e. trader-to-trader) basis.

With banks being regulated out of the bond trading business, there is really no entity filling the gap; and, as Greenspan warns, when everyone wants to head to the exits and sell bonds, who will be there as buyers? The banks (and their traders) who used to be the shock absorbers, they’re gone.

One last caveat that rather affirms the mindless ignorance of regulators can be seen in Europe and Basel II and III. Again, well meaning, what could be better than having banks in Europe also take on less risk. So, what is the least risky asset? Well, of course sovereign debt!

To make a long story short, it was only in May 2015 (oh yes, Tsipras and Syriza came into office a few months earlier and we’d already had a Greek debt write down in 2012) that Danish bank regulatory authorities finally admitted Greece’s junk-rated bonds weren’t as safe as its own AAA bonds.

For more on Denmark’s earlier attempt to deal with global bank regulators and the Basel III rule that gives all government bonds a risk-free status, see “Greek Debt Downgraded in Denmark as Banks Set to Expose Risk[1].

A Positive Response to Regulation

In the old sayings of “you win some, you lose some”, it couldn’t be more true of finance. While banks are being held back by regulation and losing jobs, other companies like Lending Tree and other online lending platforms are being created and supported by our venture and technology friends from Silicon Valley. They also have a term for all of this new innovation in finance – “fintech”.

(2) As I’ve noted in an earlier blog, “fintech” has a bright future. “Investment Do’s and Don’ts

(1) Greek Debt Downgraded in Denmark as Banks Freed to Expose Risks 

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