Looking west for the next universe to master

It's easy to understand why Ruth Porat, one of the most powerful women on Wall Street, would leave her job as chief financial officer of Morgan Stanley and head west to take the same position at Google.

At Google, Porat will be in charge of the finances of one of the world’s most valuable and innovative companies. As for money, Google can comfortably afford to match or exceed the $10.1 million in total compensation she was most recently paid at Morgan Stanley.

The really interesting thing is not this one big defection from Wall Street, nor even a few other high-profile moves from the worlds of finance and politics toward technology.

More interesting are the decisions of thousands of less famous names, promising young businesspeople and engineers who will shape the future of the US economy. And to add to the anecdotal evidence that working in Silicon Valley is the hot thing on elite college campuses, there is evidence that Porat is not alone in deciding that technology offers a more compelling opportunity than banking.

Consider the records of where Harvard Business School graduates have gone to work. In 2008, 45 percent of Harvard's MBA graduates went into financial services, versus 7 percent into technology. Finance still leads the pack, but the gap is narrowing; in 2014, it was 33 percent finance versus 17 percent technology.

Career opportunities

There’s no doubt that a lot of this is following the Willie Sutton theory of career management – go where the money is. The multibillion-dollar valuations for young companies with minimal revenue would get any ambitious person’s attention. But the flip side of the incredible economic opportunities on offer in Silicon Valley is the lack of it in the more traditional get-rich career paths of Wall Street.

Since the 2008 financial crisis, major global financial institutions of all stripes have been under intense pressure to pare down. Tighter capital rules mean less reliance on borrowed money, which makes stock grants less lucrative.

The Volcker Rule and other restrictions on what banks can do mean there are fewer jobs for would-be masters of the universe who want to make big bets – and earn big bonuses – with their employer’s money. And pension funds have become more wary of hedge funds that feature high fees, high pay and uneven returns.

It’s not that a smart, ambitious person can’t still make a boatload of money in finance, particularly in the still surging private equity industry. It’s that, on the margins, everything about the regulatory and economic environment is making finance look less compelling than tech industries.

There’s a strong argument that this is a good thing. Why does finance exist? Apart from consumer banking and managing retirement accounts and a few other areas of finance that serve ordinary consumers, finance exists to channel capital effectively from savers to investment. In other words, most of modern finance doesn’t exist as an end in itself, but to make the rest of the economy more efficient.

Back-office function

In that sense, to the degree the finance sector attracts the best and brightest young people, it is funnelling them away from making goods and services that people use, and toward serving what is essentially a back-office function for the economy.

If you think of finance that way, it’s easier to see why some economists have found clear evidence that an unusually large financial sector actually reduces the growth rate of an economy, rather than enhances it.

Porat and those Harvard Business School grads choosing Silicon Valley over Wall Street may be responding to the direct incentives rather than that logic. But the fact that these types of moves are happening is a promising sign that, in the post-crisis world, those incentives will serve the overall economy better than the old way.

– (Copyright New York Times 2015)