Critics of the US economy decry the process of 'financialization' in which exotic innovations created by engineers and physicists, but poorly understood by even their inventors, caused much of the financial crisis carnage. But the most pernicious effect of the stampede to Wall Street pay packages has been to turn potential entrepreneurs, scientists and teachers into 'wealth managers' whose job is to repackage assets created by their forebears and sell them to the highest bidder.
Previous civilizations saw similar phenomena as they peaked: the British, the Chinese and the French. The latter referred to this as the 'rentier' economy. Little was actually built during that period, but everything was for sale or rent by brokers living off the output of their more productive predecessors.
As the US and Europe contemplate the detritus of their over-leveraged economies, much anguished hand-wringing has been devoted to identifying and nurturing the magic elixir that will reignite growth. Reexamining employment incentives and alternatives for talented college grads might be a useful place to start. JL
Amanda Terkel reports in the Huffington Post:
For employers in need of fresh talent, there are few better places to go than the Stanford University career center, where intelligent, over-achieving, creative and ambitious students stop by on their way toward picking up a degree or three.
Access to these top recruits is extremely valuable, and Stanford, like many other top-tier colleges, sells it to the highest bidder.
The Career Development Center (CDC) is quite explicit about the process. Its website advertises an "Employer Partner Program" that gives participating companies "a premier position in regard to on-campus recruiting."
There are three levels of giving, each with various degrees of perks, such as use of conference rooms and prime spots at career fairs. There are two companies at the Silver level, 17 at the Gold level, and five at the Platinum level, according to a list the CDC provided to The Huffington Post.
All of the organizations at the top level, Platinum, are financial and consulting firms. Of the 19 other sponsors, more than half also fall into those categories.
Lance Choy, director of Stanford's CDC, insisted that the Employer Partner Program wasn't meant to give certain groups special access to Stanford's students. Rather, it was designed to provide order to a recruiting process that was already dominated by the financial sector.
"Through the partnership program, we are able to control the recruiting activities of some of these more aggressive companies," said Choy. "Before, without the partnership program, the banks were going to student clubs, they were getting students to email things out to them. It was quite chaotic. ... By controlling the number of [interview] rooms [companies are] able to have, we're able to limit their recruiting activities and provide some space for other folks."
The list is a snapshot of where America's best and brightest are going to work after graduation. Instead of enrolling in medical school or putting their engineering degrees to work designing or building things, these bright minds are headed for Wall Street -- and, like the MIT students who took Las Vegas, figuring out ways to bring down the house.
In 2007, an astonishing 47 percent of Harvard University seniors said they planned to go into finance or consulting, according to a survey by The Crimson. In 2009, after the financial crisis, that number fell to 20 percent, but it could just as easily go back up when the economy recovers and jobs are being created in that sector once again.
There hasn't always been a "brain drain" of America's best and brightest to Wall Street.
In 2009, Calvin Trillin wrote an op-ed in The New York Times about a conversation he had had with a man in a Manhattan bar, who pinpointed the reason for the economic recession.
"The financial system nearly collapsed," he said, "because smart guys had started working on Wall Street."
"Did you ever hear the word 'derivatives'? Do you think our guys could have invented, say, credit default swaps? Give me a break! They couldn't have done the math," continued the man, speaking about the intellectually middling types of people who used to go into finance.
Trillin's conversation, though anecdotal, plays out in data that shows the type of people becoming Wall Street bankers has indeed changed over the last decade or so -- and it doesn't appear that society is better off for it.
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.
Lee Jackson is a senior economics major at Stanford who edits a financial newsletter called The Opportune Time. He has interned on Wall Street and plans to work in finance after graduation, but admits the profession needs reform.
"I think the emphasis is more on making money and making a profit, and there's been less emphasis ... on what the greater societal implications of that are," he said, pointing to fields like law and medicine that focus on the needs of the client or patient and have outreach programs to help low-income individuals. During the debate over Wall Street reform, meanwhile, bank lobbyists fought a provision in the Dodd-Frank legislation that would require financial companies to operate in the best interests of their clients.
"Over the past few years in the mainstream American culture, the bad side of American finance has come out time and time again," he added. "But my fear is that the good side of finance and the side that can help people save for retirement, build their own wealth and be able to support themselves [will be lost]."
Yet without a cultural shift and reforms that rein in the financial industry's sky-high profits and salaries, a disproportionate number of the best and the brightest will continue to head to Wall Street.
"Our financial system remains out of whack in terms of regulation, compensation, and until our economy is stronger, it's not surprising that young people will be attracted to the place where the money and jobs are," Elizabeth Warren, U.S. Senate candidate and creator of the Consumer Financial Protection Bureau, told The Huffington Post. "In a sense … it's a demand problem, [as well as] the fact there is not enough demand in the rest of the economy. It's both problems."
Neil Shenai is working toward his Ph.D at the Johns Hopkins University School of Advanced International Studies. But before heading to graduate school, he worked on Wall Street, doing stints at Morgan Stanley and Citigroup after completing his undergraduate studies at Hopkins.
"I didn't particularly enjoy it," Shenai said. "I just felt like my skills were being put to poor use, basically trading in these financial weapons of mass destruction. Obviously the day-to-day stunk, but then there was also this weird sinking feeling that I was somehow involved in something that was detracting from the society in which I lived, and I hated that aspect of it even more than the hours."
Like so many other young people who end up on Wall Street, Shenai didn't go to college expecting to go into finance. He dreamt of becoming an academic, going to medical school or entering public service.
But two forces were working against him: peer pressure and aggressive recruiting by the financial industry, aided by his university.
"Everyone treated finance as this elite profession that smart people did after they graduated, especially people who aren't on another more structured path like medical school or law," he said. "It seemed like anybody who's just generically intelligent, skilled in the social sciences … the best of the best would go to Wall Street."
"There's subtle peer pressure that existed on campus. It definitely motivated me. I was a top student at Hopkins, and I expected to get financially rewarded for that," he added. "Wall Street recruited and played into the sense of, this is what the cool, smart kids are doing."
None of three of the largest recruiters agreed to speak for this piece. Goldman Sachs declined to comment, and inquiries to Morgan Stanley and JPMorgan Chase were not returned.
No one is arguing that all students should swear off going into finance or that Wall Street firms should be banned from recruiting on campuses. But too many students enter the financial sector not because it will allow them to make the most measurable contribution to society, but because they see the opportunity of a prestigious, disproportionately well-compensated job that will, in some cases, help them pay off a daunting pile of student loans.
That was certainly the motivation for a 2008 graduate from New York University who is now working in the marketing department of a financial services company in New York City.
The young man, who requested anonymity in order to speak openly, graduated with more than $100,000 in debt. He has now whittled that amount down to $80,000.
He does not particularly enjoy his job and he's actively searching for other opportunities. He says the management team at his company isn't helping him grow, and many of his daily tasks are "monotonous" and focused on "damage control."
He wants to make sure his next step is the right one before leaving. But part of the reason he's stayed for three years is because the job compensates well. Between his salary and annual bonus, he's making about $85,000 a year.
"Had I not had the same financial situation, I may have left earlier or sought other opportunities earlier, or even potentially taken jobs that weren't quite as well-compensated, just to have a better happiness factor and work-life balance," he said. "But unfortunately, I do have to keep the job because I have to pay these bills."
Members of the class of 2010 who took out student loans owed an average of $25,250 when they graduated, 5 percent more than the class before them. Approximately two-thirds of the class of 2010 borrowed for college. The amount continues to climb if students take out loans for graduate school.
Students without loans to pay back, meanwhile, can feel the "golden handcuffs" of a lucrative job. Living in New York City is expensive. There is the high price of rent, private school for the kids, parking for the new car, eating out at nice restaurants. Even people in their early 20s quickly begin to acclimate to their new lifestyle and find it difficult to revert back to a more modest one.
It can therefore be difficult to resist the high salaries of Wall Street. The average salary of a Goldman Sachs employee is $430,700. At Morgan Stanley, it's $256,596.
Last year, the Haas School of Business at the University of California, Berkeley put out a press release boasting that a group of its students working toward graduate degrees in financial engineering were interning at places such as JPMorgan Chase, Goldman Sachs and BNP Paribas. Their starting salaries were, on average, $7,839 a month. That works out to roughly $94,000 per year. And they were just interns.
"The real reason why people work on Wall Street -- it's not rocket science -- is because people follow incentives," said Shenai. "The main incentive is just huge compensation."
Jane Ammons is the chair of the School of Industrial and Systems Engineering at the Georgia Institute of Technology. She told The Huffington Post that the majority of their 1,300 undergraduate students go to work for consulting or financial firms when they graduate.
She admitted that students are attracted to these fields because they pay well, but she pointed to a supply-and-demand situation.
"Twenty years ago, I think if you asked that question about what is the most popular direction for students to head, you would hear answers like manufacturing, logistics and those kinds of things," she said. "As manufacturing jobs have headed offshore, students have taken some of those same quantitative skills and headed other directions and are doing well with it."
The 32 U.S. college students who win Rhodes Scholarships to Oxford University each year arguably represent America's best and brightest. They have gone on to excel in nearly every field, becoming presidents, scientists, senators, lawyers, actors and scholars.
But in recent years, they, like many other young people, have been heading to Wall Street.
"Only three American Rhodes scholars in the 1970s (out of 320) went directly into business from Oxford; by the late 1980s the number grew to that many in a year. Recently, more than twice as many went into business in just one year than did in the entire 1970s," wrote Elliot Gerson, American secretary of the Rhodes Trust, in a 2009 Washington Post op-ed, pointing out that the trend coincided with "great increases in occupational earnings differentials, which have continued to grow, seemingly exponentially."
Cornell University sends 18 percent of its engineering graduates into financial services, according to data provided by the school's Engineering Co-op and Career Services. JPMorgan is the largest employer of engineering graduates, coming in 10th place out of all employers.
Beverly Hamilton-Chandler, director of Princeton's Office of Career Services, told The Huffington Post that over the past three years, "the top industries for full-time employment" for Princeton graduates have been finance, services/consulting and the nonprofit sector.
"The financial industry has had a long-established history of recruiting at Princeton and other Ivies, and because firms in this industry generally have larger recruiting budgets at their disposal, their recruitment efforts tend to be more visible to students," she said, stressing that their office strives to maintain relationships with a wide range of employers from all fields.
During a Sept. 21 Senate Judiciary subcommittee hearing about Google's competition policy, Sen. Charles Schumer (D-N.Y.) said, "JPMorgan, I've been told, has more computer programmers than companies like Google or Microsoft."
Expect those numbers to go up. On Aug. 31, JPMorgan announced that it was committed to doubling the number of engineering interns it hires in 2012 and would be joining the President's Council on Jobs and Competitiveness Initiative, which aims to add 10,000 engineering graduates each year.
"JPMorgan Chase has been committed to hiring engineering majors into its technology and operations programs in the U.S., steadily increasing the number of engineering interns it hires each year since 2009," boasted the firm.
Teryn Norris and Eli Pollack, both seniors at Stanford University, wrote an op-ed in The Stanford Daily on Oct. 11, calling out the academic community for not doing enough to stop the Wall Street recruiting machine.
"America's university system is one of our most prized national assets, benefiting from taxpayer support and providing invaluable public goods in the way of knowledge and human capital," they wrote. "It should stop serving as the vocational training center for reckless banks and hedge funds."
"We know that many of these banks and these institutions contribute to the Career Development Center here on campus in order to gain preferred access to recruitment," Norris told The Huffington Post in a follow-up interview.
"Even if the career development centers were playing only a passive role in the recruitment process, by playing a passive role, they're essentially allowing these banks to dominate the recruitment process, simply because these banks have the most aggressive and sophisticated recruitment system of any sector of the economy," he added.
Choy told the Los Angeles Times that Stanford's CDC was trying to use money from the partnership program to highlight other professions.
The Huffington Post contacted a handful of other top colleges and universities, most of which did not respond to requests for information about their corporate donation policies. Representatives from Brown University and Princeton University did respond to inquiries; both said their career services offices do not take donations from corporations.
The students and faculty from several top schools who spoke with HuffPost agreed that the finance and consulting fields have built up very aggressive recruiting mechanisms that students find hard to resist -- and to avoid.
An employee at the career services office of a top engineering school, who requested anonymity because he was not authorized to speak to the press, said his office doesn't even post investment banking or consulting positions in an attempt to encourage more students to go into other fields.
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.
"These companies are going directly to the professors to get students' names and contact information to target them that way," he said. "And they're passing on those jobs to students."
"Part of the reason our office takes the stance we do is because we communicate with [students] after they go out in the field, so we have heard back from engineers who have gone into those fields," he continued. "They end up -- because they don't have the experience -- in consulting firms doing grunt work and gofer work. They're not being challenged. So they regret their decision after they've done it. Even though we bring these former students back, [the current students] don't want to hear it. All they see is the dollar signs, it seems."
There is an opportunity cost to this brain drain.
Paul Kedrosky and Dane Stangler of the Ewing Marion Kauffman Foundation are the authors of a March 2011 study called "Financialization and Its Entrepreneurial Consequences."
According to Kedrosky, as recently as 2005, the largest recruiter of science and engineering graduates was the financial industry. A few years later, not coincidentally, complex financial instruments blew up the global economy, though the designers of those products did just fine.
Kedrosky said their study began by looking at why, despite efforts in the United States to encourage the creation of new companies, entrepreneurship was not going up.
"The more we looked into it, we realized that there was this great sucking sound in the economy, and that great sucking sound was some of the best and the brightest in the economy -- not just in business, but in science and engineering -- getting diverted into the financial economy," said Kedrosky.
"This broad process that we call financialization was sucking people from their normal disciplines of science and engineering, over into finance, to the point that we have a number of who commented to us, who worked at Goldman Sachs and elsewhere -- these were Ph.Ds in astronomy, physics and other things -- that some of the best conversations they had about their esoteric disciplines were while they were out to lunch at Goldman Sachs. Most of their fellow graduates were showing up at these places and not inside academia."
The Kauffman study found that this financialization of the economy has had a "cannibalizing effect on entrepreneurship" in the United States.
"Were the finance sector to shrink in terms of GDP share back to the levels of the 1980s, say, we might expect an increase of two or three percentage points in the entrepreneurship rate -- back to where it stood through the 1980s, as well," Kedrosky and Stangler concluded.
John Zimmer grew up in Greenwich, Conn., home to many Wall Street titans -- including former Lehman Brothers CEO Dick Fuld, who owned a $10.8 million estate there.
Zimmer graduated from Cornell University in 2006 and immediately went into a two-year program in real estate finance at Lehman Brothers in New York City, working on commercial mortgage-backed securities.
"From a young age, I saw this all around me as, that's what success is supposed to be," Zimmer said of working on Wall Street.
He said that throughout college, he vacillated between choosing finance as a career path and becoming an entrepreneur, an interest he had possessed since he had a paper route as a kid. One year into his program at Lehman Brothers, Zimmer decided he needed to pursue his passion.
"I was like, I don't see the value I'm creating. I want to build something that I care about, and I didn't feel like I was in that environment where others were sharing that similar idea," he said.
Zimmer is now Co-Founder and Chief Operating Officer of ZimRide, a company that combines the old-fashioned concept of carpooling with social networking and environmental sustainability. He stuck out his full two years at Lehman, but he also began working on the plan for ZimRide during his second year.
In 2008, ABC News followed Zimmer's ZimRide across the country. So far, the company has raised $7.5 million.
Zimmer said more stories of entrepreneurs -- such as the popular film "The Social Network" about Facebook founder Mark Zuckerberg -- need to be shared with young people to inspire them to follow their passions.
"I didn't know exactly what I wanted to do. So the stories I was seeing -- because they're spending a lot of money on recruiting -- I was seeing these stories of people who are extremely smart and doing interesting and challenging things at banks," Zimmer said. "Bring entrepreneurs to schools to tell their stories [and] give students another option, so that it doesn't feel like there's this [one] path they're supposed to be on."
In addition to this opportunity cost, the pattern of top students going into finance may have a more subtle effect, driving the way national leaders view the world and go about making policy.
"In the debates that we have on a national level, many [national leaders] have been socialized in these financial institutions," said Shenai, the Johns Hopkins Ph.D candidate. "They're almost predisposed to these market-based, let the market solve, the market knows best, financial problems, [believing] the real problem with them is regulation. ... This kind of paradigm that got us into this crisis, I think, gets perpetuated because so many smart people worked on Wall Street."
Young people will continue to go work in the financial sector as long as its pay is disproportionately higher than alternative careers. It's basic human nature: Follow the money.
One of the most sweeping proposals designed to make finance less profitable is to regulate big banks much like public utilities.
Federal Reserve Bank of Kansas City President Thomas Hoenig raised the idea in April at the National Association of Attorneys General conference.
After receiving taxpayer bailouts and other guarantees, Hoenig argued, the largest banks were essentially government-backed guaranteed enterprises. Reuters reported that Hoenig "said these lenders should be restricted to commercial banking activities, advocating a policy that existed for decades barring banks from engaging in investment banking activities."
"You're a public utility, for crying out loud," he added.
If the low number of Ivy League students clamoring to work at local energy and water companies is any indication, regulating the banks in this way would almost certainly stem the tide of young people rushing to jump into finance. That, in turn, would force them to find other career paths.
"I have no problem with people getting compensated for work that they do," said Shenai. "When that compensation rests on externalities or other costs that are built into society -- for instance, trading at a financial institution -- you take large risks. [But] you don't get punished for it individually, so you capture the upside of that behavior without bearing any of the individual downsides. To me, it's like we're forming the incentives of financial institutions, and making compensation better reflect the broader cost to society of these externalities would be be the best way of solving it. So why not have a bonus tax on institutions that we deem too big to fail?"
No such reclassification is likely to happen anytime soon. And of course, if students were less tied down by paying back the cost of college, they might also be freed up to pursue other avenues that don't compensate quite as well.
"I think it's very difficult, from a student's perspective," said the 2008 NYU graduate working in the financial services industry. "When I graduated, like I said, I had over $100,000 of student loans. So when I was coming out, the opportunity to take something for free or take a position that might not have compensated quite as well, wasn't going to be quite as appealing as something that did compensate well."
"Yes, I think there's a concerted effort from the big corporations to mine these students out," he continued. "But on the other hand, it's kind of the fault of some of these schools, where the price to go get an education is so exorbitant that you are forced into a pattern of taking a job that pays well."
At a more local level, there is a push by some in the academic community to change how finance is perceived by students.
"My glib answer is, friends don't let friends go into finance," said Kedrosky, when asked how students can be guided into other fields.
He and others who spoke with The Huffington Post pointed to peer pressure as an important tool in changing the way that a career in finance is viewed by students.
Matthew Segal is co-founder and president of Our Time, a national nonprofit advocating for the rights of young people. The group started a campaign called "Stop the Brain Drain" and began a petition to end the "monopoly on America's top young talent."
Projects like Stop the Brain Drain are aimed at changing the norms among students and raising awareness with faculty and administrators that they need to do more to change the recruiting process on campuses.
In an interview with MSNBC's Dylan Ratigan on Oct. 25, Segal said the brain drain was "sucking entrepreneurship dry in this country." He argued that a critical step to changing the jobs students pursue is to make college more affordable in the United States.
"Whether it's free community college, whether it's making sure that we have more vocational training -- people need to look where there's demand in the market. ... There is demand to be an engineer, scientist, a mathematician and all the STEM fields," said Segal, adding that the business owners he talked to said their greatest challenge in hiring was not being able to find enough talented people.
"The career development centers can do more to be aware of how much they are doing to promote finance, and try to limit some of those practices," said Norris. "I would say, in many cases, it would be very reasonable for students to demand that these institutions not be able to make monetary contributions to the centers in order to gain preferred access. It seems like a big conflict of interest and not necessarily something that's very ethical for university administrators to be doing."
Kedrosky said that some have suggested a top-down approach to recruitment that would involve creating quotas.
"I think it's a noble idea, but it's a bit paternalistic because it probably would never work," he said. "Wall Street and others would just run side operations to recruit outside of the university, and you'll end up with the same problem."
If reforms to the process are difficult on the side of the recruiters, some believe it is possible to change the behavior of students. Many career advisers are proactively trying to encourage students to broaden their searches. The career services staffer at the top engineering school said his office doesn't even allow students to receive credit for an internship in a field, like finance, that's not in their area of expertise.
Yet finance and consulting firms not only have the most resources, they also have a large number of openings each year. They have therefore built up reputations for hiring many students each year, making it difficult for other companies to compete. Programs like AmeriCorps and Teach for America are among the few that can counter these private firms.
Megan Swezey Fogarty is the director of fellowships and postgraduate public service at the Haas Center for Public Service at Stanford. Her office connects roughly 2,000 students each year with service opportunities.
"The basic bottom line is we have to work harder to counter the private sector recruitment on campus because there's a lot more wealth in a lot of companies that are coming to campus," she said. She added, however, that there is a great deal of interest from service-minded students.
Part of what is appealing about groups like Teach for America is that they provide students with a set path and a clear understanding of what the next several years of their lives will look like. So do financial firms. They make it extraordinarily easy for students to find out information, apply and accept a job, and sign a contract -- all before they graduate.
"You have to really be entrepreneurial in your career to find a job in government right out of undergrad or start something in tech, advocacy, all of those things," said Shenai. "They require so much more initiative. Then here you are with these finance firms laying this clear path in front of you. I think in my generation, you almost have this tendency where all smart people expect to reap linear rewards in a lock-step path. That's exactly what finance provides."
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