Financial Engineers Vs Real Engineers

So let me get this straight – real engineers, guys that are actually responsible for building those little things we rarely use like bridges, roads, buildings, water systems, etc.  They don’t make as much as the guys that play with numbers and don’t actually add anything of real value to our economy?  At what point do we realize that this stuff has gone too far.  Listen, I’m as much of a free market advocate as you’re going to find, but the bottom line is that these compensation levels we are seeing for financial engineers and people in the financial industry are not the result of natural supply-and-demand, but rather the result of intense and obvious connections between lobbyist dollars, campaign funding and the government.  I’m not ordinarily a conspiracy person, but think about what these two raw numbers mean:

Civil Engineer Salary Range: 59K-130K

Financial Engineer Salary Range: 100K – ∞ (once bonuses are calculated in there appears to be no ceiling)

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The civil engineer numbers were the result of a quick Google scan and you can get the financial engineer salary range here. You can also search company directors to find a few financial engineers to see if they are in a public company. If they are, their salary might be be made visible to the public as well.

Now this is not a good message to be sending to our best and brightest folks.  I don’t know about you, but if I’m a math whiz, what is the pull to go make sure our crumbling infrastructure stays afloat when I can go to Wall Street and jump on the testosterone-fuelled money-making machine known as the financial industry?  Clearly we have to change some incentives here because this has obviously not been working and it will continue to do substantial damage going forward.

To realize the full scope about why this is so bad, it’s important to look at what financial engineers actually do.  Essentially they are responsible for creating new products to manipulate the financial world in some fashion.  This can mean developing a high-frequency trading model, creating derivatives, or various other combinations of shuffling money around.  None of these services really add anything to the economy.  In fact, they often distort the whole idea of simple supply-and-demand and do a great deal of damage to the economy, in addition to the fact that they are soaking up many of the best and brightest young math talent on the planet.

You can’t blame young people, they are just going where the money is.  “Greed is good,” as Gordon Gekko says right?  There is little doubt in my mind that this brain drain is affecting other industries.  It’s a good thing we’ve been cutting NASA’s funding anyway because they can’t compete.  High school teachers or university professors – riiiiiiight.  I’m going to say this is not a good thing.  Others might disagree and I’ve heard some arguments about financial engineers presenting value to society, but for the life of me I can’t really see what they do other than manipulate markets for the benefit of the select few that have access to these services.

If we eventually come to agree with the whole idea that it is ridiculous that the smart guys who build things for a living should earn a 10th of what smart guys that pass money around for a living earn, then the question becomes how do we fix this?  I have no be-all, or end-all answer.  I hate the idea of meddling in the free market (after all, couldn’t the same justification be used to say athletes and singers shouldn’t make as much as they do – although, I guess one could argue they actually present society with a pretty great service).  I think we should seriously look at how much banks are allowed to pay out as bonuses.  One interesting proposal I’ve seen is to limit bonuses as a percentage of profits (a very small one obviously).  This should force investment branches to look at their long-term decisions more carefully in relation to their short term ones (hello, mortgage derivatives anyone?).  Maybe the answer lies in paying civil engineers a little more as well, I’m not totally sure how the policy wonks inside the beltway figure this one out, but I sure hope they’re looking at it hard (doubtful).  Because if there are two things I know, it’s that my crumbling bridge on the way to work can’t be fixed with derivatives and we don’t want subways built by the bottom tenth of an engineering class!

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That really does make sense. Those who are actually contributing (good) to society should by all means be earning more than those who are out to just cash in. :-)

In some ways what those financial engineers are doing is attempting to leverage knowledge (of markets and capital and financing) to some end, chiefly their own financial benefit. There is nothing wrong with that. If they use what funds they have available to stack a system so that only the benefit, or, worse still, so they cannot ever fail, then, Houston, we have a problem.

I fear we may have a problem.

The Student Investor

It’s Capitalism at its work. If your from Canada and I’m sure you are then you have heard the news about Nortel. The CEO of Nortel paid millions to themselves and cheated the company, investors and even the Gov’t for falsely stating that Nortel was making profits. Capitalism created us to be power hungry and it produce people like Warren Buffett. I’m not saying he’s a bad guy but he said that rich people like me should pay higher taxes to the Government because the American Gov’t needs those tax dollars. What’s so funny about that statement is the fact… Read more »

I looked at the link for the financial engineer salaries and was shocked that interns make $7800 per month. Are you kidding me? This much money for an intern who is working on their master’s degree? Wow…and we wonder why there are negative attitudes toward Wall Street.

Its not a problem with capitalism. Cuba has rich and poor. So does Libya, Iran, Spain, Greece, etc. Name a people or system and you will find those who do well and those who do poorly. The problem is that there will always be someone working the rules, laws or guns and ammo to their advantage. It is that simple. That being said, there is eventually a day of reckoning. As a result of the financial crisis, we may just be entering a time when the trends start to reverse themselves if demand for infrastructure spending increases.

I’m pretty sure that most folks in the financial world don’t make that much money :) Also, I wonder where the term financial engineer came from??

I like to riff on my financial industry friends that finance is the science of passing money from hand to hand until it disappears. Am I a good friend?

The Student Investor

Also I hate the idea of socialism I like to think both side of the economic system. I believe in Capitalism but a few people could do more harm and causes example the 2008 financial crisis. That’s something I don’t believe in why the few affects the many and or vice versa. But I agree with @cashflowmantra because he’s right, I believe there are some people that are born having the extra advantage but given to much power.

As a former CFO, I thought I might add a perspective to the anomaly. In order for engineers to make more money they must go into management. The Wall Street people are performing relatively high level work similar to an attorney, Are they paid too much? Yes. Executives of public companies make too much too.

I have master’s degree in Mechanical Engineering. But, over the time, I’ve made transition to IT. I work for a large bank as a systems architect so I have friends who are in core finance. I agree with you that these guys make much more than I ever made as an engineer working for GE or J&J.

It takes really hard work to be an engineer. So, I couldn’t agree with you more.

Supply and demand, it is that simple. Mining companies are throwing around huge money in Australia right now to attract workers, just because they can. If you want the money, follow it. If you want to do something that means something to you, do that instead and forget about the money.

The value that Financial Engineers add is questionable. I like PK’s description.

Engineers add value by creating/constructing/designing productive assets, leading to capital and wealth.

Side note: a good part of China’s leadership have real engineering degrees.

Marla

As I civil engineer… I’m going to agree. ;) Honestly, though, you get more than just the pay cheque… you get a profession you enjoy and can be proud of (driving around the city and pointing at which buildings are “yours”).

BS

As an electrical engineer, I work hard to make industrial electronic equipment, which help thousands of industries manufacture their products. Yesterday I found a potential bug in my product design, and worked furiously to detect and fix it completely. I take immense pride in my work, and designing a defective product may cause loss of money, time and even life. Seeing my meticulousness, a senior employee happily remarked “It’s good you caught it early, you work in high tech engineering because you can.. not everyone can”. I get the feeling that the bright minds in the financial industry can try… Read more »

Adam

Obviously you don’t understand that the financial sector does quite a bit of good for the economy. Statistical arbitrage, a practice commonly employed among financial engineers, takes advantage of price discrepancies in the market. This allocates money to firms that are undervalued and pushes the market towards equilibrium. Responsibly taking companies public can be a boost to the economy. There are many other ways the financial sector adds to the economy too. It’s much more than ‘the smart people who pass money around’. Your article is so full of loaded terms and logical fallacies that my brain hurts. This isn’t… Read more »

Hey Adam, TM doesn’t do the comment thing anymore so I’ll field this one. The article is admittedly slightly slanted, but I’d argue that today’s financial engineers actually do very little in terms of allocating capital. With the software available to individual investors there isn’t much left to be desired. For a great look at what I consider “financial engineers” (admittedly a vague term) to be up to check out “Flash Boys” by Michael Lewis that just came out. How about the whole collateral debt olibation fiasco? I think it’s a pretty tough sell to say that they add value… Read more »

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