BY RASA PETRAUSKAITE

In print | November 29, 2007

Some contend that until recently, Wall Street seemed to be a prestigious and lucrative place to work and that since last summer it has become more difficult for recent college graduates to develop their careers there. However, the arguments of those people do not take into account that the latest financial crisis is similar in many respects to the crises of the past. The summer financial crisis was caused in part by several Wall Street companies issuing risky assets that they rated as not that risky.

A financial crisis ensued in the U.S. as a result of the disparity between the published and the actual risk. Some say that the crisis demonstrates, among other things, that the amount of innovation in the financial industry seems to be on the decline. They say that for us college students this means that Wall Street will offer fewer career opportunities than those that were available to those who graduated before us in recent years. However, we have little reason to fear this, even if we will graduate as soon as next June.

Some stress the negative effects of the summer crisis. They cite that the crisis created about $400 billion in losses overall in the economy. However, the losses represent only a small proportion of the overall economy, which is more than $13 trillion. Some also say that a large portion of the financial sector lost credibility. According to Goldman Sachs, the probability of such a crisis as the one that happened last summer was about 0.00…006 with 138 zeros in between.

They stress that credit rating companies clearly underestimated the amount of risk that these securities entailed. Then, they conclude that the crisis deeply undermined the credibility of many financial companies.

However, those that assert that the crisis will negatively affect Wall Street in the long term tend to overlook the fact that mortgage-backed securities (the ones entailed in the crisis) represent only a tiny fraction of financial assets, and cannot in themselves account for recent declines in the market. Rather, this is a crisis in confidence.

This will likely become clear far sooner than most people realize, and the market will put its current woes behind it.

For some perspective, only on Monday did the current market drop even qualify as a correction – a 10 percent drop, which in the grand scheme of things, is not a large drop.

There are also fears that the overall rate of innovation on Wall Street appears to be declining. Those concerned with this say that there is a limit to how much wealth can be preserved through the diversification of risks. According to this logic, without further financial innovation, the industry becomes increasingly stagnant and potential for creativity diminishes.

However, this argument does not have broad supporting evidence. One can find many crises in the annals of investing. Since the Great Depression, there have been many economic downfalls — including a recession in 1987. There was also the Enron scandal in 2001 and many others over the years. None of them left a substantial negative legacy for their industry as a whole. Thus there is no reason to expect that the summer financial crisis will hinder the financial sector in the long run.

Finally, some conclude that there will be fewer jobs on the Wall Street in the future. They say that if the industry will not expand as much in future years as it has in the past, then opportunities for jobs will not grow by as much.

However, since there is little evidence that the detrimental effect on the financial sector will last for much longer and since only some companies suffered major losses, we should not fear this. Most likely there will be as many employment opportunities for Swarthmore graduates on Wall Street in the future as there were in the past.

Rasa is a senior. You can reach her at rpetrau1@swarthmore.edu.

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