They state:
IF Mr. Hintz is right, and Goldman’s legendary returns decline, so will its paychecks. Without those multimillion-dollar paydays, those top-notch investment bankers, elite traders and private-equity superstars may well stroll out the door and try their luck at starting small, boutique investment-banking firms or hedge funds — if they can.in some contradiction to this statement:
As leverage dries up across Wall Street, so will the outsize returns at many private equity firms and hedge funds.Returns at many hedge funds are expected to be awful this year because of a combination of bad bets and an inability to borrow. One result could be a landslide of hedge funds’ closing shop.So, if I read correctly, at firms like Goldman that are changing (and possibly temporarily) to a bank holding company structure, they will face a drain of talent as employees leave to make more money in fields (hedge/PE) where there is an inability to borrow or make outsized returns? It seems they are simultaneously making a case for a landslide of hedge funds closing shop and a landslide of bored talent seeking returns by starting... boutique hedge funds and private equity firms.
Reality actually tells us that many of the small boutique firms grow bigger, and expand their scope.
The truly interesting development (assuming the bailout works as plans) will be the rise of firms like TPG, SAC, Citadel , Carlyle and Blackstone, filling the void in the existing financial system. Citadel itself has thousands of employees around the world.
Maybe what we should realize is that change is constant, bubbles are constant, human nature is constant, and talent is constant, and thus there will always be people, and firms, to take advantage of what the current economic condition is. Even when those conditions don't exist, money and energy flows toward making those conditions happen.
Our guess here is that everyone hunkers down in whatever financial structure proves most useful toward stabilizing value, and then, when the dust settles, all eyes will begin to look at where money can be made. So when Europeans, and Germans in particular, are also announcing the death of the United States as a financial superpower, they are making assumptions that defy the reality of human nature, and particularly the human nature as exhibited by creative Americans.
“The US will lose its status as the superpower of the world financial system. This world will become multipolar” with the emergence of stronger, better capitalised centres in Asia and Europe, Mr Steinbrück told the German parliament. “The world will never be the same again.”(FT)
The above comments can be made by German government officials, and there is a kernal of truth there, but the world never being the same again is not one of those truths. Money will flow to those who know how to make money, and unless other parts of the world actually become massively more creative, ultimately, the United States will be fine, and with some tweeking and humility and focus on making the financial foundation sound.
This is another reason why this current presidential election is so important. If economics is not your strong point, and yet, economics is what is setting the country back in world standing, then McCain is woefully unprepared for the major challenges ahead.
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Bonus Thoughts:
Every now and then we read about some pretty responsible financial types. We are impressed precisely because they are the opposite of how we have been personally, and they represent clear thinking in dealing with financial issues while remaining unswayed by foolish temptations. They represent what we want to be. We are thinking of people like David Swenson at Yale, who views his stewardship of their funds almost like a sacred mission, or the practices of Norway's Pension fund. The New York Times has a nice short question and answer piece about Norway's fund here.
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