Before you start that bank job you should also think about whether what you're doing is moral and right. Whether by doing that job you're contributing to making the world a better place.
That's a good point, startups don't usually make the world a better place, but at least they generally don't seem to actively try to make it worse. And even if a startup were bad, it's very unlikely to be powerful enough to do damage on the scale a big financial institution could.
Broad strokes: Startups directly create new value, which by definition makes the world a better place, at least for someone. In contrast, the finance industry adds value indirectly by optimizing capital allocation. At best, finance increases efficiency, but it's very hard to measure whether it's helping or just exploiting the complex rules to skim off the top. In contrast, startups without a value proposition fail.
Only consumer product startups create new value, at least in the sense I think you are describing.
A B2B startup, much like finance, will only increase efficiency. If I build HRWeb (replace your human resources dept with the internets), all it does is makes a bunch of other companies more efficient.
A business is two things: an organization that sells something, and a collective of employees.
As you say, some B2B startups sell efficiency to the organization.
But there is also good money in selling products to the employee collective, even if they decrease efficiency of the organization.
For example, you can sell employees a product that gives them job security by making them appear more valuable. You could sell them a tool that will help them get rival employees fired.
Both of these would come at a cost of efficiency, but would be excellent B2B products. In the end, it's the employees who sign the purchase orders, not the organization.
I have a sneaking suspicion that these make up a much larger portion of B2B products than most people would think.
Also consider that you didn't create the system and are just a part of it, if you don't take the job someone else will. Depends what stage of your life your at, the money could be a primary concern or a secondary one with flexibility, personal interest and creating something valuable higher.
> you didn't create the system and are just a part of it, if you don't take the job someone else will.
Exactly why I moonlight as a crack dealer, with the odd stint pimping adolescents I meet at the bus terminal. Sorry for the lame attempt at the witty reply... I guess the point is that not doing something doesn't mean it won't happen, but it does mean you won't do it, and that matters to some people.
I know you're joking, but I don't see the moral concern about investment banking. You may not be making the world a better place (although that is very debatable), but you're not making it worse, either.
That's like saying men are bad because men are responsible for most wars.
You can't ignore the benefits created by investment banks. Without them we wouldn't have had the financial meltdown; but neither would we have had the rapid growth of the last century which has largely been fuelled by financial markets enabling huge amounts of investment. Without the investment banking sector you would have no IPOs, no financed takeovers, no VCs, even bank lending to small business would be close to non-existent. If you want to see the impact of financing, have a look at places which have introduced microfinance in recent decades. It has a transformational impact.
Of course they're not all bad. This isn't a movie, nobody is truly evil.
But the problem is the industry has fundamentally changed as it's been deregulated from the useful industry of yore that you mention (helping to efficiently allocate capital and provide liquidity, entirely separated from retail banking) into highly leveraged gambling institutions with a small arm that still provides some of those old services.
The guys inside the big investment banks who do the things you're talking about are more or less insignificant to the results of the big banks. The traders look at them the way a programmer at Google probably looks at the cooks in the cafeteria. All of the money is on the bond floor, and that's where the damage has been (and will in the future be) done.
I've worked in most major asset classes (equities, interest rate swaps, government bonds, credit derivatives, fx) and they all have significant real world uses.
In a couple of those classes, for example FX, the volume of speculation trading exceeds the volume of "real" trading, but again that's not without it's benefit. FX spreads have dropped dramatically and liquidity is near instant and it's much harder for an individual company or country to deliberately interfere with the market price of a currency.
Prop trading which is essentially the gambling part of most banks generally tends to be a relative small part of most banks. When it comes to trading most banks make their money from market making rather than any kind of prop trading. Bank share holders generally don't like prop trading due to the high risks involved.
In terms of risk there are obviously cases where bankers are taking excessive risk (because there's a high personal upside and low personal downside risk) and that's one of the factors that contributes to the failure of some banks. But it's not as if the activities the banks undertake are fundamentally wrong, rather that the rewards for the bank aren't matched by the risks.
In terms of morality there's very limited number of banking activities you could point to and say "that's morally wrong". You could for example reasonably argue that a salesperson at a bank selling A* rated CMO's to a pension firm is morally in the wrong if they suspect that the default rate on the underlying mortgages are higher than the triple A* would suggest, but on the other hand it's not as if he's selling it door-to-door to pensioners, he's selling it to a professional banker representing the pension fund whose job it is to do the due diligence on the product he's buying. A certain amount of responsibility for the purchase falls on the buyer of the product. As the old saying goes "It takes two to tango".
They didn't. They hedged the long positions with credit default swaps, assumed that they couldn't lose (which was true if the counterparty could afford to pay the swaps) and thus didn't declare them on their balance sheets as they were viewed to be without risk.
What ended up happening is the counterparties (most notably AIG) had taken on far more in credit default swaps than they could pay out, meaning there was lots of risk hiding off balance sheet. This is why Uncle Sam had to bail out AIG. (The Fed could have bailed out all of the people AIG owed instead, but that would have been far more work for no clear gain.)
I thought they didn't so much take long positions as ended up with being long as a result of everyone stopping buying them. Were they buying from other IBs or was it just a case that they couldn't sell some of the toxic packages they'd created?
That's true for Goldman - they tend to have a very short term focus. It was not true of many of the other banks. This is why Goldman did so well (relatively speaking) in the crash.
I don't think that's true anymore. The amount of money controlled by the gamblers, and the amount of leverage they use, has gotten to the point where it threatens the fundamentals of our economy. It melted it 2 years ago and nothing substantial has changed since.
