Finance isn't Rocket Science!

While working for a large bank two summers ago, my boss pulled me aside one day to give me feedback on how I was doing and said to me ' Finance isn't Rocket Science, anyone can do this job, you just need to show you want it more than the others.' Given the tough economic climate it was a fair enough comment to be made, I was in fact highly replaceable. However, what is interesting is that while not intended by my boss, that statement helps highlight other large issues in the finance sector.

The first question worth asking is if the job doesn't require the smarts, why is it that large banks recruit only top students from top universities in the world? The answer to this question is multi-fold. First off, it is important to realise that some years ago finance was not the sector for the smartest people, law and medicine were where the 'best' went. However, as pay for the finance industry got larger and education became more expensive, the better students started taking finance jobs. Even today, a large number of the people going into finance straight out of school say that they want to pursue it for a few years to make some money and then switch to something else. Now, it is equally important to consider why banks hire such smart people, and the answer to that is actually rather straightforward, it's good marketing. A huge proportion of the CEOs and CFOs are graduates of top schools and banks want to be able to tell them that their teams are composed of the best from those very universities.

With this huge influx of intelligent people into the banking industry, you must ask the question 'how did these smart people screw things up so badly?' The problem here is simply that some are smarter than others. The problem is that with financial tools getting increasingly more sophisticated, it gets difficult it uncover all of the various risk elements hidden in any one financial product. A lot of very intelligent people make up smart ways of structuring products, unfortunately the people who trade those same tools don't understand them as well! Further, among banks, some have better teams than others and in the doggy dog world of finance, banks actually unload risk onto other banks. To make the issue even more complex, given the extremely bright younger demographic in banks, often the decision making bosses don't understand what the bright analysts have done. This disparity in the understanding of the way different instruments work is in fact what some people point to as the reason why we are in the current economic crisis. Banks didn't appreciate the risk of CMOs and CDOs.

So here is the problem, people are forgetting that 'Finance isn't rocket science!' The industry would do better to bring back the simpler times.