When Ivy Grads Pick Teaching Over Wall Street: Cohan

We are witnessing the decline andfall of the investment-banking profession as we have known itfor the past 40 years.
The evidence is everywhere. The increasing regulations onWall Street -- as required by the Dodd-Frank law and still beingwritten by the Federal Reserve, the Securities and ExchangeCommission, the Commodities Futures Trading Commission andothers agencies in the U.S. and Europe -- will require theremaining companies to increase their capital, curb their risk-taking and reduce their principal investing.
Aside from the fact that investing principal andproprietary risk-taking per se had nothing to do with the recentfinancial crisis -- and that the ability of Goldman Sachs GroupInc. (GS) to make a huge proprietary bet against the mortgage marketprobably helped saved the firm -- these new rules will greatlycurb Wall Street��s revenue and profitability at a time when thebusiness itself is suffering a severe slowdown. (What sunk WallStreet in 2008 was the seemingly more conventional business ofbeing a middleman for the manufacture, packaging and sale ofincreasingly risky mortgage-backed and other debt securities.)
Not being able to make those big proprietary bets when yousee them developing -- in effect, the closing of the casino thatWall Street has become over the past few decades -- willseverely limit bankers�� money-making opportunities. It will alsoprotect the rest of us when those big bets go wrong or areperceived to be too risky. (For every Goldman Sachs actingbrilliantly, there is an MF Global Holdings Ltd. actingfoolishly).

Signs of Withdrawal

There is little debate anymore that Wall Street had becomehighly dependent on its trading operations. Something like 90percent of Bear Stearns��s profits in the years leading up to itsMarch 2008 demise came from its trading and debt-originationactivities. The percentages are not that much different atGoldman Sachs, where in 2010 its traditional investment-bankingoperations generated only $1.3 billion of $12.9 bi! llion in pretax earnings, about 10 percent. All but $1 billion or so ofthe rest of Goldman��s pretax earnings came from its trading,lending and investing businesses.
The slowdown in business, combined with the looming tradingcurbs, has resulted in job losses across Wall Street. MorganStanley (MS) recently announced it was firing 1,600 employees.Goldman Sachs has done its usual turn of eliminating the bottom10 percent of its workforce and a group of its long-servingpartners. Bank of America Corp. (BAC) announced that about 30,000employees would be chopped by the end of 2012, although a numberof the firm��s investment bankers lost their jobs in the pastmonth.
Yet those suffering the most are the foreign firms thatwere trying to break into Wall Street��s business. NomuraHoldings Inc. (8604) has pretty much scuttled its most recent WallStreet experiment (it bought Lehman Brothers Holding Inc.��sEuropean and Asian banking operations) and firms such as SocieteGenerale SA (GLE), UBS AG (UBSN), Credit Suisse Group AG (CSGN) and Royal Bank ofScotland Group Plc (RBS) are all cutting Wall Street bodies.
In November, Bloomberg News estimated that more than200,000 people who work in finance had already lost or wouldlose their jobs this year.
Not only will the head-count reduction on Wall Streetcontinue for the foreseeable future, but the vast sums overpaidto bankers and traders will inevitably continue to fall as well-- as many of them are finding out this bonus week. There issimply no easier and quicker way for Wall Street firms to keepup a modicum of profitability than by cutting pay for the peoplewho still work there. Needless to say, the inevitable decline inWall Street��s compensation will mean less tax revenue for NewYork City and New York State and fewer government services forthe rest of us (absent higher taxes).

Ivy League Doubts

The most reliable leading indicator of Wall Street��s futureprospects is the way recent graduates of Harvard, Princeton andYale -- supposedly our ! best and brightest -- choose to spendtheir time after graduating. For years, hordes of graduates fromthose schools beat a fast path to Wall Street. Now the road isfar more difficult to travel. For those who choose to make thejourney, there is the prospect of incurring the wrath and scornof fellow students who make up the various Occupy Wall Streetmovements -- a fact not likely to deter many -- and then thereare dimmer prospects for a job on Wall Street generally, whatwith the slowdown in business.
According to a Dec. 21 article in New York Times, whereasin 2006 some 46 percent of Princeton graduates who had jobslined up after graduation went to Wall Street, four years laterthat number had fallen to 36 percent. At Harvard, in 2006, aquarter of the class got jobs in finance; by 2011, that numberhad fallen to 17 percent. At Yale, in 2006, 24 percent of thegraduates had jobs in finance and on Wall Street, while in 2010,the number of graduates going to Wall Street had fallen to 14percent.
The word around Goldman Sachs, I��m told, is that even thoseoffered a still highly coveted entry-level job at the firm arehaving second thoughts about taking it. More and more, banks arelosing talent to Teach for America, a fact that may turn out tobe one of the most heartening consequences of the financialcrisis.
(William D. Cohan, a former investment banker and theauthor of ��Money and Power: How Goldman Sachs Came to Rule theWorld,�� is a Bloomberg View columnist. The opinions expressedare his own.)

The Defeat of the "Shadow Shogun" Means it's Time to Buy Japanese Stocks

Japanese Prime Minister Naoto Kan's narrow Tuesday victory over Ichiro Ozawa for the leadership of the Democratic Party of Japan wouldn't normally get investor pulses racing - after all Japan has had five prime ministers in four years.

However, the Bank of Japan's heavy intervention in the currency markets this week confirmed my view that this political twitch was really very different.

The upshot: As investors, we should pay attention ... and should look to increase our allocation to Japanese stocks.

Big Spenders No More

Ozawa, known as the "Shadow Shogun," was originally a powerful politician in the Liberal Democratic Party that dominated Japanese politics for 55 years. He split with the LDP in 1993, reformed the opposition and became the power behind the DPJ. He served as the DPJ's secretary general from 2006 to 2009, although he was forced by scandal to resign before its election victory in September 2009.

The reason we should pay attention is that Ozawa's defeat may end the dominance of the big-spending interests in Japanese politics and allow Kan to get down to the hard work of correcting Japan's deficit and debt problem. This will take several years, but even in the short term may result in faster growth for the Japanese economy and - interesting to us as investors - the final end of the 20-year bear market in Japanese stocks.

You see, Ozawa earned his "Shadow Shogun" nickname for his arm-twisting, backroom deals. He used his power to promote Japanese infrastructure spending, forming alliances with the big construction companies that funded his own political career, as well as the careers of those around him.

This "cash splash" philosophy has been a big problem for the Japanese budget and its growing debt. Ever since Japan's stock-and-real-estate bubble burst in 1990, leader after leader has attempted to prop up the economy with major infrastructure spending.

The only excep! tion was the short (2001-2006) stretch under then-Prime Minister Junichiro Koizumi, when the spending flow was cut back and some attempt was made to balance the budget.

Alas, this budgetary enlightenment wasn't to last.

When the global financial crisis struck in 2008, Japan - like other countries - resorted to repeated "stimulus" initiatives, which is finance-speak for infrastructure spending. The result has been an inexorable climb in Japan's debt load, which this year reached 217% of gross domestic product (GDP).

At that level, something has to give. Only twice in world history - Britain after 1815 and again after 1945 - has a country with a higher debt level managed to bring it down without default.

According to the National Bureau of Economic Research (NBER), public-debt levels that reach or exceed 90% of GDP become highly problematic. And a recent research study - conducted by economists Kenneth S. Rogoff of Harvard and Carmen M. Reinhart of the University of Maryland - found that for countries with debt-to-GDP ratios "above 90%, median growth rates fall by 1%, and average growth falls considerably more."

The Wrath of Kan

Kan, who took office in June, realized that policies had to change, but was damaged by DPJ losses in July's upper house elections. And when he refused to resort to the same sort of backroom wheeling-and-dealing that had been the hallmark of "Shadow Shogun" politics, Ozawa challenged him for the party's leadership.

The Tuesday (Sept. 14) election was the showdown between Ozawa and Kan.

Having seen off Ozawa, Kan should now have a reasonable run of power in which he can take steps to repair Japan's economy. And it's pretty clear what those steps need to be.

Public spending needs to be cut back, so that the budget can be reduced, preferably without large increases in taxes. At the same time, the danger of deflation - made worse by a steadily rising yen (which reduces Japanese exports by making them more expensive, even as it re! duces th e prices of imports) - must be fought off.

The Bank of Japan (BOJ), following Kan's instructions, achieved progress on this front on Wednesday (Sept. 15): It intervened heavily in the foreign-exchange market, first in Tokyo, and then - when it opened - in New York.

One estimate puts the BOJ's first-day intervention at $11.6 billion. The intervention pushed the Japanese yen down by more than 3% against the U.S. dollar. That will help Japanese exporters - and at the same time will limit deflationary forces in Japan's domestic economy.

All of that, in turn, should give Kan some room for budget cuts.

The Tokyo stock market reacted favorably, rising more than 2% on the news of intervention. By Japanese standards, it's currently very cheap, at less than 25% of its 1990 value and it remains near the bottom of its trading range since 2000. It has bounced little since its bottom last year, unlike other global markets.

Thus, Japan's stock market currently appears to have better rebound prospects than many other markets around the world. So if you haven't got any money in Japanese stocks, you should probably boost your allocation.

Let me be clear: Even with this week's developments, Japan isn't destined to become the world's next white-hot market; given what transpired this week, I'd say my rating has shifted from 5.0 out of 10 to about 7.5 or 8.0.

Besides, Japan is still the world's third-largest economy, and its prospects seem likely to improve. And let's not forget, it is an export powerhouse in the fastest-growing region in the world - Asia.

Action to Take: Japanese Prime Minister Naoto Kan's victory over Ichiro "The Shadow Shogun" Ozawa for the leadership of the Democratic Party of Japan this week was worthy of note all by itself. But you throw in the Bank of Japan's dramatic intervention in the world currency markets and Japan is a market U.S. investors can no longer afford to! ignore. Japan's stock market currently appears to have better rebound prospects than many other markets around the world. So if you haven't got any money in Japanese stocks, you should probably boost your allocation.

For a general exposure to Japan, you should go for its exchange-traded fund (ETF), the iShares MSCI Japan Index (NYSE: EWJ). The fund has $4.5 billion in assets, so it's certainly large enough for ample liquidity, while its expense ratio is low at only 0.55% of assets. Trading at 15 times earnings, the fund is reasonably priced. Plus, it's got a 1.6% dividend yield.

Of the big exporters, I most like Honda Motor Co. Ltd. (NYSE ADR: HMC). It's trading on only 9.9 times trailing earnings, or only 17% above book value, and it hasn't had to deal with the scandalous product-quality problems that have dragged down rival Toyota Motor Corp. (NYSE ADR: TM) in the U.S. market. With the revival of global automobile markets in full swing, and its orientation towards fuel-efficient models, Honda is well placed to take advantage of the increasing wealth of East Asia.

Japanese banks are a real bargain. Mizuho Financial Group Inc. (NYSE ADR: MFG), for example trades at only 60% of its net asset value (NAV) and at only 5.5 times earnings - a far lower rating than its U.S. or European peers. With the Japanese economy expanding in a healthy manner, and its domestic real estate problems far in the past, Mizuho looks like an excellent value, and the market is likely to realize this soon.

Finally, Japan's small-company sector will likely benefit greatly from an economic revival. To benefit, investors should consider the Fidelity Japan Small Companies Fund (FJSCX). This well-established, no-load mutual fund concentrates on Japan's smaller companies, which are often difficult for U.S. investors to invest in directly. As foreign funds go, its expense ratio of 1.1% is quite reasonable.