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December 13, 2006


Just getting hired (with your Harvard/Columbia/Wharton MBA) at a top i-banking firm is no guarantee that you'll make it into the millionaire's club. Many people are winnowed out along the way and relatively few make it to the rareified upper levels.

Yes Peter, I have no doubt that the guys at the top want to limit the number of people with whom they have to share the wealth.

Of course, no matter what industry you join, few make it to the rarified upper levels.

HS -

I think your explanation makes a lot more sense than Kling's. Do you really think that somebody with, for example, an MBA from the University of Kansas, would say, "Yeah, I know I could move to New York and get a job with Goldman Sachs and end up making millions, but that work is sooooo boring, I'd much rather stay here in Topeka as the assistant chief financial officer of the local dairy co-op. This work is just so much more exciting." If free market principles applied to investment banking, there would be lots of new start-up investment banks and rents would be greatly reduced by competition. But this doesn't happen. The whole thing is a de facto cartel, designed to preserve enormous incomes for the few lucky owners. Of course, similar cartels exist in other professions, such as law and medicine.

Kling is only partially right, in that some people w/ the requisite brains & work ethic would rather host a neverending dinner party for a statewide book club of Jewish mothers than enter law, medicine, or business. But you're right that this doesn't apply to most people majoring in business / econ.

The tracking process is even more bizarre: it starts during your undergrad years. Certain top-tier schools have special relationships with certain big investment banks. When I was in college, Goldman Sachs was in tight with Brown, while Merrill Lynch was in tight with Yale. The firms favor intern applicants from their preferred school, they advertise more than other firms in the preferred school's campus newspaper, and so on.

The worst cartel is medicine. I'm happy that fewer people are able to become shysters, and keeping business grads out of Wall St just means they'll be forced to do something productive rather than strike it rich moving large amounts of money around in foreign currency markets. But keeping more people out of medicine just so the doctor can golf -- sickening.

While your explanation is much better than Kling's, I think you credit the banks with too much skill. A very important feature is the failure of their clients to demand lower prices, for reasons both rational and irrational.

If you go with the status quo, an expensive investment bank, you won't be blamed for the results. That may be more important for the client than making money for his company. The IPO story is irrational, since the ownership is concentrated at that point. But it is a standard human error to regret more the loss from a nonstandard path.

(For IPOs, I'm thinking more of the method of setting a low price and letting people with connections get in early. The easily measured 7% is absurd.)


You've mentioned this before and you’re still just as wrong as in the previous post!

Many of the most lucrative aspects of Wall Street have literally thousands of competitors and no legally imposed barriers to entry. It may be hard to get into and getting in the door may be a combination of equal parts of talent, luck and willpower, but it’s not a monopoly.

You seem to think of the entire financial sector as one big cartel. 100,000 people all conspiring to keep you out. Why on earth would the big i-banks go for this? How does this fit in with the outsourcing of i-bank jobs. Why would Goldman or Lehman Brothers intentionally restrict entry into the industry? To keep it's payroll artificially inflated?

I-banking isn't even the most difficult finance job to get into. Private equity and buy-side investment management and top-tier strategy consulting are just as competitive to enter especially since they don't bring in an army of fresh blood each semester.

The reason even extremely smart people can't just walk into a high-paying job in finance is that it simply makes more sense to higher someone who can do the job right away on day one. People are valuable for very specific skills and even their very high salaries are small in relation to the money at risk.

If you had $20 billion to invest or a merger to accomplish or needed a triple-bypass surgery, cost cutting would not be your primary concern. THAT is why all of those people make so much money. And unlike law or medicine, most jobs on Wall Street have no legally erected barriers to entry. Consider hedge fund managers. Anyone can start a hedge fund. Just find high-net worth people to entrust you with their money.

Why be so selective with new hires? If you need 5 new people for a job that 5000 qualified people want, you narrow your choice to people smart enough to get into a top business school and motivated enough to do so. In India, the software industry is almost exactly like finance is here. Brain power and experience are the two most valuable commodities, but apart from the insane competition there are no barriers to entry.

How is that anything but raw competition? Are you upset that fund manager David Tepper didn't take you under his wing and teach you his bag of tricks? Well, me too! As heartbreaking as it may be that successful firms don't roll out the red carpet for every bright person who feels entitled to make a lot of money, it doesn't make it a monopoly.

I would answer your points, but frankly I can't figure out what you're arguing. Is the banking profession itself labor cartel like the United Auto Workers and the NEA or are the i-banks themselves the monopoly based on the 7% commission for a public offering? Besides, IPO’s do you have any more details on this supposed monopoly? What about the huge trading profits that have been driving profits recently? That’s open to anyone. Wall Street is brutally competitive and the big money makers from the past (brokers) have been subject to brutal margin squeezes. Every day boutique i-banks, small hedge funds and small trading outfits open up. What ever inherent advantages the big guys have it’s not a monopoly.

The MIT professor is exactly right, to a certain extent. You and he both go astray by missing a central point. Making it on Wall Street isn't just about being smart, hard-working, ambitious and willing to sacrifice a personal life. Those are necessary but not sufficient conditions. You also need a lucky break.

I suppose it's a lot like acting. There are probably 10,000 unknown people who are better looking and more talented than Adam Sandler or Joe Black. Unfortunately, people won't pay to see their movies. It's not a monopoly and it's not a conspiracy. It's just life.


HS, you are wrong. You don't absolutely have to graduate from an Ivy League University to become an Investment Banker. I know guys who worked in Big Four Accounting who are given job offers to work in investment banking (granted, you have to be a manager or senior manager at one of the Big Four firms and have accouting experience in financial services before you get an offer).

Not going to an Ivy League School makes it harder to get in, but not impossible.

Just because people sometimes get in with no Ivy degree doesn't mean there isn't a cartel. Focusing on the Ivy degree obscures the question of whether a few firms monopolize the offerings. As I recall there is a syndicate where a few firms share the money from all their work, but I am not an expert here.

"The worst cartel is medicine. I'm happy that fewer people are able to become shysters, and keeping business grads out of Wall St just means they'll be forced to do something productive rather than strike it rich moving large amounts of money around in foreign currency markets. But keeping more people out of medicine just so the doctor can golf -- sickening."
Well, at least they weed you out early.

It's not about golfing (ie free time), really. It's about money. The medical cartel drives prices up by driving supply down, but a side effect is that doctors are overworked. Plenty of other people are overworked but don't get six-figure salaries, however.

There are also considerable inequalities within the medical profession, most notably (and easiest to grasp) the divide between specialists and generalists. Specialists make more money, and residency spots in a specialty are notoriously difficult to obtain. (Ask any med student about matching in dermatology.) Many generalists have difficulty paying off their massive loans...so in some respects a lower-tier private med school may actually be more of a scam than a public med school if you know you are mediocre. (Even Harvard may not be worth the investment if you want to be a pediatrician...sure you can practice in a big city with a prestigious degree, but not everyone wants to do that, and in another inversion of the usual pattern, big-city salaries are actually lower.) Of course, since med students tend to be at the top of their college classes they all think they are going to be number 1.

While I'm not going to comment on how much further we could lower the bar without compromising quality (some countries have more while other have less), free-market medicine is a big flop from the point of view of patient care. Cardiologists get money from procedures, so they'll do them even if a less aggressive approach might be warranted. Preventive medicine gets ignored because you don't get money for treating diseases that don't happen.


"Focusing on the Ivy degree obscures the question of whether a few firms monopolize the offerings. "

Yes, and focusing on the firms obscures the claim that there is labor cartel. If investment banks were in an industry cartel (they aren't) it would have no bearing on whether there is an i-bank workers labor cartel (there isn't).

It's an obvious distinction that you guys seem to be missing. One would be like Ma Bell and the others would be like the Teamsters. One thing that the Wall Street industry cartel and the Wall Street labor have in common is that neither exist outside of this blog.


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