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PaperclipPerfector  22d ago (text post)   24416 thread views

Culture War Roundup for the week of April 8, 2024

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Paging @2rafa or anyone else who can explain to me what an investment banking analyst actually does: AI is coming for Wall Street: Banks are reportedly weighing cutting analyst hiring by two-thirds (paywalled for me on desktop but it's loading fine on mobile):

Incoming junior Wall Street analysts could be in danger of losing their jobs to AI, sources within banks told the New York Times.

Big firms are reportedly mulling whether to pull back on hiring new analysts as Wall Street leans more heavily on AI, several people familiar with the matter at Goldman Sachs, Morgan Stanley, and other banks told the publication this week.

Incoming classes of junior investment-banking analysts could up being cut as much as two-thirds, some of the people suggested, while those brought on board could fetch lower salaries, on account of their work being assisted by artificial intelligence.

I don't know how to evaluate the claims in the article because I have little understanding of what a banking analyst actually does on a day to day basis. How much of it requires "thought" (not thought of incredible complexity and originality, but thought nonetheless) and how much of it is just plugging numbers into Excel in a relatively formulaic fashion?

In general I lean towards being skeptical of these claims, especially in domains where I have little expertise, because the dominant pattern of the last 2 years is that people who don't know much about X tend to overestimate how good AI is at X.

If I compare this to a domain where I do have some knowledge (computer programming), most of the tests that people use to demonstrate LLMs' coding ability aren't particularly representative of what programmers do on a daily basis. Sitting down and opening a new blank file and "writing code to do X" is certainly part of the job, and it can be a bigger or smaller part of the job depending on what type of organization you're at and what type of project you're working on etc, but it's not the whole job (for some programmers, it's a very small part of it!)

So I'd like people with more domain knowledge to weigh in on what aspects of these financial jobs are liable to be automated today and what the forecast for the field is like.

I support an Investment bank department. To my understand analyst is more rank than role and can do a wide variety of things depending on the department. The group of analysts I work most closely with are looking at the developers that have successfully won bids to build low income housing for Low income housing tax credits. LIHTC pay out over like 10 years and developers don't want to be in the business of keeping assets on their books, they want to build and move on.

So the analysts I'm working with are trying to determine what a good deal with one of these developers would look like, Most basically we supply the capital and our org gets to put our name in the proper place that lets us get the tax credits but there are many different ways to go about it, and then bidding on those deals. In practice you have pricing analysts that try and find the best deal, usually with an eye for price per tax credit. There are underwriting analysts doing something close to building up pitch books for the deal, turning the data we get from the developer in a comprehensive document and looking into things that might impact occupancy like nearby crime rate and the kind of special needs populations that might be serviced in the area as well as the various guarantees and business stuff. There are risk analysts that I know less about and I believe to be looking at the whole portfolio to make sure we're looking good from a risk perspective.

AI isn't really threatening our department any more than us tech guys already are by building out tools to make the process more efficient. In the end of the day these deals have big dollar amounts of them and making labor more efficient probably wouldn't have us cut head count as much as make us willing to go after smaller deals that we currently don't think are worth the time it takes to underwrite them.

IB analyst/associate is a fake job to give 22 year olds a few years to learn some basic professionalism and finance skills. After a few years of polishing they move on to a somewhat more real job (real in the sense that they’re doing something with real-world consequences, not necessarily socially useful) like PE or more senior banker.

Banks provide this training for various reasons discussed downthread but it’s not surprising that as revenue decreases they start cutting back. They don’t want to announce to clients that they’ve been charging them to train Harvard grads with fancy finance jobs for even fancier finance jobs all this time, so instead they pretend it’s about AI. I am skeptical that LLMs are actually good at doing what junior bankers do, rather, what junior bankers do is close to pointless.

So I'd like people with more domain knowledge to weigh in on what aspects of these financial jobs are liable to be automated today and what the forecast for the field is like.

The classic IB/PE role/career track will definitely survive. I don’t think AI/LLM is very relevant to what a more senior person does. Junior roles are cyclical (related to the state of the economy, not AI developments). Back-office or support-type roles like IT will probably be most impacted for the same reason that these kinds of roles will be impacted economy-wide.

So it's an apprenticeship, and I think the problem will be that if you cut out the juniors and replace them by AI, where are the new seniors going to come from when the current lot retire/move on/die?

You haven't trained up the next generation of successors and if everyone has done the same thing by replacing the lower ranks with AI, you can't hire them on from elsewhere, either.

I think you're misunderstanding the process of AI development.

  • Capabilities are encapsulated within tool use.
  • AI retrained on this tool use now use it 'intuitively'.
  • Instead of breaking down tasks into low level skills, AI gain the ability to break them down into high level skills.
  • This makes high level skills that were previously too complex to learn into tasks that are no longer to complex to learn.
  • These new capabilities are encapsulated within tool use.

We've been focusing so hard on communicating to people that AI aren't human, that we've been glossing over how anthropomorphic this process actually is. Once the AI have fully internalized the low level skills that we teach to entry level human analysts, the same process that allows some of those low level human analysts grow into senior analysts, make the jobs of more senior analysts learnable to AI.

LLMs are probably very good at doing what junior bankers do, since what they do is essentially running basic statistics on publicly available financial data (already categorized by the big financial data providers) and then adding some light commentary, charts and visuals for pitches. I remember using FactSet’s primitive auto pitchbook feature in 2014 or 2015 and thinking that this was a job that was going to be automated very soon. But you’re correct that that isn’t really the point.

Granted, my career in finance was short, and I only worked in tech, but in my experience most finance was underwhelming.

There were a lot of people who more or less had a call center job. Some were doing telemarketing, trying to sell pension-investments. Others were calling people, trying to get them to sign a form promising that they weren't using their pension money to fund ISIS. There was no point to the latter job except ticking a box for the regulators. Lots of people had jobs where their job was to open piles of PDFs, find a key number and insert it into an excel spreadsheet.

With that said, some developers and traders were truly impressive and had almost super human abilities. The issue is that the company was an inverted pyramid. A few people kept the show going, while the majority were support staff. The people who actually did the core work were remarkable people whose jobs won't be automated until we have AGI. The majority were just doing tedious office work in a toxic work environment.

The one thing that keeps demand up for junior employees is that regulation increases the demand for staff. There are fewer and fewer doers and more and more people who have to ensure that the clients aren't on some list of Russian oligarchs or that have to create graphs of carbon emissions in the investment portfolio.

Do the data entry and call center jobs pay well?

A lot better than a regular call center job but not amazingly well. A lot of 27 year old business majors working 60 hours a week and making 50% more than their class mates doing telemarketing. Telemarketers do really matter. A good salesmen can bring in millions to the firm. Convincing a dentist to move his pension to their fund can generate tens of thousands in revenue over the course of decades. A small difference in conversion rate can have a major impact on the firm's performance. The top people were well paid.

The most important thing to understand about investment banking analysts (and associates) is that they do - in the purest, Graeberian sense of the word - a bullshit job. Moreso even than consultants.

Investment banking is a critical part of a market economy. But the role of the analyst and associate is a curious historical oddity. Before modern investment banking emerged in the 1980s the role didn’t really exist; junior bankers were clerks and then the good ones quickly became dealmakers. It emerged because every major investment bank can handle the same IPOs, M&A, secondary offerings and so on in exactly the same way. There is no functional difference whatsoever between hiring Goldman Sachs and hiring Morgan Stanley, or Barclays or Citigroup for that matter, to IPO your big tech business or to issue debt for your public athleisure company. They know the same people at the same funds, can structure the same things in the same way etc.

At the boutique and mid-market level, and in niche markets where capital is harder to find and more picky (like the one I work in), actual skill on the part of bankers is required because it’s not guaranteed that you’ll actually be able to raise money (for example). But at the major bank (‘bulge bracket’) level, even the most retarded banker of all time is not going to have any issue IPO’ing Arm or issuing equity on behalf of Nvidia or Shell.

This led to a strange arms race starting in the late 1980s among bankers about who could add the most ‘value’ to their client offering. The banks operate as a soft cartel in fee terms, so Barclays isn’t going to undercut Goldman by offering half the fees in basis point terms on a deal. But they can compete on flair, and on pitch decks. This, in turn, led to the pitch deck arms race that exists today, where junior bankers work 100 hour weeks making up bullshit numbers for PowerPoint slides that nobody reads in the hope that this will surely lead to us getting the deal and not the shitstains at MS or Bank of America and so on.

In the 1980s, a pitch deck might be a few hastily Xerox’d pages stapled into a booklet. Today it’s a 200 page brochure. No bulge bracket bank can opt-out because then you look like amateurs next to Goldman’s production design (all BB banks have large graphics departments that work on this stuff, not even outsourced to India but often actually in NYC/London). Clients don’t care because they pay the same fee regardless (as mentioned), so they might as well take the brochure.

The analyst economy works for banks. Most analysts leave after a couple of years, either because they’re forced out or go to private equity, those who are good enough and don’t want to leave can stay and eventually rise to become actual dealmakers (above VP you’re essentially working a normal corporate sales job most of the time).

Beyond the fact that the need for the role is nonexistent (analysts perform no intellectual labor, just downloading and copy-pasting from Bloomberg/Factset), I think one of the best things AI could do would be to get everyone to realize how pointless pitchbook inflation has been. But it’s more likely this is just an excuse for layoffs because deal volume is down since 2021.

I work in an industry where I end up having to read pitch books. Man do they say a lot without saying a lot. Buzzword on top of buzzword.

I believe the big thing for them is availability and consistency. Like a McDonalds worker with great grammar and can do algebra and make an identical Big Mac at 4 am.

Simplistically Mr Banker meets with CEO at 3 PM on Tuesday. He gets feedback from the client on what they are thinking. At 7 PM he gives updates to his analysts. At 4 am the analyst have all the materials updated. At 7 am the printers have finished documents. At 8 am the banker has the new reports in his briefcase. At 9 am the Banker again meets with CEO and closes the deal.

And everything has to look perfect because it’s a big deal. Just having the correct numbers won’t work because it looks sloppy for that size of deal so hours spent picking out just the right shade of blue for a pie chart.

That’s my understanding of the job.

It’s also that even though analysts and associates are paid very well by general standards, they’re only paid a very small proportion of the deal fees the bank makes. On a big $20m fee (when apportioning based on bonuses and salary for the subsequent year), ‘the bank’ might make $10m, the ‘vice chairman’ (typically semi-retired senior banker still affiliated with bank because of their connections, some banks will have a different title) makes $2m, the head of the industry team (‘global head of industrials’) might make $1m, the two or three MDs involved may make $500k each, then you down from there through directors/EDs, VPs, associates and down to analysts. Of an analyst’s $60k or $80k bonus (maybe there are four or five staffed on the deal across an industry team and execution), perhaps $10k comes from this deal if one had to pick a number. (This isn’t how bonus pools work, but it illustrates how small the analyst’s share would be).

It hasn’t been great for IB the last couple of years. Cutting headcount isn’t a great signal; cutting headcount because we automated is a great signal.

They successfully hired conservatively between 2010 and 2020 even as deal volume recovered post-GFC, then the COVID deal boom happened and they threw a decade of caution out of the window and sperged out, doubling analyst intake for what everyone knew what a temporary thing. Nobody in the industry thought it was a good idea except HR.

I agree that this is most likely an excuse to fire people without blaming declining dealflow.

They're essentially on a long, well compensated trial period for one of the jobs selling large businesses on strategic ideas (financing, mergers, etc). This is what senior investment bankers do, they'll convince CEOs to accept a merger proposal, strategize ways to not merge, find a financing tool that meets the company's needs and desires etc.

The junior analysts are usually cranking out pitch documents for senior guys (who will shift quickly based on market changes). Modelling a company's operations and estimating the effects as financial inputs are changed. Let's say an oil refiner is at a crossroads:

They have older plants that are well placed for cheap inputs but RINs are eating their margins and they'd like to know what one of their older refineries would sell for vs using new equity financing to build a biofuel refinery to generate RINs of their own vs selling the company to Valero and using the money to buy a poorly placed competitor and converting all their refineries to renewable fuels and making money selling RIN to Valero. So the CEO will call the bankers he knows and they put teams of analysts on laying out all those scenarios (and others) then the senior banker will meet again and give the CEO the best of the options. There are almost always some changes like half way through 2 board members may want to buy out one refinery so all the pitches need to be changed to reflect the new option.

Oil and gas, especially exploration/upstream is a unique subfield in IB in that the best teams will actually employ oil engineers with industry experience to run calculations to find minimum viable oil prices etc for projects, but your example is way more complex than what most investment banking analysts do. The average M&A analyst is downloading spreadsheets from Bloomberg and looking through annual/quarterly reports, running rote calculations on them (with many fake numbers) and massaging the resulting data into a few charts that they then spend hours aligning on a PowerPoint. For ultra niche fields they’re more likely to hire a consultant to do the modelling for them if they think they must.

I agree that the analyst (and by extension associate) role is mainly just to create pool from which to hire more senior bankers, though.

I work opposite your BB banks who are financing energy infrastructure. They’re definitely experts in finance and the industry and have a very specific and well thought out view of the investments financials. I agree this is likely a niche area but the analysts I work with are very bright and doing good work. Though I will admit that they’re not 22-25 year olds generally.

You’re painting a picture of the banks as mainly salesmen and make-work. I have no doubt that’s a large part of it, maybe even a majority. But I think you’re overstating it.

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