Article: ‘Friends Don’t Let Friends Get Into Finance’

Okay, so maybe the author goes a little hard on my friends who were trained alongside me as an engineer but have chased a career in finance.  But I think a lot of solid points are made, so I thought I’d share it here:

The long and short of his complaint is that engineering grads are lured away from building something useful in exchange for boatloads of money.  That is true to an extent.  However it’s not like Goldman is asking these engineers to kick puppies or anything.  After all, is designing a financial instrument all that different from an optimization algorithm written for a database?  It still has the sexiness of a problem waiting to be solved, and it gives the engineer an opportunity to do something totally new.  Add to that a paycheck that results in a seemingly limitless budget for cars, gadgets, and dates with the opposite sex and you’ve got yourself an engineer on staff.

I’ll even take it one step further to address his example of the CDOs and how a new engineer might have thought he or she was contributing to a better society with his derivative.  If a manager was looking to get an engineer to design a CDO, here is an oversimplification of how it could be done:

Manager: Hey Billy, thanks for your interest in our new department creating financial instruments.  What we want you to do is figure out a way to take a bunch of these subprime mortgages into a bond that can be split up and sold to an array of investors.  If we can find a way to give investors access to subprime mortgages, we can create a huge market for our bonds.

Billy: That’s a great idea, but why would  changing who the investor is make a market that is more attractive than the current one that exists between banks and the homeowners?

Manager: The problem is the bank-homeowner system is inefficient.  If we could open up the market to give each investor a small part of a mortgage, there will be more investors willing to buy and therefore easier access to credit.  That means the average American will be that much closer to fulfilling the dream of home ownership for their family.  And the investors will be able to buy a small part of lots of loans, so the 2-10% default rate pain is spread around to everyone based on the quality of bond they bought.  I’m sure you can design something better than a one-on-one market.

Billy: I hate inefficiency.  And I want to help people build wealth through home ownership.  Seems like you might be onto something here.  Let me run some numbers and see what I can come up with.

Of course, now that we’ve gone through the past 3 years of economic turmoil it is easy to know that the rest of the story doesn’t turn out so great.  But my point is that without the benefit of hindsight a good engineer could work on a financial instrument and still feel like he or she is contributing to society while making a mint at the same time.

The final message is this: we now have the benefit of hindsight.  The statement Vivek Wadhwa makes with the name of the article is valid: there are better ways to apply our talent than finance.  We have seen that financial instruments simply changes the way an asset appears; it does not create anything new or change the asset for the better.  An engineer should spend a fair bit of time thinking of the true effect of his or her work.  It is our profession that builds the world one widget at a time — we need to be sure we’re building something that will last.


2 responses to “Article: ‘Friends Don’t Let Friends Get Into Finance’”

  1. Nice post. I like how you explained it from the engineers point of view and how the financial instruments aren’t inherently evil, and how many of the folks involved with the creation of that stuff had good intentions. My lingering question is – how do folks know if what they’re working on is something that is making the world stronger/more sustainable without the benefit of hindsight?

  2. dyoung Avatar

    AHart, That is the real question here. As with everything in engineering, it is impossible to determine if things will work as expected since new designs never been tested before. I suppose the larger question would be where the system ignored the feedback. When buyers could finance more
    than 100% of the home value without showing proof of income, those in charge should have looked into how the market supported such loans.
    My bet is that when people saw things that shouldn’t happen such as over-financing, they were busy pulling in big business and managing growth so they didn’t have the time (or perhaps the desire) to figure out how or why the financial instruments were producing those results.

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