Money to Blow . . . on Coursepacks?

When I was an investment banking analyst, the expectation was that I blew my discretionary income on nightlife. As a student, the expectation is that I am cheap.  Still, even students can have indulgences.  Mine are overpriced lattes and of course, new textbooks.

Whatever may be said about the monotony of reading thousands of pages of court cases that is law school, one benefit of spending hundreds of dollars on casebooks every semester is that it is less psychologically unsettling than spending hundreds on coursepacks as I did in undergrad.  Coursepacks (in undergraduate business school anyway) comprised business articles from sources such as the Wall Street Journal, some academic papers, and Harvard Business School (HBS) case studies.  Spending anywhere from $100 to $200 on these materials per course seemed silly—partly because so many of those articles could be found for free online and partly because of the flimsiness of their binding and presentation relative to real textbooks.  (After all, Jay Gatsby didn’t stock his library with shoddily binded computer paper.)

Honestly, I can’t complain about having to pay for the HBS case studies because a decent amount of sweat goes into collecting the real-world data and organizing it for a small audience.  The limited distribution of the cases relative to a Dan Brown novel forces a price markup with which I can live.  However, the fact remains that you are also paying for many free, publicly available materials.  The other problem is a more general one with education:  in most courses, you only ever reference a couple of the HBS cases but still pay for the other five.

Some renegade professors surreptitiously post supplemental articles on course management websites such as Blackboard.  The more circumspect ones post links to those articles.  But these are rare cases because professors generally have nothing to lose in selecting material and forcing students to buy expensive coursepacks (except a few negative course evaluations); whereas, if they distribute copyrighted material, they risk violating school policies and the law.

While copyright law, through fair use and exceptions for educational uses, gives some room for copying, courts have likely made the practice of circumventing coursepacks by professors an even greater rarity.[1]

There is much talk about education in the United States needing serious repair:

–          In light of the financial crisis of 2008, there has been commentary on the ‘Wall Street brain drain’—the trend of excessive numbers of young and bright Americans heading to work in finance.

–          In response, initiatives in support of science, technology, engineering, and math education (STEM) have been announced.

–          Occupy Wall Street has reinvigorated an argument that has never really gone away, which is that student loans, and implicitly college expenses, are just too high.

I think it is undeniable that education needs reform.  Although the bullet points above are mostly relevant to higher education, maladies infect the entire system.

The last bullet resonates with me most.  The first two issues would directly benefit from the lowering of higher education costs.  Greater financial flexibility means greater flexibility in contemplating different careers and taking courses in subjects of interest.  I think it’s safe to say that a vast majority of folks headed to finance go there for money and opportunity rather than enthusiasm for the vocation.  Allowing people to educate themselves in things that they find exciting is more likely to lead to innovation, opportunity, and an economy that is not dominated by the financial sector.

Our liberal arts education system is predicated upon this diversity of interests.  I will be the first to admit that sometimes too much curricular flexibility causes a neglect of the less ‘sexy’ subjects, such as STEM.  However, I posit that if quality education were cheaper even STEM would benefit from a boost in popularity.

Peter Thiel, former Pay-Pal co-founder, has commented that education is in a cost bubble.  I don’t doubt him.  Paying $200 for 200 pages of paper, of which only 20 pages ever benefited my mind, is appalling.  Perhaps, inflated coursepack pricing isn’t the fault of educators as much as it is the cost of copyright law.  However, it is just another symptom of a bloated and inefficient educational system. (Another example is schools paying premium salaries to professors for their research rather than teaching ability.  Schools again may be the victims rather than the culprits because they are merely trying to improve their reputations, which though superficial, may be just as important as quality education.)

I am not advocating skipping college. (As a grad student, I would be a hypocrite if I did).  Although not attending college may make sense for an elite few, I do think the vast majority of Americans could benefit from the networks and job opportunities colleges and some types of vocational training can create.  I advocate instead for a massive retrenchment.

How?

I have no clue.  Maybe that’s my cue to go occupy Wall Street.


[1] See, e.g., Princeton University Press v. Michigan Document Services 99 F.3d 1381 (6th Cir. 1996)

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The Problem(s) with Wall Street

Wall Street is no longer a street in Downtown Manhattan. It hasn’t been for some time now. Wall Street has actually weaved its web across most of New York City. It is no longer just the banks. Its appendages include hedge funds, private equity firms, wealth managers, and any other type of financial/investing house that may have sprouted in the past couple of decades. However, when it comes down to our current mess and whom tax payers are bailing out, the blame indeed does revert to the traditional salestraders, investment bankers and bank execs. They are the ones that took on misunderstood, levered off-balance sheet risks to satisfy their hedge fund clients. They are the ones that provided a secondary market for bad mortgages, incentivizing brokers to give out a loan to any potential homeowner that would seek it. Now, there are many to blame including perhaps, the SEC, which may not have oversight when it comes to hedge funds and private equity shops, but which is absolutely in charge of maintaining the appropriate regulation over banks to provide shareholders transparency. Yet, even with so many to blame, there is no question in my mind about how broken the Wall Street system really is.

I seem to have vilified investment banks and refered to them as “they.” Unfortunately, I myself am a member of the industry. I have only been involved for about a year and a half now, meaning I really have nothing to do with most of the ills that spurred this historic collapse, but I am a cog in this ‘broken’ machine and am obligated to at least offer some insight into the repairs needed. So here is an initial list:

  • Short-term Gratification:  As with any public corporation, banks are rewarded for short-term results quarter-by-quarter rather than on long-term performance. Banks, however, facilitate capital so that an overreaction to good or bad short-term market conditions has a much more severe bullwhip effect for our whole economy than a typical company whose overreaction is slightly more isolated to its industry and supply chain. More broadly, banks are encouraged to maximize profit in boom cycles even more so than other companies because employee attrition is so high, and many employees are looking to grind for money over short bursts of time rather than build a career. Employee attrition is so high in the industry because people recognize the need to be opportunistic regarding their resumes and financial wealth. In other words, they want to maximize their bonuses during the boom times. Unless clawbacks become a reality, this is where the currently popular term, ‘moral hazard,’ comes into effect. When playing with other people’s money and having only upside, why not aim for the quick happy ending?
  • Incentive Structure:  Bonuses on Wall Street are not like typical bonuses. Besides being much bigger than in the typical corporate job, they are also much more than just a year-end cherry on the top. Bonuses are considered part of one’s expected compensation. There is no way, especially at the junior level, that people working at an investment bank would work 80+ hours a week for just their base salaries. The amount of verbal [and physical if you count lack of sleep] abuse involved would not justify it. Bonuses are based on revenue, and on Wall Street revenue is largely based on volume and size of transactions. This explains why employees may push irrational trades and transactions for the incremental revenue. One solution is giving more stock to employees, and while banks do implement this, it worked better in the old private partnership models. Now that banks are public, however, there are still plenty of non-employee shareholders onto whose shoulders employees can push risk.
  • Client-Facing Business: While Goldman Sachs, JPMorgan and other banks have used proprietary trading essentially to the effect of having in-house hedge funds, Wall Street is still a client business. Whether it is bending over backwards to produce an M&A analysis at 4:00 AM on Saturday for the VP of Corporate Development so that he can use the phrase, “The acquisition of ‘xxxx’ company is accretive,” on slide 27 of his presentation to the President of Corporate Development, or executing an MBS trade worth millions while having no idea about the true risk profile of the security, the client is always right. Banks want to make money and cater to the client’s every single need. The current crisis largely stems from the latter case in which traders had no idea what they were trading but could not say no to the client. Maybe a refresher course from middle school health class would help: “No means no.”

The following points might not have prevented a financial crisis, but are still flawed facets of the financial services industry:

  • S&T vs. IB:  Sales and trading and investment banking advisory are two distinct aspects of the Wall Street business model. Traditionally, sales and trading desks have been responsible for  acting as an intermediary to ensure buyers and sellers can get trades done, and they would get paid for this service. As mentioned, more recently some traders have also traded as investors/speculators taking risk onto banks’ balance sheets, essentially making bets that assets would increase in value and make the bank money that way. Investment banking advisory groups, on the other hand, give clients advice on M&A, IPOs, restructuring, etc. In boom times both segments do well, but traders often see more upside. Trading is what caused banks to take on undue risk in this last collapse. In these down times, though, both traders and bankers are punished via layoffs and lower pay. There is probably more nuance involved than this, but somehow it doesn’t all quite make sense.
  • Analysts vs. MDs: Analysts are the lowest rung on Wall Street. In investment banking advisory they are chimpanzees, jumping and clapping on command. That guy doing that M&A analysis at 4:00 AM before, well, that was an investment banking analyst (i.e., me). The Managing Directors (MDs) bring in the deals and have the relationships that generate business. So maybe they do merit the millions a year, like any good agent would in other fields. The analyst makes his $60K base and hopes to make a bonus of anywhere between $20K and $100K (perhaps, closer to $0 these days). The analyst is only in his early to mid 20s. Plenty of money at that age right? Maybe, but you do have to factor in the average of 80-90 hours a week, the cost of living in Manhattan, and the workplace abuse. There are people between analysts and MDs with MBAs that check work and manage deals to ensure execution, and they are paid somewhere between $100K and a couple million. The problem with the model is that analysts do everything—from the initial financial analysis and company presentations to binding and couriering books—but are not incentivized with the appropriate financial upside or long-run career path. I don’t know what the solution is because truth be told, most analysts are just using the position to save some money and go do something else. Perhaps, the people in between should shoulder more responsibility since they hope to be on career paths to become MDs. The fact that one has his or her MBA does not justify sitting on one’s hands and having his or her analyst do all the work so that it can be passed onto the MD, who originally sourced the business.

Some of this was just venting, but hopefully, there were some sage (or moderately useful) words, as well. Here’s to Wall Street fixing its woes so that maybe the rest of the ‘normal’ folks can fix theirs.