Careers in Finance with Prof Kenneth Abbot Part II

Alright, my name’s Ken Abbot. I am what’s 
called a distinguished lecturer in the law   department. It means I’m an academic in the 
civilian military. I don’t have a PhD but I do   have 35 years of experience. I was a managing 
director at Bankers Trust, Bank of America,   spent 9 years at Morgan Stanley, and then I was 
America’s chief risk officer at Barclays before   I left. I have an undergraduate degree from 
Harvard and two master’s degrees from NYU.   And I love this business, this is what I wanted 
to do and I did it for a long time and then I   decided I didn’t want to do it anymore because 
I didn’t want the stress, because it’s a young   person’s game and now I’m a teacher and it’s the 
best job I’ve ever had. So, last time we spent   an hour and a half about why you might or might 
not want to be in finance. I told you that yeah,   it’s a good way to make a lot of money if you’re 
good at it and you like what you do, but there   are a lot of people that go into it for the wrong 

And we spent a lot of time talking about   the different types of attributes. Today, I want 
to talk about some different topics. Today, I want   to talk about the type of jobs that are there, 
both in the front office and the back office,   and then we’ll probably break this into two 
parts. And we’ll talk about the type of companies   that are out there because it’s one thing to 
know that you want to be a trader but then,   it’s do you want to be a trader at an investment 
bank, at a universal bank, at a broker dealer,   at a commodity dealer, at a hedge fund? Those are 
different types of companies so it’s a different   discussion about what the difference is between an 
investment bank, a commercial bank, a mutual fund,   a hedge fund, a private equity firm, an insurance 
company, a mortgage broker.

So that’s a key part   of understanding the job market, understanding 
who these companies are. And another reason I do   this is I was completely clueless when I was your 
age and the story I always told is that I would   write letters that are basically saying, “Well I’m 
not sure whether I want to be a truck driver or a   prima ballerina”. And It’s okay to be interested 
in several things, but when you communicate with   these companies, you need to be focused about what 
area you’re speaking about. You don’t want to talk   about private equity and municipal finance because 
those are chalk and cheese. Those are completely   different businesses that require different skill 
sets. So, what I want to talk about today is,   sort of, the type of jobs and the things that 
people do. A lot of this material I developed for   a couple courses. One course I teach on control 
functions, I teach in the fall. And the second   course, and that is the supporting functions 
for sales and trading, investment banking,   private equity, etc.

For every job in the front 
office, there’s anywhere between two and ten jobs   in the middle office and back office. And most 
people end up working in those types of jobs,   at least for part of their career. And this 
course talks about what those functions do.   And the second course I teach in the spring, 
it’s on the regulation of products and markets.   And in order to talk about the regulation of 
products and markets, we have to talk about what   those products are and what those markets are 
so I divide the financial world up into a set   of products and a set of different markets, which 
all have their own individual characteristics.

So,   if you have questions, post in the zoom chat 
and I’ll try to keep an eye on that and see if   anything interesting comes up. If I don’t see 
anything that is germane to the discussion,   we’ll keep it to the end. My email is Abbbot, 
K, A, B, B. Here, I’ll post it. There it is.   Everyone, feel free to email me. I’ve had a lot of 
success helping kids get jobs. If you look at my   RateMyProfessors page, you’ll see that generally 
what people have said. Because I hired hundreds,   maybe thousands of people over the years, I 
kind of know what interviewers are looking   for and I know the kinds of things that you have 
to know. In fact, anecdotally, several students   in the past year weren’t sure about the types of 
interview they were getting and so we sat down,   we talked about the types of companies, the types 
of jobs, and they said that was a key part of how   they got the job. And I’m happy to do that for any 
of you, not just for the people in my class.

You   can always call me. If you don’t hear back from 
me, contact me again. I get a bunch of emails,   sometimes I miss stuff. Somebody asked about my 
FIN 3903. That is the course on control functions   and we’ll talk about that there. I think the 
finance co., it’s split between law and finance.   The finance cohort is filled up but there’s still 
plenty of spots open for the law course, as far   as I know. But, you guys let me know, alright, 
and I’m happy to help. So now I’m gonna share   my screen and I’m gonna use these slides. About a 
third of these slides are slides that I got from   Kara, and then I went in and I added a whole bunch 
of material based on my experience. And one of the   things I’ll talk about just as we get started, 
it’s hard to come up with one definitive way of   dividing up the world of finance because there are 
many different ways you can cut it: by product, by   institution type, by country, by industry. There’s 
all kinds of different ways you can look at it.   This is one particular cut, the one that I think 
is particularly useful, based on my experience.   Alright, so what is finance? Things like how do we 
pay for new equipment? Do we issue equity, do we   issue bonds, do we borrow money, do we take money 
out of our cash account to do that? If I’m buying   a company, how much do I pay for that company? 
How do I determine what the appropriate amount   is? Well, there are set ways to do this.

established techniques to say this company’s   worth so many million dollars. When I’m making a 
loan, if I’m in the commercial banking business,   I have to first of all figure out whether I 
want to make the loan, how do I make that loan,   and another question is how do I calculate the 
estimated loss so I can get an estimated risk,   risk adjusted return on capital calculation. 
And the fourth thing here is when I look at   the way things trade in the markets, how do I 
make intelligent assessments of the individual   securities, commodities, and currencies that are 
available to me, in order to make intelligent   investment decisions.

So these are among the types 
of questions that are asked. Now we talked about   career areas, there are many different areas 
within finance. This is one particular way of   looking at it. You got people that need capital, 
you have people that have capital. Capital being   money. In the form of either debt or equity 
financing. So who needs money? Public companies   need money. Public companies need to borrow from 
the markets, in the form of debt. Public companies   need money in the form of equity. They want to 
share their ownership of the company, so they   go to the capital markets as the intermediary to 
raise funds. Private companies and individuals   also go to the capital markets, might be for 
loans, could be for initial public offering,   could be in what we call the private equity 
market, where companies that are not listed can   trade ownership shares or buy or sell ownership 
shares or buy or sell other companies.

Very   active business in private equity. Governments and 
agencies also need to borrow money. So we see this   mostly in the US government bond market, one of 
the biggest bond markets in the world. And federal   agencies as well as state and local governments. 
They go to the capital markets. So we look about   people who have the money to invest, we have 
institutional investors, we’ve got pension funds,   we’ve got mutual funds, we’ve got real estate 
funds, private equity funds, college endowments,   that have money to invest and they often look for 
long term, sometimes short term, but frequently   long term investments.

You have retail investors, 
mom-and-pop who want to buy stocks. More commonly,   mom-and-pop are invested in stocks through their 
401ks, through their IRAs, through their 529,   which are tax advantaged college investment 
instruments, and also through retail equity   markets as well, through mutual funds. Your 
government and agencies that also have amounts   to invest, and sometimes, you’ll get the mandate 
to manage a certain, a certain agency’s money so   that’s another thing that happens. So the capital 
market is sort of the nexus, the hub, where all   this activity takes place. I’m hoping that most 
of you are of, king of, more or less familiar   with this because if you’re, if not, that’s okay. 
If you have questions on this, I posted a lot of   stuff to Not being paid by them, 
I just use it as, it’s a blog and if you go into   books, I posted a lot of introductory material, 
readings, and videos that I found useful,   as well as a lot of stuff on risk management.

anybody is interested, you can look for the stuff   I post there. I try to update it on a regular 
basis. So obviously, you have a lot of different   types of institutions when we talk about, when 
we talk about the business. The one thing most   commonly think of are the universal banks, like 
JP Morgan, Morgan Stanley, Goldman Sachs, Bank   of America, Barclays, they do broker dealer, they 
do commercial lending activity, they do investment   banking, they do asset management, they do funds 
management, they have their own mutual funds,   they do custody services, they provide a whole 
bunch of different type, but there are many, many,   many other types of firms involved and we’ll get 
to that a little bit when we talk about it.

So,   when we talk about why institutions hire and we 
talk about what kinds of people they need. Well,   what do they need? They need people to look at 
their market risk, how much money they can lose   based on moves in the markets, they need people to 
look at credit risk positions, how much money they   could lose if people choose not to pay them back, 
either because they’re unwilling or unable to pay   back.

They hire a lot for technology positions 
and when we say technology, it’s not necessarily   a hardcore development, where people are sitting 
in black rooms, whose skin is a light blue from   lack of sunlight. No, that’s not what technology 
is about anymore. Might have been that way in the   60s and the 50s. Not that way anymore. Technology 
is an active part of the business. I would argue   it is the most crucial part of the infrastructure 
behind any Wall Street business and the companies   that have succeeded have generally succeeded, 
at least in part, sometimes completely based on   superior technology. I would argue that Goldman 
and Morgan Stanley have better technology than   most. I would argue that a lot of the other big 
banks have dismal technology. Now, I can tell   you with 100% certainty that when and if you join 
the financial community, one of the things that   will shock you is the appalling general state 
of technology in the markets and how bad it is.   Most firms have very [unintelligible] but that’s 
another story. You have operations. Operations is   very different from technology. Operations is the 
plumbing, how disposition data gets from the point   where it is booked in the system to when it shows 
up in the general ledger.

How does it actually get   booked so people can analyze? Finance, and I’ll 
talk a little bit about that, is scorekeeping.   It’s the accounting side for the most part. Well, 
we say the field is generally known as finance but   this is an important distinction. When you talk 
about a position in finance, in a bank, you’re   generally talking about an area in the accounting 
practice of the bank so be care-. When somebody   says finance, the question you want to ask is, do 
you mean finance accounting or do you mean finance   as a general description of all business dealing 
with financial assets. Important distinction to   be made. Compliance. Compliance, how do we know 
we’re following the rules we’re supposed to be   following? I’ve got a slide on that, we could talk 
about that later. Legal, how do we make sure we’re   following the right regulations, how do we make 
sure our conduct risk is good, how do we make sure   our contracts are enforceable? Internal audits. 
Now, internal audit, I’ll talk about that a little   bit later too.

Internal audit is not audit going 
to work for PWC or EY. Internal audit is making   sure that the company is following its own rules 
and regulations and it’s completely different than   what you think of when you think of an audit 
company. Internal audit is a very different   function. Human resources, hiring and firing, 
training, development, alright. Corporate services   is a whole separate set of business, in terms of 
managing office space, managing vendors. So these   are the support functions and I’ll get to them 
and these are generally the revenue generating   functions. I don’t know that I should probably 
make these different colors so we can read them   a little better. Stay with me. Oh! I’m getting 
the pinwheel of death. Bear with me for a second.   Bright yellow. Alright. And again, I’m gonna 
talk about these. We have sales and trading,   which is which is, just what it is, it’s selling 
financial assets, stocks, bonds, securities,   commodities, currencies to clients. Trading is 
managing those from a [unintelligible] standpoint.   Asset management is managing other people’s 
money as an investment. Investment banking,   which is generally capital raising and 
corporate advising. Investment research,   which is figuring out what companies are in what 
industries, how those industries are performing   [unintelligible] each other and how a company 
stacks up with an industry and merchant banking,   which I would argue felt like private equity, 
taking positions in the companies in which   you’re doing research in.

Anybody have 
any questions before we move on? Alright,   I’m looking at the window. I don’t see anything 
there. Nothing’s coming up. I will take that as   a no. Let’s move on. Kara, is there anything you 
think I ought to add at this point? This is great,   I’m learning a lot too. Alright. So, we talked 
about this a little bit last week and this is   part of the presentation that the Starr center 
actually has. Now, I left a lot of these slides in   because I think they’re very valuable.

Pros, you 
get a lot of responsibility really quickly. Uh,   it’s interesting work, you work with really smart 
people. It’s generally meritocratic and there are   clearly defined measures of success. You know how 
well you’re doing, generally. And prestigious,   well, certainly was much more prestigious 
before the financial crisis but it’s still   pretty prestigious and the compensation is not 
bad. The cons, long hours. I worked 50 to 60 hours   weeks for decades and now that I’m an academic, 
sometimes, I don’t know what to do with the time.   It’s great. There’s a lot of pressure. Some people 
thrive on pressure. I always did my best work when   I had 20 things I had to get done. There can 
be an aggressive corporate culture. This varies   a lot from firm to firm.

A place like Goldman 
is known for its aggressive corporate culture   and the business cycle can move against you and 
people sometimes lose their jobs when the market   goes to hell and nobody wants to deal with these 
companies cause bank earnings move along with the   economy. When the economy, the stock market, goes 
down, generally banks don’t do as well and often,   they will let people go. So, there are risks and 
rewards to doing this but again, the good news is   it’s interesting, you work with smart people, 
and generally not underpaid. That has been my   experience. So what are the key qualifications 
there? Interpersonal skills. Interpersonal skills   are key. I teach a lot of quant courses and the 
thing which distinguishes quants from a success   standpoint, is largely the extent to which 
they are able to express themselves clearly,   spoken and written English.

Very important being 
able to communicate, having interpersonal skills.   You have to network, you have to get to know 
people. Some people do it naturally, some people   have to kind of push themselves in that direction. 
They have to have self confidence. They have to   take the lead. They have to own the problem. 
Alright, and they have to handle, they have to   be able to handle high stress environments. If 
you’re gonna get crushed when things get tough,   it’s not a business you want to be in. Basic 
qualifications. I don’t know about this, I mean,   I’ll let Kara speak to that 3.5. I didn’t have 
a 3.5 when I was an undergrad but I worked very   hard. But, regardless, internship experience helps 
and one major reason internship experience helps   is that when I see someone just had an internship, 
I know that they’ve proven to me that they have an   interest in the business.

So do I care whether 
somebody had an internship doing credit cards at   CitiBank or doing investment banking at Goldman 
Sachs. No, really, I don’t. Or if they had an   internship doing investment banking at a tiny 
little regional investment bank in Tuscaloosa,   Alabama. Nope, don’t care. I’m more interested 
that you got the job, you did well at the job, and   you show me that this is something you’ve really 
thought about. This is something you want to do.   Very important is proving to me your interest, 
because a lot of people, and I think I was one of   these, I got caught up in the moment.

One reason 
I want to do finance is a lot of my friends are   doing finance and fortunately, the more I heard 
about it, the more interesting it was. Now,   I can’t, a question came up with the minimum GPA 
requirements, I can’t speak to that directly. I   can tell you that when I look, my own heuristic 
when I’m looking at resumes is, I look for 3.0,   and if you don’t have a 3.0, maybe you don’t want 
to put your GPA on the resume.

I will defer to   the Career Center on that. Yeah, so some of firms 
will post a minimum requirement. Typically, it’s   like a 3.2 or a 3.3, I’ve seen more frequently 
than a 3.5. I also always remind students it’s   the whole package. So the GPA is one piece of it 
and I saw a question came in also about how do you   compete with the requirements. If you were working 
full-time, employers are looking at everything   and I’m sure Professor Abbot would agree they’re 
looking at your internship experience, your GPA,   your extracurriculars, your leadership, 
your work experience, and they’re looking   at it all together. Also, how you present 
yourself on your resume, if it’s well done,   if there’s no typos or errors. So don’t focus 
on one piece, you want to highlight the areas   that you’ve excelled in or that have been really 
meaningful for you. But if a company does post   that they have like a minimum 3.2, and you don’t 
meet it, there are some times they won’t allow you   to apply. Let me tell you a story though, I had 
I had a kid last year, before he left, who was an   immigrant to the country.

Neither of her parents 
went to college, I’m not sure her parents finished   high school. She’d had some challenge, took some 
time off, she’s one of the most polished people   I’ve ever met. And she had worked in an accounting 
function without a college degree for a company   and I got a call from a friend of mine at B of A 
and said we need some people with some raw skills,   can you introduce me, and she didn’t, she did not 
have the requisite GPA for the honors program.   Alright, she was below a 3.5, and she landed a 
job at a relatively senior position at Bank of   America and made a boatload of money her first 

It was a story, she took time off. If   there’s always a story, it’s okay. Now, there’s 
another question about better to get an MPA or   MBA or CPA or MS before you start the job search. 
There are different opinions on this. Personally,   I tell people, no. You know, I know that Baruch 
will offer you a special deal if you go on and   continue on and that’s fine. If you think 
that works for you, that’s okay. My issue   is when I went to grad school was six years after 
I finished undergrad, and I was highly motivated.   I knew exactly why I wanted to go to grad school 
and my experience was completely different because   I was much more driven because I knew why I was 
spending all this time and money doing this.

With   a CPA and an MBA right after college, you don’t 
know what you’re doing, you don’t know what’s   important and what’s not. You may spend all your 
time looking at municipal securities tool-making   board rules when I had to study that, for those of 
you who want to know. But I’ve never used those,   even when I was in the Uni desk. There’s a lot of 
useless stuff you can learn that’s not gonna be,   it’s not gonna be as useful to you. I ended 
up taking a, I did an economics program,   then I did a quant program, because I needed a 
quant background. And I was very motivated but   I knew why I wanted to do it so it’s very, very 
important to do that. Some asked the question,   would you accept an offer for a company you’re not 
interested in? If it’s the right business and it’s   the only one that you have, take it.

That would 
be my advice. Your first job is what it is in golf   and I don’t play golf. I’m a musician, you can’t 
be a musician and play golf. It’s what we call a   mulligan. It’s a throw away. If you do really well 
at your first job, great. If you do poorly at your   first job and you hate it, you go do something 
different. Hey, when you interview for the second   job, say I took this, I tried it, I worked really 
hard at it, I didn’t like it. It’s okay! I have   never held a first job decision. You know somebody 
who worked for Macy’s for a year and discovered   they didn’t want to be a buyer, they wanted to 
be in banking and then they told me why they   wanted to be in banking.

It was a good story. 
Hey, sold! No worries. Your first job, you get   a mulligan. It’s a throw away if you want it to 
be. I tell people your first job should be a. to   learn the lay of the land, what are the different 
types of companies, what do people do, and do   I really want to be in this business or do I want 
to go to law school, do I want to go get a PhD,   do I want to go work for a film company? That’s 
what your first job is about. That is my opinion   on that. Alright. So, let’s talk a little bit 
about the types of businesses that are involved   in this. Or let me- hold on, let me just make 
sure I covered- oh, I didn’t cover the technical   stuff.

Let me go through that. Technical, 
knowledge of finance and accounting. It helps,   accounting is painful, for me. Gotta have it, even 
on the quant side. I found having, I took three   semesters of accounting, and to me, I’m so glad I 
did it. Was it boring and tedious? Oh, yes, but it   would tremendously useful throughout my career and 
now, with all three semesters of accounting, none   of the accountants could put stuff in front of me 
that would totally lose me. I knew what was going   on, I knew enough accounting with three semesters 
of accounting. Four semesters would probably be   even better. It’s not wasted time. Finance, know 
stocks, bonds, CAPM, arbitrage, pricing, a little   bit of portfolio theory, that’s what I feel found 
useful. Analytical and quantitative skills. I tell   people and there are different schools of thought 
on this, but I think it’s really important to   have some advanced quantitative skills. I let 
people that take a semester of linear algebra,   two semesters of calculus, a couple semesters 
of statistics, I found that to be useful.

Again,   painful, and look, I know, I did a master’s 
degree in statistics and it was very painful,   but tremendously useful. It really, it really- it 
made my career. And as a result of that, you gain   knowledge of the analytical tools that you’re 
required to know. Somebody says most companies   want people 1-3 years of experience, where 
do you recommend you look for your first job?   Wherever you think you can find one that will be 
an interesting position. If you did mutual funds   and then you want to go interview for investment 
banking, that’s okay. When I looked at resumes and   looking for interest, and need somebody to cover 
commodities, if I saw they did investment banking,   that’s okay.

They want to cover commodities, 
I can understand that. If I saw that they   did- they worked for a civil engineering firm, 
designing street signs that could be visible,   then I kinda scratch my head and say, how can you 
prove to me that you’re interested in finance if   you worked for a civil engineering company.That 
becomes a different story. Developing your story   is much trickier there.

So I hope that helps. 
Alright. Knowledge of relevant analytical   tools. I think the key thing is knowing how to ask 
questions when you're a junior person. Even when   you’re a senior person, you’re going outside your 
area of expertise. I mean, I have a certain amount   of statistical knowledge and there are things for 
me, the key thing was knowing where my knowledge   stopped and when to bring in an expert. Never 
talking about things I didn’t know about. So it’s   understanding the tools that are available to you. 
Knowing that when you’re working with a portfolio,   you might be using portfolio optimization tools 
and they use a certain kind of math. Do you have   to know that math? Not necessarily, but you 
need to know that that’s the kind of math that   people do when they do that.

When you’re doing 
Black-Scholes, you’re doing option pricing,   you need to understand, what is it about 
partial differential equations that makes   this work? When I’m doing time series analysis 
to study market behavior, I need to distinguish   between volatile periods and quiet periods and the 
different tools I have that are out there. So, a   key thing is understanding the tools. It’s almost 
like knowing what the difference is between a car,   an SUV, a pickup truck, and a dump truck. And 
yeah, they’re all internal combustion engines,   you turn them on with a key, they have 
headlights, they can go fast or slow on the road,   but they’re used for different things.

So you need 
to understand the tools that are at your disposal   and how those tools can be used. Alright, so 
let’s talk a little bit about investment banking.   Investment banking is primarily, not exclusively, 
now I want to distinguish first between investment   banking and investment banks. Not everything 
that investment banks do is investment banking,   per se. And that’s why I broke this presentation 
into businesses and types of companies because   investment banks are broad institutions that could 
do asset management, custody management, security   sales, securities trading, mutual funds, all 
kinds of different things. The investment banking   function is primarily capital raising and advisory 
on mergers and acquisitions. Also, I would add   private equity to that and I’ll talk a little bit 
about private equity. When I think about what an   investment bank, what investment banking as a 
business is; first, it’s underwriting. Company   wants to issue bonds, they want to issue stock. 
What should the price be? And they’re different,   there are many different analytical tools we 
use in assessing that.

We do industry analysis,   we look at the way the markets behave, but what 
are the options that are open? What types of bonds   are out there? What types of stock offerings are 
there? How is it managed? How is an initial public   offering managed versus a secondary offering? 
That’s one very distinct piece and also in that   piece, very distinct bonds versus stocks. Equity 
capital market is very different from debt capital   markets. Cause in debt capital market, if we 
have a high yield and high grade, those are very,   very different businesses. So the first thing 
that investment banking is is underwriting,   allowing companies to raise money in the public 
securities markets and sometimes, the private   securities market. Alright, the second thing is 
advising. Mergers and acquisitions, LBOs which is,   you could argue, a form of acquisition when the 
inquirer happens to be managing the company,   and restructuring the company. So, company A 
wants to expand in a particular business.

How   do they find a company that fits that and how they 
combine? Which is, they want to align themselves   horizontally or vertically? Do they want to buy 
someone who supplies them with something or to   whom they can supply something or do they want to 
buy somebody who is similar to them so they can   gain economies of scale, economies of scope. 
Very different types of analysis. And then,   when you do that, there are different forms 
that M&A can take, it can be a merger,   it can be an acquisition.

They’re different 
and these are different legal formats,   different types of transactions. Leveraged buyout 
is when the management borrows a lot of money   to take the company private. So it’s a reverse 
initial public offering. Those are structured a   very particular way. You spend a lot of time doing 
credit analysis on the cash for the company to   make sure you understand whether they’re gonna 
have to cash to pay off the debt and the debt   often has covenants on it, which are, which can be 
very restrictive. And then restructuring, company   wants to restructure itself. How might it do that? 

Excel is a presumption. Powerpoint helps,   also. With Excel, oh god, I’m teaching a business 
analytics course in the Honors Program this fall   and I’m gonna spend a lot of time on Excel cause 
you’re gonna learn it one way or another. You can   either, you can either figure out how to do that 
funny graph at 11:45 at night because it’s due   the next morning at 7:00 when your boss comes in. 
Well, you can learn it in school so it only takes   you five minutes to do, but you have to learn 
how to use Excel.You have to learn the basics   of Excel because it’s so powerful in terms of what 
it can get done. The world changed completely when   spreadsheets, when spreadsheets came out. 
Powerpoints. And powerpoint isn’t just how   do I turn on Powerpoint and how do I make slides. 
It’s how you make a presentation. I would actually   change to Powerpoint presentation skills. And I 
have a whole separate, I have a whole separate   thing on presentation skills we can talk about. 
Having witnessed thousands of presentations,   having given thousands of presentations, 
I’ve got my own style tips on how to set   these up.

For example, no fonts smaller than 
20, no more than 2 sentences in each bullet,   usually only one sentence per bullet. It’s a whole 
school of thought on how to make presentations   make sense. Ability to work long hours. I never 
worked, I confess to you, I never worked an 80   hour week. I worked multiple 60 hours plus weeks 
definitely. Actually, maybe when I was teaching   in the, at some point, I was America’s cheapest 
[unintelligible] from Barclay’s and I was teaching   at three different places. Maybe some of those 
weeks I worked 80 hours a week. Not uncommon,   but on the other hand, and I talked about this 
a couple weeks ago, you may really like that.   I know I did. When I got my first big raise, I 
was like wow, give me more work to do. It’s 10   o’clock at night. No, I want more and it’s very 
satisfying when you get a lot of stuff done,   [unintelligible]. And detail oriented. You have to 
be, you have to be ready to stand by the numbers   you create.

Alright, so I mean this is a brief 
description of investment banking. You spend   hours on this and I spent a fair amount of time 
talking about this in [unintelligible]. Private   equity is a subset, some people say it’s a subset 
of investment banking, other people would say it’s   a subset of fund management, because most private 
equity is done as part of a fund and it’s a whole   different set of, private equity is buying and 
selling companies that are not publicly traded.   They’re often owned by a small group of people 
or one person and it’s not listed on a public   exchange. So there are funds and there are 
investors in those funds and the investors   in those funds rely on the fund investment company 
to invest in a number of small companies, smaller   companies that aren’t publicly traded.

why would you do this. Well, you know what’s a,   stock market, you can get a dividend, you can 
get, and in a good year, you can certainly, you   can double your money, in a very, very, very good 
year. With a diversified portfolio, it’s gonna be   tough to do that. With a private equity portfolio, 
I’d be really, really disappointed if I made less   than 20% per year. In fact, if I invested a lot of 
money privately, I’m looking to make a 100%, maybe   two or three or 400%, depending on how much risk. 
The fact you can make that much means you can lose   all your money, but I’ve seen many private equity 
investments return 400%.

Now, it’s a portfolio   game, because in private, for every ten that make 
200%, you’re gonna have one that loses everything   and I’ve seen that many times and for any number 
of reasons. But it’s a very different type of   business. So, here institutions and retail, 
when I say retail, you’re not gonna get into a   private equity fund for less than a couple hundred 
thousand dollars, probably less than half a m-,   you can’t get in for less than half a million 

But institutions will do 100 million,   200 million, a billion dollars. Pratt pension 
funds will invest billions of dollars in private   equities investments. In a private equity fund, 
the pension fund isn’t gonna buy the company. The   pension fund is gonna buy shares of a fund that 
invests in a portfolio of private companies. I   sat on the investment evaluation committee for 
Morgan Stanley [unintelligible] private equity   business and I looked at dozens, probably hundreds 
of companies and evaluations and I was part of the   final decision-making process. By the time it got 
to us, it was mostly a sniff test as it doesn't   make sense, although, all the hard work was 
done by the analysts, but it’s a very different   business.

Most employees have advanced degrees, 
many with MBAs, some have PhDs. Certainly, an   analyst in private equity is an interesting job to 
have, but you really need to understand corporate   structure and strategy, in order to understand 
how these businesses do well. Generally, private   equity funds have limited partners who provide 
the capital. They usually own most of it and a   general partner who owns a small percentage 
and is the manager. So the general partner   executes and operates the investment. Alright, any 
questions on investment banking or private equity?   Alright, I’m not seeing anything come up. Alright. 
Sales and trading is another business, sorry,   wait for it to come up, which is not investment 
banking, per se, but many investment banks have   sales and trading operations so where they 
directly face off with the markets. When we   think of an investor, almost all investment 
banks, I think an M&A advisory firm might not   have a sales and trading operations but the big 
investment banks, Goldman Sachs, Morgan Stanley   and universal banks, you know, Bank of America, 
Bank of Switzerland, they have sales and trading   operations and it’s the distribution arm of 
the investment bank.

And also, for some banks,   it’s proprietary trading. Now the Volcker Rule, 
which came out of the Dodd-Frank Act of 2010,   prohibited banks from making proprietary 
investments subject to certain restrictions or   make private equity investments but there’s still 
a lot of broker dealers can certainly do prop   trading that banks couldn’t do. A very different 
lifestyle than investment banking. When I worked   on the trading side, I would.

There’s a question 
about investment banks and private equity. Private   equity, different focus. When you’re doing private 
equity, you’re looking at, should I buy this,   should I incorporate this small, private company 
into my investment portfolio. Investment banking   is a company needs to raise money or needs advice 
on as to what company they want to buy. Very   different, very different [unintelligible]. But 
we can, we could take that offline. Alright, very   different lifestyle than investment banking. When 
I worked in trading, generally at my desk by 7,   and I generally got out at a decent hour because 
when the markets closed, you close up the books,   you can go home but it’s really, really intense 
during the day. It’s a different thing so when   you’re focused on the market, you generally 
work market kind of hours. Skills, you got   to understand finance, you gotta understand 
financial markets. You have to want to look   at Bloomberg every morning to understand why the 
markets are doing what they’re doing. In my mind,   you really need to find, I think I might have 
used this analogy last time, to be successful   in the sales and trading business, you have to 
look at the markets, the way an entomologist   looks at an ant farm or a beehive.

You stand back 
and say why are they doing that? What’s driving   this particular action. That to me is the key. 
Communication skills, always. You have to be able   to articulate what’s going on to people in clear, 
effective English. High energy helps because it’s   a very active marketplace and tolerance of 
pressure. I’m telling you, oh boy. I spent,   it’s very high-pressure. There’s no better 
feeling than making a lot of money trading.   There’s no worse feeling than losing a lot of 
money trading. I can tell you that from personal   experience. Do I think that positions will be gone 
because of logarithms? Logarithms? I don’t think   you mean logarithms. Regulations? Algorithms. Uh, 
it’s hard to say.

There will always be somebody   that needs to mind the store. I think that we 
will continue to make advances in algorithmic   trading but their portfolio decisions, which can 
be aided by algorithm, but I think ultimately,   to some extent, will require some kind of human 
supervision. That’s what I think. I think there’s   only a certain, there’s a certain amount that you 
can automate and a certain amount needs to be,   needs to be done by people. That’s what I 
think. So when we talk about sales and trading,   what are we talking about? So primarily, we’re 
talking about four different product sets;   commodities, foreign exchange, fixed income, 
and equity. There certainly may be others,   I think you could argue bandwidth, there’s other, 
I would say 95 to 99 percent of sales and trading   is taking place in these product categories.

liquids. So when I crack a barrel of crude oil,   what do I get? I get, I get light ends, I get 
gasoline, I get kerosene, I get fuel oil, jet   fuel, sorry, jet fuel, fuel oil, residual fuel. 
Oil liquids, petrochemical can be part of that.   Metals, base and precious. Aluminum, copper, base. 
Gold, silver, platinum, precious. Algriculturals,   wheat, corn, soybean oil, soybean meal, soybeans, 
live cattle, tiger shrimp, cheese, butter, eggs,   for smaller futures contracts.

Largely when 
we talk about eggs, we’re talking about wheat,   corn, soybeans, pork bellies, live cattle, live 
hogs, a couple others. And if you go to Chicago   Board of Trade, you’ll see them listed as what 
the major ones are. Alright, nat gas and power   and I list them together because in, certainly 
in the US, and there- for countries like France,   relies very heavily on nuclear and other countries 
have some access to renewables.

But in the U.S.,   most power is provided through natural gas 
so there’s a relationship between natural,   how much power you get from a certain amount 
of natural gas.That’s called the spark spread.   Between coal and power is called the dark spread 
but that relationship, they’re interchangeable. So   when we talk about this and it’s a whole different 
complex and these trade completely distinctly from   oil liquids, I would argue. Foreign exchange. 
Major currencies, dollar, yen, Euro, pound,   Aussie, kiwi, Canada. Those are the major 
currencies and the relationships between them.   Most of them are traded against dollar. There’s 
a couple we call the major crosses, Euro:sterling   would be one of the major crosses, Euro:yen would 
be another, pound:yen would be, would be another   one. Alright, but so those are the majors. Minors 
would be currencies that a lot of certain Latin   American currencies would be considered minors. 
I think you’d probably put renminbi there, even   though it’s a huge country, the currency doesn’t 
trade like a very liquid currency.

There’s a lot   of government controls there. And exotics, they’re 
small countries. Azerbaijan, the Kazakh Tenge,   the Peruvian Sol, for example. Not a lot 
of liquidity there. Fixed income, we have a   variety of different types of instruments that are 
traded. They’re all bonds, they all have coupons,   they all pay interest from time to time, but 
they’re different, very different instruments. You   got treasuries, which are liabilities issued by 
the U.S. Treasury. High-yield, companies with low   credit ratings. These trade completely differently 
than high grade bonds that are BBB, AA, A,   and AAA, in terms of the credit quality. Different 
market. Municipals, which are bonds issued by   states and local governments. Sovereigns, bonds 
issued by governments outside the U.S. In the   U.K., they’re called gilts. In France, they’re 
OATs and BTANs. They’ve got a different name in,   Bundesobligationen in Germany, different sets 
of names in different countries.

And emerging   markets. So emerging market countries often issue 
sovereign bonds and they trade in a very separate   market. In equities, generally it’s Delta one, 
which means it’s like trading a stock or trading   a stock directly or [unintelligible] just like a 
stock or trading some kind of option. And there   are many different types of options involved. Some 
of the options are options; they are puts, they   are calls, there’s a whole separate thing. I spend 
a lot of my class talking about the difference   between these.There’s prop and there’s flow. A 
prop isn’t done too much anymore in the equities.   It’s buying and selling for your own account to 
make money because you bought low and sold high   or sold high and bought low. Versus flow, which is 
customer trading.

So you’re buying and selling on,   you’re making marks for your clients. You’re out 
there buying on behalf of your clients or you’re   maintaining an inventory. So these are very, 
very different types of businesses and we can   certainly spend a lot of time, this is where I 
spent most of my career. I covered all these at   some point in time. Loved commodities. Been out to 
a lot of different commodity areas to see it. Any   questions on sales and trading before I move on? 
One came through to me. Is fixed income trading   more complex or harder than equities, especially 
now that rates are so low? I would say it’s more   complex. I think you could argue that each of 
them have their varying levels of complexity.   When you’re talking about corporates, you’ve got 
a whole different set of risks that are there,   which is is the company going to default? Now, in 
a really bad year, higher bonds as a class default   at about a four percent rate so 96% of high-yield 
bonds won’t default in any given year. It’s much   lower. The default rates are much lower in high 
grade bonds.

A double A bond, historically,   has .02% probability of default based on history 
and lots of analysis that are done here. So when   you start going from Treasures, which suppose they 
have zero risk, countries are not supposed to have   risk because if a country gets into trouble, 
they can always print more money unless you’re   Russia and you default on local currency debt but 
Russia, it’s like those internet memes. Meanwhile   in Russia. Russia lives on plant Russia and they 
do their own thing. It’s really hard to describe   or understand what goes on there, but countries 
aren’t supposed to default on local currency debt   because they could create more currency so you 
don’t spend that much time worrying about country   risk.

Although, there is the probability, even 
in the U.S., that a country could default because   there’s some kind of political issue, and the 
government, the Congress doesn’t approve the   budget. We’ve had a couple standoffs in the past 
ten years where the U.S. could, while the U.S.   has the money, they might default, which is 
to say they didn’t make the payment on time,   because there’s some political thing that got in 
the way.

It’s a whole different type of analysis,   and when we talk about country risk, we’re talking 
about sovereigns and the emerging market debt,   and this could be country debt or this could be 
company debt. You got a whole, you have to put   currency restrictions involved. There are a whole 
bunch of other things that are involved when we   think about debt. Municipals is a separate 
market. Municipal bonds are tax-exempt at the   federal level, so they trade very differently 
and they’re held, but most munis are held by a   mom-and-pop in mutual funds.

A lot of this is held 
by, others are held by institutional investors.   Very different markets. Very different. In fact, 
you’ll find people that can move from one fixed   income area to another fixed income area. You 
don’t see much crossover, people going from fixed   income to equities, equities to fixed income. 
In my experience, people typically specialize.   I’ve seen a lot of people go from fixed income 
to commodities.

I don’t see a lot of people go   from commodities to fixed income. I have seen it 
done. Often, fixed income covers foreign exchange   and sometimes, it includes, there’s fixed income 
currencies in commodities, but it varies. Equities   is always separate. Delta one. Somebody asked 
a question about delta one. When we talk about   Delta one, generally its cash equities. It could 
be other things that have prices that move like   equities like total return swaps, for example. But 
mostly when we talk about Delta one, we’re talking   about largely cash equities, buying and selling 
stocks, or things that behave like stocks. ETF,   for example. Alright. Alright, wealth management 
is a whole separate business. Wealth management is   basically providing investment advisory services 
for wealthy people. Now, wealthy people are, fall   into several different categories. There’s the 
mass affluent with maybe up to a half a million   dollars to invest. High-net-worth individuals with 
up to like a million, two million to invest. Very   high-net-worth individuals, anywhere from two to 
twenty million to invest. And ultra high-net-worth   individuals with north of 20 million to invest. 
Some people with ultra high-net-worth have 40   million to invest. So a high-net-worth individual 
wants to be able to make the right investment   for his daughter’s college fund.

A high-net-worth 
individual might be managing money so they can buy   a second home or another Audi S8, alright. A ultra 
high-net-worth person wants to buy a Picasso for   four million dollars and probably has two or three 
yachts and a villa on the French Riviera. So their   needs are very different. How they borrow money 
and what they use as collateral. They’re people   that use art as collateral. How do you judge 
that? It’s a whole different thing.These people   need credentialed financial advisory specialists 
they can call on and why’s it different than a   fund? Well, because when you’re dealing with an 
individual, you have to coordinate their retail   banking, so the person, they might have 10 million 
in the account, but they need a checking account,   they need a savings account, they need to be able 
to shift money back and forth, and they don’t want   to wait in line at the teller.

Estate planning, 
how do I pass this money onto my children without   triggering taxes? Legal resources, how do I make 
sure I’m setting up myself in such a way that I’m   not paying any more tax than I need to pay. Do I 
want some of this offshore or do I want to keep   it onshore? How do I minimize my tax bill while 
still remaining in the confines of the law? Tax   planning is a very part of it. And investment 
management, do I want to have my money largely   in stock or largely in bonds? When you’re young, 
the equity market over the long-term outperforms   all other markets. It just has over centuries, but 
as you get older, your tolerance for loss changes,   because your timeframe changes.When I was 30, 
my investment horizon was 40, maybe 50 years,   so I was willing to take risk, because I knew 
over the long run, I’d make the money.

Well now,   I’m a little older, I’m almost 60, I don’t have 
a 30 year timeframe anymore. I have a 10 year   timeframe. I, just before, just as coronavirus, 
I’d still taken a rather aggressive position,   I was 70% equities, 30 % everything else, which 
is a very aggressive position and it served me   very well for a long period of time. But when 
coronavirus hit, I changed that to 30/70,   I repositioned. Now, because I spent so much 
time in the business, I didn’t feel the need   to go to an investment manager for this advice. 
I’m not gonna pay somebody 2 to 3 percent to make   decisions that I should make because I spent my 
whole career doing this, but understanding how to   make those decisions for people that have money to 
invest is very, is very important..

And again, so   estate planning, business-succession, stock-option 
planning, hedging for large blocks of stock. If   somebody’s gonna get, if somebody owns a large 
block of stock, they want to hedge their position,   how do they do that? They demand a greater 
level of service. Again, you don’t want to   wait in line at Bank of America if you’ve got 
20 million dollars in their account. You want,   you want a special service. You want them to 
serve you crudités and maybe offer you a glass   of champagne when you sit down if you’re keeping 
that kind of coin there. And the products that   people buy are very, very different. There’s been 
a huge increase in affluent investors so there’s   been a much greater demand for more sophisticated 
solutions. Used to be just put your money in the   bank, bought some stocks but now there are 
people, they can help you structure portfolio   and now you’ve got automated processes that do the 
wealth management side, that are taking artificial   intelligence so it’s a very different business. 
So the primary difference with individuals   versus corporates or time horizons, companies 
can exist for a hundred years, individuals,   you know, what’s that life expectancy? 70? 80? 
So you have to manage over a shorter period of   time and you have to have tax-efficient 
asset transfer strategies and individuals   face different taxes by locality and investment 
strategists have to take that in consideration.   Alright.

When we think about corporate banking, 
generally not specifically but generally,   we’re talking about making loans and how do we, 
how do we do this business and how do we make   loans and who does that? And that is largely a 
credit intensive business where you’re looking   at financials – you’re looking at a company, 
not financial institutions.

You’re looking   at companies’ balance sheets and making the 
assessment as to whether or not they can handle   the amount of debt which is being proposed for 
them to take on. And so being a lending officer   is making those decisions and this is all part of 
the, part of the credit process, which I’ll talk   about next time. And so you’ve got loans, you’ve 
got cash management services, you got leasing,   commercial real estate. Alright, trade finance, so 
somebody wants to finance their receivables from   doing international trade and they offer services 
through their investment banks. So a lot of it is,   when we talk about corporate banking, we’re 
talking about how do we provide debt through   bank loans as opposed to bonds to companies and 
I would argue that that is the key part here. Now   we’re just about one, we’re just at about an hour, 
so I think I’m gonna stop here. Next time we meet,   assuming there’s interest, what I will do is 
I’ll cover the key functions.

This has taken,   parts of it are taken from, I’ll just give 
it a quick preview of that and I’ll post this   presentation. We had you ‘till 2:30. Oh okay. 
Then I’ll spend some time going through these   four functions. For every, did I lose anyone? 
Let’s see, how many people do we still have?   45. 45! Well, it did increase. How ‘bout that. 
Alright, for every front office job; lender,   trader, wealth manager, investment banker, they’re 
anywhere between two and a half and ten support   functions.

People in, people doing supporting jobs 
that facilitate that business. I spent some of   my career in the front office, I spent most of 
my career in the middle and in the back office   and there are plenty of excellent jobs to be had 
there. So I’ll talk a little bit about the ones.   And again, I’ve got a whole course on control 
functions that I teach in the fall. So first,   I’m gonna talk about risk management because 
that’s where I spent a lot of my career. Market   risk, credit risk, operational risk. Market risk 
focuses on how much you can lose in stock, a bond,   a derivative, currency, commodity, a structured 
product based on how the market moves.

The focus   is generally relatively short-term, anywhere from 
five minutes to five days to maybe five weeks,   but the time horizon is gener- and the metrics 
are focused on relatively short-term measures   of risks. The presumption is that instrument, we 
can get out of these instruments within a week   or two and that we can hedge them. Alright, so 
again, securities, which are stocks and bonds,   commodities, which can be cash or derivatives. 
Stocks and bonds also can be cash or derivatives.   Currencies, alright. And equities, well, I’ll 
talk about equities as part of securities.   How did their prices move? I think of it as this, 
understanding the statistics of the market and the   portfolio of the bank, and how we can make sure 
that senior management is fully aware of the risk   profile of the trading book of the bank. That to 
me is the very definition of market risk.

Often,   not always, often tied to the sales and 
trading portion of the business. Certainly,   if you’re on the buy side, there are, in a mutual 
fund, they’re gonna have risk management then have   different kinds of metrics that they look at, but 
this is something, this is, most often, part of   the sales and trading part of the business. 
Skills, highly analytical. You gotta have,   generally quantitative analysis comes, generally, 
not exclusively, generally in two flavors,   either partial differential equations in terms of 
being able to price contingent claims, which are   options or understanding statistics time series. 
Econometrics. Those types of skills are very   valuable. Uh, computers and computer programming. 
Now, I haven’t programmed in thirty years,   but I did program for a while, and I learned 
a lot about how, what good code is and how it,   why it’s important to do. So now, understanding 
SQL, in terms of a structured query language,   C++, Python are all these languages that are out 

People who do market risk usually end up   spending a lot of time doing Microsoft Excel. Just 
an important part of the business. Any questions   on market risk? I’ll wait ten seconds before 
that comes up. Nothing on market risk, we just   got a couple of other questions previously. Yeah, 
I think, I think, I think I got those, lease the   ones I see. Are there any that I don’t see that 
were sent to you that you want to ask me? No,   that’s it. Alright. Credit risk looks at people 
or companies that owe us money and the probability   that they’re going to pay us back. Now, when 
somebody owes us money, they might, they might,   they might fail to pay us back for one of two 
reasons. Either they’re unable, they don’t have   the cash or they’re unwilling.

Sometimes, they’re 
unwilling just, because they’re jerks. Sometimes,   they’re unwilling, because they think they’ve 
been cheated and the documentation says that.   Sometimes, they’re unwilling, because they don’t 
think that they owe money based on their read of   the contract and so credit risk is making 
sure that your claims against somebody are   good and well understood and and aggregated and 
reported. Now, when you aggregate credit risk,   how do you do that? Do you do it based on 
outstanding? The credit risk of a one month bond,   the overnight credit risk of lending money to 
somebody or the, there’s one day credit risk,   one month credit risk, one year credit risk. 
Those are very different types of risks and   there’s whether or not I have collateral, and how 
do I manage that collateral? There’s understanding   that I may be lending to ten different 
subsidiaries of a company so when I say I,   when I look at J.P. Morgan, I’m just, not just 
looking at J.P.

Morgan bank. I’ve looked at   J.P. Morgan securities, I’ve looked at J.P. Morgan 
Asset Management, I’m looking at all the different   subsidiaries and untangling those exposures to 
understand how that risk aggregates into a whole,   understandable whole. Now, responsibilities 
are evaluating companies/industry fundamentals,   projecting earnings, preventing cash flows, 
and understanding the probabilities of default.   As I mentioned before, high-yield bonds in 
general, in a bad year, would default at a four   percent clip. Triple-A bonds [unintelligible] 
haven’t seen a company in last hundred years,   known history, certainly from which I’m aware that 
having had a Triple-A rating at the beginning of a   year was in default by the end of the year. I 
only know of one instance where a company was   Double-A and then defaulted within a year and 
that’s Enron in 2001, 2002. So they, still even   with Single-A bonds, you’re still talking about 
under one-half of 1% of these are gonna get in   trouble over a particular year but understanding 

Also, understanding how those risks come   about. There are fundamentally two, maybe three 
different ways somebody can owe you money. Either   you’ve lent them money and they need to pay 
you back through a bond or a loan or something   like counterparty risk. Now, the best analogy to 
counterparty risk is if I’m betting with any of   you on the spread of a basketball game, in this, 
in reality, it’s on the price of a security or a   commodity or a stock or bond, alright. But I’m 
betting with you on the spread of a basketball   game. At the start of the game it’s zero. 
Throughout the game, I can owe you, you could owe   me, maybe ten dollars a point. At some point, risk 
has been generated, because you owe me money and   you haven’t paid back. I haven’t lent you money, 
per se, but we’ve agreed on the trade and the   trade has made for me.

You owe me that money. Are 
you gonna pay me back? In terms of the liability,   it’s just a [unintelligible] liability. You could 
put somebody in bankruptcy, because you lent   them money, and they didn’t pay you back or you 
put them in bankruptcy because they owe you money   on a transaction, like the spread of a basketball 
game, for example. And they didn’t pay you back.   There’s also a type of risk called settle risk, 
which I would argue is counterparty risk, where   I agree to sell euros to you and I’m gonna pay 
you dollars and I wire the dollars into your fu-,   into your account and you haven’t paid me my euros 

It may only take two or three or five minutes   but I know that money’s coming in? I would 
argue that’s a type of counterparty risk. Not   everybody necessarily agrees with me on that but 
that’s okay. So when we talk about credit risk,   we’re talking about issuer risk and counterparty 
risk, we’re talking about willingness or ability   to pay us back. We’re talking primarily to 
bonds, loans, or derivative transactions.   That make sense? Anyone? Any questions on credit 
risk? I do an entire lecture on credit risk. Is a   very – a lot of people get involved in credit 
risk. Alright, I will take that as a no. Next   one, operational risk. Operational risk is a 
requirement of Basel II. If you look in the   lower left of this, the lower right, sorry, other 
left. Give me a second while I full-screen this.   This is the amount of assets by the type 
of risk taken by major companies.

2018,   but it hasn’t changed that much. At most financial 
institutions, big financial institutions,   the bulk of the risk is credit risk: loans, bonds, 
derivatives. Most of the risks that Citigroup and   Goldman take is credit risk. The second highest 
amount of risk is not trading risk, market risk.   Even at Goldman Sachs and Morgan Stanley, which is 
a big trading house.

The second biggest source of   risk is operational risk, and operational risk 
is the likelihood of loss from failed people,   failed process, bad luck, bad weather. You can 
have damage to physical assets, internal fraud,   external fraud, you can have losses from process 
management, you can have losses from angering your   customers, they’re all different types of ways you 
can lose money, and we think about these losses in   an actuarial sense. We can estimate probability 
and severity when we do this, and there are many   highly analytical techniques that do this. A lot 
of it is very process-oriented, but some elements   are very, very, very quantitative. The key risks, 
the key tasks involve the key risk indicators,   so we come in with dashboards. One of the things 
is are we running hot or are we running cold.

How   many securities are we trading? What is the 
volume? How many fails? How many operational   errors do we have? How many times did the systems 
fail? How many times did people not complete their   training? How many times did we have somebody 
do a trade they weren’t supposed to do and break   through a limit? Risk control self-assessment 
is another thing that goes on. Companies do a   very detailed self-assessment of where they 
are taking risk, and it’s a very detailed   questionnaire that most parts of companies have 
to go through. Certainly, all banks have to do   it and many other types of firms as well. SA 
is scenario analysis. So scenario analysis is   a highly detailed self-assessment on a business 
by business basis where we’re going with senior   management of equities and say let’s talk about 
all the ways, the very low probability ways you   could lose business. Do you have any probability 
of fraud? Do you have any systems failure? How   often did it happen and how much did you lose 
when it did happen? Policies and procedures and   loss analysis.

When we lose money because a system 
failed, whose fault was it? What happened? Anytime   you lose money that isn’t from market risk or 
credit risk, you record that loss, and you define   what happened, because you need to track that, and 
again, the second biggest source of losses for big   banks is not trading losses, it’s operational 
screw-ups. And a lot of it is retail losses,   because you screwed up with your customers. You 
didn’t provide them payments on time, you violated   some kind of covenant with them, you broke some 
kind of rule, you didn’t manage the money right,   huge losses can come about here. Sometimes, it’s 
bad luck. Sometimes, companies ten years ago had   huge losses. Nine years ago, because of Superstorm 
Sandy. Why was that? Well, all of lower Manhattan   flooded. You guys were not even in high school 
then for the most part, but a lot of banks,   particularly on Water Street had their computer 
systems in the basement.

Lower Manhattan was   generally under four feet of water. Guess what? 
All the systems went bad. That’s when companies   started having all their supporting operations 
out in New Jersey. Started moving things around   so they can get things that are not centralized 
in Manhattan. September 11th, the whole payment   system almost failed because the wiring was down. 
How do you measure that risk? Legal risk because   you got people that are breaking the rules, that 
are doing insider trading, that are hosing their   customers. How do you assess that? Operational 
risk takes a study view of how that takes place   and how it can be prevented. That’s a lot more 
in this, but these are the categories. Internal   fraud, external fraud, employment practices and 
workplace safety. So did I shovel my sidewalk   or did I fail to shovel my sidewalk and three 
people fell, broke their legs, and are suing   me for a billion dollars. Employment practices, 
do I discriminate? There’s huge source of loss,   a lot of this is going to be lawsuits, people 
that are not doing the right thing.

Clients,   products, and business practices, am I abusing my 
clients? Am I selling bad products? Am I selling   toxic derivatives that companies are losing a lot 
of money on? Damage to physical assets, did I have   my computer systems in the basement? Business 
disruption and system failures, did a storm stop   it and there’s overlap between these. Executions 
will be in process management. You’ve got a lot   of banks that are very big and very complex and 
can’t manage themselves, because they’re too big   to manage. So this is a whole separate area in 
risk management. Anybody, questions or comments?   Alright, I will take that as a no. 
Hold on. Nothing on my end.

Alright,   finance. Finance, in the context of a support 
function, finance means accounting. Finance,   generally, four separate roles. Commentator, what 
happened? Why did it happen? Did we make money?   Did we lose money? Why? Why did we lose money? 
Where do we make money? Where are expenses going   up? Where are expenses going down? And how do 
I measure [unintelligible].

Business partner,   how do I structure my business? How do I structure 
my business to make as much money as I can   possibly make as a business partner? Scorekeeper, 
focus on bookings, are my numbers right? Do I have   faith in my numbers? And custodian, governance. Is 
everybody doing what they’re supposed to do? Now   these are, this is not the list of roles within 
finance, not limiting the service to this but   you’ve got financial control, which is books and 
records, financial reporting, external reporting   to the public and to regulators, BP&A, business 
planning and analytics. How do I do budgeting? How   do I do a forecasting? How do I do control costs? 
There are a lot of positions in BP&A. Accounting   policy, how do I account for a particular thing? 
How do I make sure I got the economy moves   right? Regulatory policy, how do I make sure I’m 
following the regulatory rules on that? Treasury,   and treasury is often seen as a whole separate- 
it’s usually housed within finance, but how do   I manage money inside the company to make sure I 
always have enough cash on hand.

You could be very   wealthy but cash poor, not having the cash to pay 
your- the money coming to you and you could be put   out of business. Investor relations, often part of 
that, the CFO, which is a whole separate function,   the chief financial officer. How do I make sure 
that tax is being done right and product control,   which is related to financial control. Alright, 
so when we’re talking about within banking,   we’re generally talking about the accounting 
function. Anyone questions or comments? We still   have 40+ people or am I boring them here? No, 
we do. Wow, alright, that’s good. Let me just,   the problem, as soon as I can’t, oh actually, 
nameplates down here.

Look. Internal audit.   Internal audit is not well understood. Most 
people when they think of audit, they think of   E&Y or PwC or KPMG. Internal audit is not E&Y, 
PwC, KPMG. Internal audit is a function that   provides assurance to senior management that we’re 
doing the stuff we’re supposed to do. Actually,   not just senior management, also the board, 
regulators, other stakeholders and the job is   to make sure that people are following policy and 
procedure, that they’re doing the things they said   they were going to do, that the processes work. 
So if you say you’re in risk management, you’re   validating models, how do we know you validated 
all the models. Show me a list of all the models.   Show me all the model validation documents.

me the dates on which you completed those model   validation documents. Show me all the models that 
were used and prove to me that none were used   before the validation was complete. Show me that 
when you committed to fix something by June 30th,   that it was in fact, fixed on June 30th. Show me 
that when you committed to have a meeting with the   appropriate people to talk about the problems in 
a certain business that you had that meeting. Show   me the minutes in that meeting. So, in general, 
they assess the adequacy of the internal control   environment and the risk management systems and 
I would say, largely, it’s how to maintain an   effective internal control environment to minimize 

It’s a very big job, a very important job   and politically, it can be challenging. 
Admittedly, when I was very, very senior   and was very, very close to leaving, I thought 
about taking a job in audit because I could be   a pain to people and I had nothing, no political 
stake in the game and it’s very interesting. You   see everything in audit. It’s a great place to 
start, you see everything in audit. So you look   at the adequacy and effective risk management, 
controls, governance. Controls, how are you mana-   how are you measuring things? How do you know 
that your measurements are accurate? Governance,   show me your policies, your procedures, your 

Show me your committee structures. Are   you taking minutes? Are people showing up to the 
meetings? How do you know that you’re complying   with the laws and the regulations? They provide 
recommendations for improvement, and they help   detect fraud. So internal audit is, again, a very, 
very, very different function than audit, like   working for an accounting firm. Internal audit is 
very, very different. Any questions or comments?   Alright, general question. Let’s see. What is 
the main topic of my Fin 3093 class? The course   is called control functions. You look it up 
on CUNYfirst, it’s there. My understanding,   I don’t know, somebody asked whether it’s going to 
be online in the fall. I don’t know exactly what   CUNY has planned. I am assuming that, at best, 
these courses are going to be hybrid courses.   I can’t imagine that we’re gonna have, and it’s 
as much for the professor’s as for the students,   but it’s for everybody, particularly in a school 
where a lot of people commute.

Are the subways   safe? I’m not sure the subway’s safe. I don’t even 
think they’re not, but I don’t know. And it’s even   more important for the professors than for the 
students, because a lot of the professors are   over 60, and they’re at risk. So, my presumption 
is that at least part of all the courses are going   to be online and we’re all learning how to do 
it better. Alright, so uh, Benjamin, I hope,   I hope that answers your question. If you have 
other questions, you guys can email me. I’m   happy to answer questions. Human resources. Human 
resources is a separate function, and the idea   of human resources, how do we make sure that we 
attract the right people? We hire them according   to the right rules, we don’t discriminate, we 
hire a diverse workforce. How do we make sure   that once we have them that we keep them, that 
they don’t leave.

How do we make sure that they’re   performing at the right level and they’re meeting 
the organizational goals? So generally, five   different things. Recruitment & selection, where 
do I start to look for people? Once I find the   right few to interview, how do I go about picking 
the right people? And this is, one reason, I would   argue that a key reason that companies have summer 
internships is not because you’re gonna change the   world by doing your summer internship project. 
It’s they get to try before they buy.

The more   money they spend on summer internships, the less 
money they spend on recruiting, because they’re   going to hire three-quarters of their class every 
year, based on the internship. So once we found   the right people, how do we train them? What 
kinds of classes do they need to take? Do they   need in-person classes, they need online classes? 
They need regulatory training classes. That’s a   big requirement. Another thing is in terms of 
development. So, I’ve got, a lot of people leave   because they don’t think they’re given the career 
opportunities that they want to get. So how do you   give people career paths they can see that they 
go from investment banking analyst to whatever is   after investment banking analyst.

And somebody 
asked, if you’re in the investment banking   business but you receive an offer for a department 
that isn’t related to what you do? I’d probably   take it if I’m an analyst, just to get my foot in 
the door and understand what the company does. Do   a good job. If you do a good job, you generally 
get a chance to look around. When I start, when   I’ve got, I’ve helped a lot of people get jobs. 
You look at my ratemyprofessor stuff, you’ll see   people say that. I’m not saying that to boast, 
well, maybe a little bit, but I generally tell   people that I’ve helped get jobs, I expect 
you to spend two years at that job, first job,   unless you hate it.

And I spent a year in my first 
job, and I got a much better job after that, but   when I help someone get a job, cause it makes me 
look bad if you come, stay for three months, and   leave. I had a woman I helped get a job, very good 
job, and she’s being called by [unintelligible],   and I said look, at the end of the day, you gotta 
do what’s right for you, but my hope is that you’d   stay there two years. She’s been there a year 
now, so I figured now after a year-and-a-half,   she’s more or less a free agent. So, how do we 
train them? How do we develop them? How do we   ke- make so that our best analysts stick around, 
then become associates and our best associates   stick around to become vice-president and our best 
vice-presidents stick around to become directors   and our best directors stick around to become 
[unintelligible]. How do we provide career paths?   How do we do performance appraisal? Who did well? 
Who did not? How do we link the compensation to   that? So do we track that.

If somebody’s doing 
badly, we have to record, very carefully, what   they’re doing and why that’s a problem and how 
they can improve or we can get in big trouble with   the government for firing people without cause. 
How do we provide that feedback? Is it written? Is   it in meetings? What’s the right way to do that? 
Human resources, sort of, coordinates them.

How   much do people get paid and what kind of benefits 
they have? Benefits are something like 25% of   total compensation. Medical, alright, for example. 
Dental, vision care. Having access to this is huge   and human- it’s managed at human resources. 
How much do people get paid? I spent a fair   amount of time, I talk about this a little bit 
last time. How much people get paid, how do you   benchmark people against their peers, either at 
your own company or at different companies. That’s   an important part of what Human Resources does. 
And labor relationships, when people are having   problems, how do we deal with it? If somebody has 
a gripe, how do we record that? Compliance.

Now,   there’s general compliance and there’s specialist 
compliance. General compliance, lending laws. So   there’s Truth in Lending Act. There’s all 
kinds of rules about usury and what rate of   interest you can charge and how you make sure the 
documentation is clear. Brokerage requirements.   How do you make sure that you’re meeting all the 
rules that the Securities Exchange Commission   sets? Rules about compensation. If I’m gonna be 
trading or doing sales, those people have to have   the right licenses. And you have to do all kinds 
of regulatory reporting. Specialist compliance   anti-money laundering, counterrorist. All kinds 
of rules with respect to private banking & wealth   management. Tracking derivatives. Technical risk 
management and conduct. Whole separate field,   used to be largely lawyers, increasingly well 
beyond that. So compliance is a whole separate   field within this area. Anybody, questions 
on those two? I’ll take that as a no.

No,   nothing. Alright, it is now, let me see. We’re 
at 2:25. Yep, research. Aggregates information,   they provided a service to clients and this 
has changed hugely in the past ten years,   because it used to be you want to do business 
with a company and say do a good research   report about them. Now, it’s got to be more 
arm’s length but doing fundamental research,   and I got one of my research friends to talk to 
people a couple of months ago about what he does.   Economists are often part of the research 
function. How do we estimate, you know,   how companies are doing? We write reports about 
them. Metals and mining industry, about the   oil industry, you have that kind of expertise 
in-house. The research people are typically the   kind that do that. So sometimes, they’ll come with 
their own ideas, you should buy in this sector,   sell in this sector. Sometimes, they’ll help you 
manage the portfolio and sometimes, they’ll just,   you know, if you’re on the buy side, you have the 
research function to say what companies are the   best companies to buy in this particular sector. 
So this is very highly analytical job.

You have to   spend a lot of time reading financial statements, 
understanding markets. Key skills: verbal, written   communication, Excel, financial modeling, you have 
to be inquisitive, I would stay there. Alright,   I think I’m gonna end it here. I’ll take a 
couple questions. There are a couple things here,   recruiter timelines, core school model. 
Well, we’re changing that. Baruch gets,   I’ve helped place people at, in the last six 
months, Credit Suisse, JP Morgan, Morgan Stanley,   Goldman Sachs. You are not at a disadvantage, 
because you didn’t go to Yale or go to Middlebury.   I’m telling you that. Do a good job at Baruch and 
you are as marketable as anyone. I could tell you   that, because Credit Suisse reached out to me. 
They said, “we hear good things about Baruch,   we want to hire somebody.” Well, I got some 
students together, and they hired somebody.   Got a summer job next year.

Somebody just reached 
out to me from Citibank. “Ken, I’ve known you for   a long time, I know you’re teaching now. Help me 
find some good people. I need to hire a bunch of   people.” Alright, so this idea of the core school 
don’t- just because you go to CUNY, doesn’t mean   you’re not just as marketable as anyone else. 
Keep that in mind. Conversion of summer interns,   this is a key recruiting tool. Again, I mentioned 
that before. That’s what companies want from it.   So, search out internships, keep your grades up, 
network, get to know people, you get there, make   calls, make sure you join in other finance-related 
activities, and I talked about this last time,   read the newspaper. Make sure you know what 
every article in The Wall Street Journal is   about. You have to read every article, make 
sure you know, topically, what’s going on and   always get ready for interviews and I’m always 
happy to talk to people about that. Alright,   I think I’m gonna end it there.

You guys 
know how to reach me. I’m around. Kara,   if you want me to go into more detail, I have 
another thing that, shortly after this section,   let me find it, [unintelligible]. Oh, my screen 
sharing paused. My screen go blank? No. Why   don’t I put it into the chat box for those 
of you here. Um, if you could type in, did   this seem to cover all of the questions or would 
you be interested in a part three that went into   more? Because what I would do is I’d talk about 
financial institutions, where I talk about. Here,   I’ll show you what it. The third part of this: 
banks, thrifts, credit unions, broker/dealers,   mutual funds, hedge funds, private equity, life 
insurance, property casualty, mortgage company,   finance company, exchange, clearinghouse. All 
very different types of companies. Looks like   we’re getting a lot of comments for part 
three so I’m happy to set that up.

So Kara,   come up with a couple dates. I know you may not be 
around, you should enjoy the rest of your summer.   She said you can’t with two little kids running 
around the house. Well, my kids are older now,   but it’s complex. Keeps you busy. I will post 
these slides, I’ll send to you, Kara, and you can   post them. You know, we don’t typically share our 
slides from the career center, so what we would   suggest is we’ll put the video up on Youtube as 
early as possible and you can get everything on   there. Alright, very good. Alright, everyone so 
maybe we’ll do it in a couple weeks. You let me   know, Kara, what works and I’m around and I’ll 
make the time. If any of you have questions,   some of you reach out to me.

I’m happy to chat 
with you, so feel free to reach out to me. If   you don’t hear from me right away, persist. I get 
a lot of emails. I’m happy to answer questions. I   already talked to a bunch of you. Well, thank you 
everyone then for coming and look out for the part   three. Hopefully, we’ll be able to pull that off 
in the next, maybe, two weeks or so. So, just make   sure you check our Starr Weekly and look for the 
flyer so that you have that information and also,   the Youtube video will be up soon. Good. And thank 
you, Ken, so much for giving the time and for   sharing all of this really useful information for 
students. I know I, myself, learned a lot as well   so hopefully, I can be more helpful to them. My 
pleasure, any time. Alright, take care everyone..

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