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October 19, 2008

The I-Banker's dilemma: Get a "real job" or join Uncle Sam

Harvard Business School Professor Kenneth Rogoff has an interesting take on the US bailout package in a column appearing in Businessworld.
After years of attracting many of the world’s best and brightest into ultra-high paying jobs, these collapsing banks are now throwing them out left and right. One such victim, a former student, called me the other day and asked, “What am I supposed to do now, get a real job?”

This brings us back to the US Treasury’s plan to unclog the subprime mortgage market. The idea is that the US government would serve as buyer of last resort for the junk debt that the private sector has not been able to price. Who, exactly, would the Treasury employ to figure all this out? Why, unemployed investment bankers, of course. Let us ponder this. Investment bankers have been losing their cushy jobs because they could not figure out any convincing way to price distressed mortgage debt. Otherwise, their firms would have been able to tap the trillions of dollars now sitting on the sidelines, held by sovereign wealth funds, private equity groups, hedge funds and others. Now, working for the taxpayer, these same bankers will suddenly come up with the magic pricing formula that has eluded them until now.

Efficient financial systems are supposed to promote growth in the real economy, not impose a huge tax burden. And the US financial sector, in greasing the wheels of the real economy, has been soaking up 30 per cent of corporate profits and 10 per cent of wages. Thus, unlike in the 1930s, the US faces a hypertrophied financial system. Isn’t it possible, then, that rather than causing a Great Depression, significant shrinkage of the financial sector, particularly if facilitated by an improved regulation, might actually enhance efficiency and growth?
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.