Hi, it's another installment of Ask A Banker. We've gotten lots of good questions, and also lots of bad questions, on Twitter and email, but answered only a fraction of them, in part because in some columns I just answered questions that I or Planet Money made up. Sorry. So let's make up for lost time by giving short answers to a bunch of real questions from real people, or at least real email accounts. A lot of real people, it turns out, mostly want to know what it's like to work in banking.
Tristan asks: How do you know if a job in finance is something you should be doing? Can you know before you go and try doing it?
Not only can't you know before you try it, you often can't know for the first few years of doing it. It's a weird industry in that junior investment bankers spend 100 hours a week making spreadsheets and formatting client presentations; the main skills required are attention to detail, cheerful obedience, and the ability to add two-digit numbers in your head. After a while, though, you graduate into a more senior role where you spend 70 hours a week flying to the Midwest to shake hands with a corporate treasurer and ask him how his kids are doing in school. The main skills required there are a firm handshake, a facility with small talk, and a good but not too good golf game.
(Here is a more balanced and accurate account, but that's the gist of it. In non-investment-banking roles — sales and trading, for instance — this is not as true, but there is some truth to it even there.)
The fact that successfully completing four to six years as a spreadsheet jockey is the prerequisite for becoming a traveling salesman has always struck me as a particularly acute case of the Peter Principle. Somehow it mostly works out. Often, though, it doesn't, and excellent junior bankers fail to transition to the more client-facing sales role. This can lead to disgruntlement, and since sales is generally rather a grubby profession the disgruntlement might be expressed in ways that can embarrass the banks.
Still, there are a few things that might indicate you're cut out for a finance career. For one thing, it helps to like finance. Read the best book about mergers and acquisitions, Barbarians at the Gate, or the best book about sales and trading, Liar's Poker, and ask yourself: does that sound fun? I mean, it's mostly not as fun as those books make it out to be, but: it's never more fun.
Otherwise: ideally you should be a little quantitative. Banking is not, as they say, rocket science, but those who are afraid to do a little mental arithmetic will run into trouble. You should be self-confident and like people: most successful senior bankers are essentially salesmen, and even those who aren't work in a culture that places a high priority on your ability to sell yourself.
The other thing is ... well, take me. I used to sell derivatives and now I make stupid jokes about finance on the internet. And I write "Ask A Banker" columns about derivatives or whatever, and people say HOW CAN YOU BE SO CAVALIER? THOSE DERIVATIVES CAUSED THE FINANCIAL CRISIS AND THE MELTDOWN AND THE HOMEOWNERS AND CRIME. And I think "Well, sort of, but isn't it interesting?"
You should have that.
Harold asks: How can bankers consistently work 100-hour weeks? How can someone keep this up for 10-20 years? How can they date, have families, and be normal, social, friendly individuals who can smalltalk about sports, movies, music, whatever? Why don't investment banks hire more people, pay them less, and have them work saner hours?
So there are three questions here. One is: how can bankers consistently work 100-hour weeks without, y'know, dying? Lots of junior investment bankers really are at work all the time. The way work flows work at banks, though, junior bankers spend much of their day more or less sitting around and listening in on conference calls, and really start pounding out the Excel models after their bosses dump a pile of work on them and leave for the night. It's not, like, 100 hours of manual labor, or even intellectual labor. It's 100 hours of being there.
Another is: how can they be normal? One obvious answer to that is that they probably can't; many well-adjusted humans find investment bankers unpleasant to be around, or at least imagine that they do without much evidence. Another answer uses the horrible expression "work hard play hard": you can work 100 hour weeks and have an active social life if you're willing to sacrifice sleep. Cocaine, obviously, helps, though its heyday in the financial industry is long past.
Also, most trading floors have big TVs showing CNBC on mute; during big sporting events people change the channel and half-watch sports at work. So you can keep up on sports.
Finally, there is: Why not hire more people and work them less? This is a great question, frequently asked by junior investment bankers themselves, generally late at night and in whiny tones. A partial answer is that investment banking is a client-service business, clients expect 24-hour availability on their most important work, and they want to be able to reach the person whom they know and trust rather than the random night-shift operator. Another part of the answer is that you wouldn't be entirely wrong to imagine investment banking as a little bit like a fraternity, and to think of the first two years of misery as macho camaraderie-building hazing passed on from one generation of junior bankers to the next.
Incidentally I've used the word "junior" a lot here. The first two to five years at an investment bank are pretty rough. After that, you're not exactly working forty-hour weeks or anything, and you're travelling more, but your time is more manageable and more your own. You can have a family, for instance. I doubt there are a lot of 25-year-old investment bankers with kids, and if there are any I don't envy them.
NR, who is really into us not using his or her name, asks: We always hear about the high flying 25-year-old investment banker. How can a young investment bankers, right out of university, earn six-figure salaries? Especially when they have so little on-the-job experience? I know doctors that didn't make that until long after their residencies. Who thinks a 25 year old is worth that much?
Banks do. That's who. Banks think 25-year-olds who execute deals that bring in eight figures of revenue are worth six figures of salary. To be fair, 25-year-old basketball players make even more. Also, like, apps or whatever. Are those people more important than doctors? Than bankers?
Banking is an industry that is built on the very strong belief that things are worth what people pay for them. There are plenty of careers that are not built on that belief: medicine, for one; most flavors of writing, for another. Some of them even pay well. Medicine, for one.
A more concrete answer to your question goes like this: Some 25-year-old traders make millions of dollars for their banks, and so it seems only fair to pay them hundreds of thousands of dollars. Here's a 30-year-old hedge fund trader who made his employer $2 billion last year, which, like, what have you done that's so special? But most 25-year-olds at investment banks probably aren'tunique snowflakes who provide irreplaceable value to their banks that far outweighs whatever they get in salary. It's just that:
- they have the potential to develop into 35-year-olds who bring in a lot of business, and
- their current jobs, objectively, suck.
So they need to be paid well to stick around.
Mark asks: I suppose you've got this question before, but why did you leave the industry?
To fulfill my childhood dream of being a blogger, obviously.
Basically there are two reasons to work in investment banking:
- You really like investment banking, or
- You see the opportunity to get paid somewhat silly amounts of money for a little while and then go do something fun.
Both are totally respectable, both are totally common. There is another approach, though, perhaps even more common though less respectable, which is basically #2 without the leaving to do something fun: you hate banking but stick around for the money, and the complaining. This is generally referred to as "golden handcuffs," which implies sticking around for the money, though you shouldn't underestimate the psychological appeal of complaining a lot.
I was kind of a mix of #1 and #2. I really liked many aspects of the business, just not enough of them to keep me there. I actually just like finance, and I liked a lot of the people I worked with and, God knows, the money. But as I've explained, the more senior you get in investment banking the more of a traveling salesman you become, and many aspects of the sales job - the constant travel, the schmoozing, the upselling - did not much appeal to me. And I had often thought of one day trying to make a go of writing for a living.
And one day I had made enough money to allow me to take a risk and go do something else that I figured would be less lucrative but possibly more fun. And so I did.