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 QuantNet.com. 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.
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.
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.
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.
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.
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.
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
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
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
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
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.
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.
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.
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.
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.
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..