Life Just Got Much Worse for Wall Street Back Offices

Wall Street sign
Paul Giamou | Aurora | Getty Images
Wall Street sign

There aren't a lot of places left in America where you can work your way from the mail room to the executive suites.

Upward mobility within an organization is severely limited these days.

Based on merit, you can rise up within the silo you are hired into.

But those silos have ceilings. Very often to jump from one silo to another, you have to leave the company, perhaps get a graduate degree, and try again at a different place.

But Wall Street was different. Sure, many of the top guys had degrees from Wharton or Harvard Law School. And a lot of the junior clerk positions, jobs that sometimes went to guys still in high school, had been eliminated by technology. But there were still people who might not have qualified for the glamorous investment banking or trading jobs who could get a job in the back office of a firm, keeping records, settling trades, working with the compliance guys to make sure no one was violating the rules.

And those jobs in the back office could lead to front office jobs. You were already at the firm. Head count didn't go up when you moved from back to front office, which helps if there is a hiring freeze in place. You maybe met a couple of people at firm events or in the cafeteria. One of the compliance guys was an ex-trader who wanted a slower paced job but could still recommend you to the guy in charge of small-cap equities.

That window of opportunity wasn't very large. It took some luck to get through it. But now it is probably closing altogether, thanks to UBS's alleged rogue trader.

One of the reasons Kweku Adoboli was able to hide his huge exposure to losses was, allegedly, that he knew the back office systems too well.

He had started in the back office, so he knew how it worked. He knew how to game the system in a way that traders who started on a trading desk never would. To most of them, the compliance systems are a black box. They enter the trades but have no idea what happens after that.

Go ask a guy on a trading desk how money gets moved from Morgan Stanley to Merrill Lynch to settle trades. Odds are his answer is "it just does."

It seems likely that in order to prevent well-informed scammers from learning enough to undermine the system, investment banks across the world are going to erect a wall of separation between the front and back offices. This is already becoming the conventional wisdom about what UBS should have done.

Here's how the blog MacroMan puts it:

There is a really good reason why you don't promote people from back or middle office to front office: they know the systems well enough to cover their tracks. Better the norm where very few front office people have a clue what happens to a trade once they press "done". Leeson, Kerviel and Adoboli all had this in common. Note to management—if you want to hire a back or middle office guy to do a front office job, hire them from a different bank.

Note that the final possibility—getting hired from the back office of one bank to the front at another—is extremely remote. The entire advantage of working in the back office was built off of already being an employee, a known quality, a person with access to people in the front office. No one actually says, "Let's try to poach a trader from Goldman's back office."

And so, just like that, Wall Street is becoming an even more stratified, calcified, immobile place.

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