Young Money: Inside the Hidden World of Wall Street's Post-Crash Recruits (12 page)

IT BEGINS IN
June—the lunch-line gossip, the frantic refreshing of message boards and tap-tapping of Bloomberg instant messages with friends across the Street, the amphetaminic all-nighters in a last-minute attempt to suck up to the boss. Every June, young Wall Street loads up like a spring, pregnant with anxiety and hope. And then, when the time is right, it simply happens—the annual earthquake known in the corporatized language of HR as the “compensation communication period,” but referred to by everyone in finance by its real name: bonus day.

Every summer, young analysts at Wall Street firms are notified about the amount of their annual bonuses, and placed in top, middle, and bottom “buckets,” according to their performances over the previous year. (The exception is Goldman Sachs, which gives its analyst bonuses in January.) Bonuses for analysts are nothing like the eight-figure executive bonuses you read about in newspapers, but they are still hefty sums for twenty-three-year-olds. A top-bucket first-year analyst at a profitable firm might make a $75,000 bonus on top of a $70,000 base salary, for total comp of $145,000. A bottom-bucket analyst at a struggling firm might get $10,000 on top of that same $70,000 salary, for a haul of only $80,000. Because bonuses often make up more than half of an analyst’s yearly pay, and because in the process of getting these bonuses, analysts are ranked in relation to their peers, bonus season amounts to a combination of Christmas and Judgment Day. Analysts who land in the top bucket are often assured of a third-year offer; analysts who land near the bottom are often given a subtle hint to start looking for new work.

J. P. Murray, the churchgoing Haitian-American analyst from Philadelphia, was expecting a pretty good number. In the year since J. P. had joined Credit Suisse’s health-care banking division, he had grown immensely as an analyst. Complex modeling skills were now second nature to him, and his industry knowledge ran deeply enough that other analysts and associates often came to him for help. Like everyone else in his position, J. P. spent between eighty and a hundred hours a week at his desk. But he’d made a conscious decision to fill the other, nonworking hours of his weeks with the kind of lifestyle he’d never imagined getting to live—the kind of over-the-top, hyperactive life his favorite rappers talked about in their songs.

“On Wall Street, you can have two out of the three: a job, a social life, and sleep,” he’d explained to me. “I’m picking the first two.”

So on the rare nights he wasn’t working, he hit the town. He went to birthday parties, house parties, clubs, nonprofit fund-raisers, networking events, gallery openings, and any other event with an open bar and a high likelihood of finding attractive women. J. P. felt, at times, like he was mastering both facets of young Wall Street life—working hard and playing hard. He wasn’t getting much sleep, and he had been forced to deal with the same last-minute cancellations and late-night pitch book sessions as the other members of his group. But that was all part of being a Wall Street analyst, and J. P. was starting to consider himself a good one.

But on bonus day, when J. P. was called in to his managing director’s office for his first year-end review, he got a shock.

“I’d like to talk to you about some things your colleagues and I have noticed about your work this year,” the director said.

J. P. was used to criticism—he’d gotten plenty from senior bankers that year—but what spilled forth from the MD’s mouth felt more like a pile-on than a constructive feedback session.

“You’ve done some excellent work this year, but I have some concerns. Some of your colleagues are very impressed with your work, but others have noticed that you can be inattentive to detail. Some praised you as thoughtful and diligent, but others are unsure whether you’re committed to putting in the time necessary to make sure everything is right. One colleague wrote, ‘J. P.’s pitch books are sometimes so messy that I often have to redo entire sections myself.’ Others have talked about your attitude during stressful deals, which they say is often too unfocused.”

J. P. was stunned. Why had nobody told him about these things earlier? And moreover, how were his colleagues’ opinions of him so binary? How did some of them think he was a star, and others a schmuck? He didn’t have any enemies at the bank, and he thought he’d done a fairly good job of ingratiating himself with the members of his group. Had he been fooled the entire time?

Then came the hammer.

“Your total comp is $90,000,” the MD said.

J. P. knew that things had been rough at Credit Suisse. He’d read in the papers that profits were down, and that as a result bonuses probably would be, too. He’d heard through the grapevine that top first-years were being given roughly $50,000 bonuses, and most analysts were preparing themselves mentally for $35,000 or $40,000. But J. P.’s base salary was $70,000, meaning that his bonus was a mere $20,000. It could only mean one thing: he was in the bottom bucket.

The MD continued: “Based on this review,
obviously
we will not be in a position to offer you a third year with the group.” She sat back in her chair, somehow affectless despite having just delivered a knockout punch to J. P.’s banking career. She gestured his way and asked, “So, what are your thoughts?” J. P. knew he was being tested on his positive attitude—which was, after all, one of the strongest points in his review, and an asset he could hang his hat on. But at the time, maintaining a poker face was proving to be a challenge. The only thing he could come up with was, “Well, it’s not nothing.”

After walking out of the MD’s office, J. P.’s hard shell disintegrated, and he felt himself getting misty-eyed with rage. Had it meant nothing to Credit Suisse that he’d clawed his way to Wall Street from an underprivileged background as a Haitian immigrant’s kid with no connections? Had it mattered that when he’d gotten to Credit Suisse, he’d done everything he could to promote the bank, up to and including volunteering to recruit college students? For fuck’s sake, had it meant nothing that he’d missed his parents’ anniversary, Mother’s Day, the Fourth of July, and two months’ worth of church Sundays, all for the sake of work that would probably never see the light of day? J. P. knew he wouldn’t find much sympathy on Main Street, where being paid $90,000 as a twenty-four-year-old was still a tremendous accomplishment. But in the cloistered, rich-is-relative world of Wall Street, he’d just been dealt a cruel hand.

J. P. had no idea what he would do, now that Credit Suisse was saying it wouldn’t hire him back for a third year. He hadn’t planned on hunting for a job so soon after arriving, and he was unsure what his best options would be. He had chosen not to take part in the private equity recruiting process that spring, both because he considered it disloyal to Credit Suisse and because, deep down, he was counting on getting a third-year offer.

The fact that he would likely be unemployed in a year, no matter how hard he worked over the next 365 days, scared and confused him. After working so hard to get to Wall Street in the first place, he could barely believe his high-flying life was spiraling back to Earth.

AT 8:00 A.M.,
Ricardo Hernandez and one of his fellow analysts got called into the corner office. There, their boss, a senior J.P. Morgan banker named William Bishop, sat waiting for them, stone-faced.

“I have a new project for you,” Bishop told the pair.

The analysts looked at each other in fear. They had both stayed up most of the previous night, finishing a massive pitch book that had been given to them at the last minute. Both dreaded what they thought was about to be given to them: a new, equally draining project, right on the heels of the last.

Instead, Bishop pulled an envelope out of his jacket pocket and handed it to Ricardo. He looked down and saw what it was: two VIP tickets to that night’s Jay Z concert.

“I appreciate what you guys did this week,” Bishop said, a smile spreading across his face. “Take the day off. Go have fun.”

Ricardo laughed. He hadn’t expected any perks out of J.P. Morgan, and these acts of random kindness still caught him off guard.

Things were going much better for Ricardo since his first year, when he’d worked endlessly in an M&A division that relied on pharmaceutical assistance to handle its massive deal load. As a second-year analyst, he had become better and more efficient at his job, and a new class of first-year analysts had come in to handle the worst of the grunt work. He no longer worked every weekend, and he often got out at a reasonable hour when he did. He moved out of Windsor Court, the “banker dorm” complex where he’d lived since the start of his analyst days, and into a one-bedroom apartment with his girlfriend. And he used his newfound free time to catch up with friends, play more rec-league basketball, and watch Spurs and Cowboys games at a bar in Murray Hill where Texas transplants gathered.

“I feel like I’ve gotten my life back,” he told me.

The other part of his newfound happiness was that he’d been transferred out of the M&A group and into a small group of bankers who worked with the bank’s clients in Latin American countries.

“Lat-Am,” as the group was called, didn’t sit quite as high on the investment banking totem pole as M&A. But it was a better fit for Ricardo. In Lat-Am, the hours were more relaxed, the pay was roughly comparable, and the travel opportunities were much better. Every few weeks, he and a higher-up would fly south to visit one of the bank’s clients, and once in a while, he would be given a chance to make presentations by himself.

Ricardo had once insisted that he would leave J.P. Morgan after two years to go to business school, jump to a hedge fund, or quit the industry altogether. But now, with an assignment that was both more exciting and less strenuous than his old one, he could see himself building a career at the bank. There was nowhere better for him to go, at the moment, and he cringed at the thought of risking his stable, well-paid existence just for a slightly bigger paycheck at another firm.

Ricardo’s satisfaction with his job provided a striking contrast to the depressed, disgruntled analysts I’d met in the course of my investigation. And watching him progress had given me a sense of how young financiers can eventually settle into stable, comfortable careers.

I’d spoken to a number of older financiers in the course of my fact-finding, and asked them how their lives had morphed as they’d made their way up the ladder. Some of them had kept their noses to the grindstone, worked hundred-hour weeks well into their thirties, and eschewed the pleasures of a normal life for a chance at rapid, lucrative career advancement. They jumped to the buy side when the time was right, or remained on the management track at their firms, and saw their income increase rapidly year after year. Others had stepped off the hedonic treadmill, accepted the fact that they were likely never going to make it to the CEO’s chair, and did the best they could to provide value to their firms in whatever roles they inhabited. This was a less sexy version of the finance path, but one that was becoming increasingly appealing as the financial sector struggled, and people attempted to mitigate their personal risks by staying put.

“It’s not
Liar’s Poker
anymore,” one private equity worker told me. “Most people on Wall Street work hard, have a nice family, and are trying to put their kids through private school.”

Ricardo didn’t love the surges of adrenaline that coursed through the bullpen around the time of a big deal (in fact, they gave him stomachaches) but he liked the other things his job gave him: financial security, a prestigious résumé line, intellectual stimulation, smart young colleagues who shared his interests and were fun to be around. The monetary perks—a comfortable apartment, the ability to take a cab instead of the subway without guilt—were nice, too, but the crux of the finance sector’s attraction was what would come in the future. He knew that the pressures of being young and servile would eventually ease up, and he’d be left with a secure career that would give him the time and disposable income to do the things he really cared about.

The mystique and hyperbole that surrounds Wall Street often clouds the fact that many people who work there aren’t chasing after ever-bigger bonuses and piling leverage upon leverage. For a sizable number of people, working at an investment bank is a means to other, more boring personal ends. These people aren’t (and shouldn’t be) immune from criticism when banks screw up, since their willing participation enables a structure that can be mobilized in harmful ways. But they’re rarely engaged with top-level strategy, and they hardly consider themselves fighters for a cause. For them, finance is a job, not a calling.

Banking hadn’t been Ricardo’s first career choice, nor did it represent his truest passions. And at times, he sometimes felt guilty about leaving medicine behind. But after seeing how much his job had given him, and how much he’d grown as a result of it, he knew he’d made the right call.

“A career is such a big, loaded word,” he said one day, when I asked him how much longer he planned to stay at J.P. Morgan. “Ideally, you don’t want to spend thirty or forty years doing the same thing. But…yeah, I’m happy here.”

AFTER TALKING TO
Ricardo about his satisfaction with his banking job, I started to worry again that my sources, aside from him, represented an overconflicted sample.

I knew there were hardcore, remorseless young financiers in the world—I’d met some of them at Wharton, and others at investment conferences and industry events. They were the kind of die-hards who had known their whole lives that Wall Street was their destination—who slept with a copy of Benjamin Graham’s
The Intelligent Investor
under their pillows, tacked posters of Warren Buffett and George Soros on their walls, and spent their middle school days practicing their Excel shortcuts. These kids had no compunction about being on Wall Street, even in the post-crash era, and would defend the moral goodness of the financial industry to anyone who would listen.

I wanted to find these people. So I boarded an Acela train and headed up to Cambridge, Massachusetts, to meet the members of Black Diamond Capital Investors.

Black Diamond is Harvard’s most exclusive student-run hedge fund. Its thirty members, who are all Harvard undergraduates, each kick in at least $1,000 (and as much as $25,000) for the privilege of getting to invest alongside other committed finance nerds. This limits membership to students who can afford to part with a thousand dollars, of course, but it also means that, in the patois of investing, the students all have “skin in the game.” Each member shares in the gains and losses of the fund, and their buy-in money (or what’s left of it, anyway) is distributed back to them after graduation.

Black Diamond’s founder, a Harvard junior named Patrick Colangelo, invited me to see the group’s weekly Sunday afternoon meeting, where they talk about the global markets and come up with new investment ideas.

I found Patrick in a private dining room off the main cafeteria in Quincy House, sitting around a large table in front of a projection screen. He’s a fresh-faced Canadian who plays on Harvard’s club hockey team, helps run Harvard’s undergraduate private equity club, sports a short haircut with a little ski-ramp flip in front, and was wearing a white Burberry shirt with slacks. Roughly twenty guys were gathered around a table with him—most in collared shirts, a few in blazers. There were no women. (One came in a few minutes into the meeting, looking for a water bottle she’d left there earlier in the day, realized she’d interrupted an all-boys meeting, blushed, and scurried back out.)

Patrick began the Black Diamond meeting with a discussion about what was going on in the news—a nascent recovery in the housing market, Congress’s most recent budget talks, and the goings-on in Europe. Lots of people chimed in with observations about how these phenomena might affect the financial markets, and the unmistakable impression given off was that this is a serious group. These guys had opinions about austerity in Greece, the effects of expansionary monetary policy, and the Federal Reserve’s forward guidance. They weren’t the most brilliant market insights I’ve ever heard, but for guys who should by virtue of their stations in life be saying “bro” a lot and doing keg stands, they weren’t half bad.

Despite their ages, most of the members of Black Diamond are somewhat experienced investors. There’s Bryce, a sophomore from Southern California who ordered his first annual report at age thirteen, began investing shortly thereafter, and at sixteen was the youngest-ever person to apply for a job at PIMCO, the giant California-based investment manager. (PIMCO’s recruiter was impressed at his ambition, but told him to come back when he had a college degree.) There’s Arash, a senior who interned at a hedge fund the previous summer, and is slated to work at another large fund after he graduates. And there’s Christian, a freshman who managed a six-figure chunk of his family’s money while still in high school.

After some more macroeconomic pondering, Patrick pulled up a chart on the screen and asked the group, “So, what should our market exposure be?”

The group decided it wanted to identify some good shorts—stocks it could bet against. Patrick proposed shorting the stock of a large oil company, pulling up a chart that shows, according to him, that the price of oil has been propped up by a relatively weak dollar and is overdue for a fall. Bryce disagreed. He’s the group’s de facto risk management expert, and he spent a good chunk of the meeting pouring water on other members’ overly aggressive ideas.

No actual trades are made at these meetings. Black Diamond’s members have a secure e-mail listserv to hold their trading ideas, and each member who wants to propose a trade has to write up a short summary explaining the size of the trade, what risks it represents, and how much money he thinks should be put into it. Then, if a majority votes for the trade, Patrick plugs the details into an online brokerage account that holds the group’s money and executes. Patrick wouldn’t say how much money this strategy has made the group, but he did tell me that they haven’t lost money—which is more than many professionally run hedge funds can say.

Despite some minor disagreements, there was no yelling or table pounding at the Black Diamond meeting. In fact, the whole thing felt more like an international relations seminar than a hedge fund meeting.

“Why would we run to metals if the economy is improving?” Bryce said at one point, after Patrick suggested investing in platinum to take advantage of low prices. “Does anyone think the economy isn’t improving?”

Later in the meeting, the group video-chatted with a hedge fund trader from San Francisco, a Harvard Business School graduate who serves as an informal advisor to the group. The trader dispensed a few nuggets of wisdom about how to assess risk—figuring out, for example, which assumptions are already factored into the price of a given company’s stock, and what you expect to behave differently about the company than the market does. It was solid advice, but the students around the table were bored and browsing Facebook on their laptops the entire time. They’d heard it all before.

People perked back up when the regular investment meeting resumed. The guys began discussing ways to invest in graphene—a new-ish industrial material that is made of a single layer of carbon atoms and is supposed to be three hundred times stronger than steel. They ran through a few more stock ideas—Microsoft, Apple, Nokia, and a clean energy company—before letting out for the day.

Later that night, I went with Patrick, Bryce, Arash, and several other Black Diamond members to dinner at a restaurant down the block. We munched on a hummus plate, and they sipped on wine and whiskey drinks, as I asked them why they were spending their college days staring at stock charts and discussing macroeconomics.

“This isn’t something you do as a club,” Patrick said. “It’s a serious endeavor.”

The members of Black Diamond—who are mostly economics concentrators, with a smattering of classics and history students—are eager to distance themselves from the other finance clubs on campus, all of which they believe are more focused on educating neophytes than actually getting down and dirty with real-money trades.

“There are other clubs,” Arash said, “and you go there and you just stay for maybe forty minutes, and usually you don’t even grasp the material because it goes by so fast. But here, you have guys with commonality; everyone is going into finance, everyone has a background in finance, everyone is interested in making profits. And more importantly, everyone has a personal investment in it.”

Nor do they concern themselves with the softer side of finance. Most of them want to work in private equity or at a hedge fund right away after graduation, and when I asked why they’d prefer skipping over the typical stepping-stone bank job at a place like Goldman Sachs or J.P. Morgan, Bryce said, “I was reading something the other day about how in the eighties, Goldman Sachs was very much an aggressive place to work, but now Goldman is becoming this, like, social investing place that gives money to small business and nonprofits and stuff, and it takes me away from wanting to go there.”

“Why?” I asked.

“Because Wall Street is about making money,” he said.

“Yeah,” Arash concurred. “Nobody goes into finance to do charity.”

So, if you want to know what kind of overachiever goes to Harvard and joins a student-run hedge fund, there’s your answer: a person who is turned off by Goldman Sachs because it’s
too charitable
.

It’s tempting to accuse Patrick and his fellow hedgies-in-training of being crafted from the same mold as the financiers who plunged the financial system into chaos in 2008. They are, after all, utterly unconcerned with the social vectors involved in working on Wall Street. They don’t spend much time thinking about who’s on the other side of a profitable trade, or who loses when a Wall Street bank makes money from a complex mortgage-backed security that goes sour.

Still, one observed fact keeps me from total cynicism: namely, investing seems to be these guys’ honest-to-God passion. These are young people who obsess over 10-K financial statements like most teenagers obsess over video games, who spend their free time studying the Japanese “lost decade” of the 1990s instead of playing intramural soccer. They’re not interested in finance as a culture or a social institution, and money is only important insofar as it serves as a rough proxy for success. At one point during dinner, I took a straw poll to find out who would still want to work on Wall Street if it paid the same as being a lawyer or an accountant. All of them raised their hands.

“I would do it if it paid $100 a week,” Bryce said. “This is my social life—I sit in front of a computer and look up stocks.”

“My buddies spend time on Facebook when they’re wasting time in their rooms,” Christian added. “I’ll take out my mobile
Barron’s
instead.”

Maybe none of Black Diamond’s genuine enthusiasm redeems the snobbishness of their endeavor, their $1,000 buy-in and their boys’-club elitism. Maybe the desire to make money trading stocks and other financial products, even if it’s come by honestly, can’t help but metamorphose into something more dangerous later on.

But I find something oddly endearing, and slightly exculpatory, about their dorkishness. They get the same rush from a well-executed trade that a writer finds in a well-turned paragraph—not because there’s money in it, necessarily, but because it takes technical skill and some measure of creative thinking to pull off.

So maybe there’s a fourth cohort of people to add to those who tend to enjoy being young on Wall Street: the Habituals, the Locomotives, the Gunners, and the Geeks, who are honestly fascinated by the machinations of the global markets, who delight in bond prospectuses and get lost daydreaming about collar trades. And if that’s true—if the members of Black Diamond are genuinely interested in finance qua finance—it would seem to make their Wall Street trajectories a bit more honest than the one taken by many of their classmates, the path that starts with private nursery schools and ends at Goldman Sachs because they’re addicted to status and structure.

I asked the guys at Black Diamond about the difference between them and their Johnny-come-lately classmates, who enter the industry with a completely different set of priorities, often planning to stay only for two years before departing for industries that better represent their values and ambitions. They agreed that many of the Harvard seniors who go into the financial industry aren’t motivated by the right things. Given the way Harvard’s student body loves to sneer at the financial sector, they added, it was amusing to watch the ideological evolution of Harvard students as graduation approached.

Patrick chuckled. “Yeah,” he said. “Everyone here hates Wall Street until spring of their junior year.”