Stanford Business

NOVEMBER 2006


Wall Street Careers: It’s All in the Timing

Once they enter investment banking, MBA graduates tend to stay and earn more than their classmates.


Illustration by Harry Campbell

by Alice LaPlante

The summer of 1987, Peter Adamson snagged an internship in investment banking, his chosen field. His three months at Goldman Sachs went well—so well that he was offered a full-time job after graduation. But Adamson was put off by the crash of Oct. 19, 1987. Upon completing his MBA in June 1988, he accepted an offer at consulting firm McKinsey & Co.

“I was concerned that it would be a riskier move, careerwise, to go to Wall Street at that time,” says Adamson, who adds that there were other reasons he took a different path. “I didn’t like staying up all night,” he jokes. Today, he is chief investment officer for the family and three charitable foundations of entrepreneur Eli Broad, the founder-chairman of both SunAmerica Inc. and KB Home (formerly Kaufman and Broad Home Corp.), a job he calls “very interesting and satisfying.”

Adamson wasn’t alone in eschewing an investment banking career because of the whims of the market. According to research by Paul Oyer, an associate professor of economics at the Graduate School of Business, many MBAs go into investment banking due to the happenstance of a bullish financial climate as much as a die-hard determination to get to Wall Street. And those who graduate during a bear market may never get the chance later—a fact that dramatically cuts down on their lifetime earnings.

The difference in payoff is startling. Based on the salaries provided by thousands of MBAs in a self-reported survey conducted in 1996 and 1998, Oyer calculates the present value of lifetime income of an MBA who goes into investment banking to be $2 million to $6 million higher than an MBA who goes into a non-banking career, such as consulting or entrepreneurial ventures.

And although it might seem intuitive that only a limited subset of MBAs has an aptitude for investment banking, Oyer says the significantly greater numbers who go into the field during bull markets “tells me that there is a deep pool of potential investment bankers in any Stanford MBA class.”

Some Business School alumni who fit the profile agree with Oyer’s conclusions. “Luck and timing certainly have a lot to do with careers, as with life,” says Steve Krausz, MBA ’85, who had a number of offers upon graduating—including one in an entrepreneurial startup—but accepted a job as an associate in U.S. Venture Partners, where he is now a general partner. “Having said that, you need the right credentials to have a shot at winning the lottery.”

Of course, investment banking firms simply don’t hire as much—or at all—during recessions. Andrew Davilman, MBA ’89, today a salesman at Goldman Sachs, recalls interviewing for a summer associate position in 1988 at Lehman Brothers. Although he was headed toward the fixed-income trading floor, which had escaped unscathed from the 1987 crash, he found it hard to be considering a job at a time when the firm had just laid off a significant percentage of its full-time employees. “It was very emotionally wrenching,” he says.

Keith Baum, MBA ’86, investment principal at Lowry Hill, an investment management firm, adds: “If you look at what was going on in 1987 or 1988, it was a rough time and certainly served as a deterrent to anyone thinking about going to Wall Street.”

Indeed, although more than a quarter (26 percent) of Stanford MBAs who graduated two years before the stock market crash of 1987 became investment bankers, just 17 percent of the MBA graduates two years after the crash took that career path. And, “the classes of 1988 and 1989 could expect significantly lower lifetime income due to the timing of their graduation than the classes of 1985 and 1986,” Oyer says.

John Loftus, MBA ’86, consulting managing director of Pacific Investment Management Co., says he “fits the data profile” of those who benefited hugely from choosing a Wall Street career at the right time. He joined the company immediately after graduating to pursue a career in fixed-income investment management, and “my lifetime earnings have been pretty substantial when compared to what other career paths would have provided.”

Peter Copses, MBA ’86, joined Drexel Burnham Lambert upon graduating. Today a senior partner with the private equity firm Apollo Management, he says he was well aware of the difference in compensation that would accrue because of choosing a Wall Street career. “Certainly, I perceived that my net present value was going to be higher than most of the alternative areas,” he says.

Oyer also found that the state of the economy affects the careers of those who earn doctorates in economics. He studied the careers of graduates of the seven top-rated schools from 1980 to 2003, and concluded that the initial job significantly determined how successful they were in their careers. If they graduated when academic economic positions were plentiful, they had a 40 percent to 60 percent better chance of ending up at top-tier schools than colleagues unfortunate enough to graduate in “off” years.

Oyer himself got his MBA from Yale in 1989 and a PhD in economics from Princeton in 1996, a very good year for PhDs seeking their first appointment. In the acknowledgements of his thesis he wrote, “I also want to thank Bill Clinton, Alan Greenspan, and anyone else responsible for the fact that the economy was healthy during the 1995-1996 academic year.” In fact, this whole area of research occurred to Oyer because he considered that he’d gotten some “good breaks” along the way.

Oyer also discovered that MBAs who go into investment banking—a category in which he includes money managers and venture capitalists—tend to stay for the long term. The percentage of a typical graduating class working in investment banking does not change significantly after the first five years following graduation, during which 5 to 10 percent leave the field.

“Once you’re there you tend to stay; once you’ve started down another path, you’re not likely to move to a Wall Street firm,” he says.

Part of the reason is that the skill set required of investment bankers is highly specialized, and once an MBA has chosen a different field, it’s difficult to find a “way in.” Jonathan Knee, MBA ’87, an adjunct professor at the Columbia University Graduate School of Business and author of the book The Accidental Investment Banker (Oxford University Press, 2006), says that investment banks “have no interest or patience for training people in basic skills.” Knee got into investment banking after initial career forays as a lobbyist and airline executive, but he was hired by a “rebel” executive at Goldman Sachs who was willing to take a chance on him. “This was highly unusual,” he says.

Oyer’s research also suggests that bull markets discourage entrepreneurs. “Because there are a fairly limited set of things that MBAs do, there’s some evidence that when bull markets move people onto Wall Street, it takes away from consulting and entrepreneurial careers,” Oyer says.

What’s the takeaway from this? According to Oyer, it’s that MBAs who worry about the general state of the economy are correct in perceiving that such things have enormous long-term financial implications.

“Every year our students get very anxious about the state of the job market. I always thought we—because I was the same way when I was finishing school—were being silly,” he says. “But as it turns out, we had pretty good reasons to be worried, as it would affect us for a long time to come.”

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