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all right. today, we want to talk aboutinvestment banking, which is different from commercialbanking. and today we have a guest, jonfougner, who took this course almost 10 years ago and hasbeen working in investment banking since. i'll introduce him in a fewminutes, but i wanted to start with just the elements ofinvestment banking, and then i wanted to talk about changesin it that came about after
the financial crisis of2007 through 2009. ok. the topic is investmentbanking. and that is a term, a20th-century term, that first became big and important, i'dsay, in the 1930s, but preceded that by some years. and it refers to a business ofhelping other businesses create securities. if someone wants to issuestock, they go to an
investment bankerto help them. or if you want issuebonds, you go to an investment banker. it can be a corporationthat goes to the -- for-profit, it can be anon-profit corporation, it can be a government. i suppose even an individual,who is incorporated, can go to an investment bank. that's the investmentbanking business.
now it's different -- it shares something with theconsulting business, because investment bankers serveoften as consultants. a company will come to aninvestment banker with a problem, and they want to raisemoney by issuing new shares, for example, tosolve that problem. but if it's a good investmentbank, they will do more than just issue shares for them. they'll talk about their wholecorporate strategy.
so, in that sense an investmentbank looks like a consulting firm, but they don'tdo pure consulting. that makes the distinction. maybe, they're in many ways afavored consultant, because they bring money. you can talk to a consultant,who will bring you no money, and another consultant,who has his hands on money somewhere. and that helps a lot.
the advice and the moneytogether help a lot. so, investment bankers aredifferent from traders, because usually they deal withcreating something -- about making a corporation ora government -- making it work, enabling them todo something that they want to do. and then, being realistic aboutit, and coming up with the money to do it. and so, that's how investmentbanking differs from
consulting[correction: trading]. and it differs from commercialbanking in that a pure investment bank does notaccept deposits. you can't go to your investmentbank and say, i'd like to open a savingsaccount. they don't do it. i'm talking about a pureinvestment bank. but let me just give yousomething about this business. i'm going to come in a momentto pointing out that most
investment banking businessesare not pure investment banks. but let's talk about what apure investment bank does. it does underwritingof securities. that means -- suppose you're a company andyou want to issue shares. you need someone to go to batfor you, someone who knows the kind of people, who mightbuy your shares, and can vouch for you. so in some sense, it'sa reputation thing.
the investment bank has contactsamong people who make big investments, and they managethe issuance of your new shares, and that's calledan underwriting. if it's the first time you'reissuing shares, it's called an ipo, or ''initial publicoffering.'' so, you're a private company, it's just youand a few friends own the company, but now you want to gopublic, you would generally go to an investment bank,and talk to them about how to do it.
and the investment bank wouldsolve that problem for you by doing an underwriting. so, traditionally there's twokinds of underwriting -- also, there's also somethingcalled a ''seasoned offering,'' and that means, fora company that has already gone public, and it already hasshares traded, so that the shares are seasoned, but youwant to issue more shares. so, you can go to aninvestment bank to do that, as well.
there's two kinds of deals. there's a ''bought deal,''and then there's a ''best efforts.'' with a boughtdeal, the investment bank buys your shares. they go in and say, you know, weknow that we can market for your shares. we will buy them ourselves andresell them on the market. a best efforts offering is one,where the investment bank doesn't buy it and doesn'tpromise anything.
they say, we'll makeour best efforts to place this offering. so, those are the basicthings that they do. the methods that they use areregulated by the securities and exchange commissionin order to make -- the sec in the united states,and regulated similarly in other countries. so, that's the basic investmentbanking business. so, if you're thinking of whereto place yourself, i
think investment banking suitsvery well people who are -- it's not good forautistic people. if you're autistic,be a trader. then, you just get on the phone,and you buy and sell all day, and you can be rude,and you can have coffee stains on your shirt, and you don'thave to know anything about classical music. ok? but investment bankersare a different --
i see jon is laughing. tell me, what you knowwhat classical music. i assume that was a part ofyour training at goldman. he says no. it's a whole differentindustry. so, if you go to the symphonyand look around, you'll see lots of investmentbankers there. but you won't see any traders. you nod on that[pointing at jon fougner],
maybe. we talked about moral hazard. i think that an important partof what investment banks do is, solve a moral hazardproblem, and that problem is, that companies, who issueshares, don't have a reputation. and so, what do i care, i'llissue shares, right before we're going to go bankrupt. we know inside that we're goingto go bankrupt, so hey,
let's just see, if we can milkthis company, before the public knows it, andissue shares. that's a moral hazard. and the investment bankis in business to prevent that moral hazard. they do the due diligence, theycheck you out, and then after that, people aremore trusting of you. so, i think investment bankingis built around trust, it's establishing trust.
so, that's how it differs froma lot of -- that's why it's important that these people becultivated and impressive. they tend to be well-spoken. i can ask jon, whether he agreeson all this, but it's my impression, you can tell whenthe investment bankers walk in the room. they dress differently,they look differently. i don't know what it is. it's something about reputation-- it's what it's
built around. the investment bankingindustry -- let me just -- since i'm talking about thenature of investment banking and since we have a goldmansachs representative here. i put on your reading list abook as an optional reading by charles ellis called thepartnership, and it's a history of goldman sachs. goldman sachs was an investmentbank until just
very recently, and we'lltalk about that. they're still in the investmentbanking business, but now they're officiallya commercial bank. it's an old, venerable firm, andgoldman sachs emerged in the early 21st century, as,i think, the most highly respected and esteemedinvestment bank in the world. amazingly successful, andamazingly well-respected. ellis wrote a book justa few years -- ellis is on the yalecorporation.
he's a distinguished businessmenand author himself, and he wrote a bookabout goldman sachs, which is largely admiring. like, how did this happen? how did this phenomenon ofgoldman sachs come about? and i suggested -- i didn't assign -- i suggested, you read onechapter, which was called principles.
and it says something aboutgoldman sachs, and it refers to, in that chapter, thechairman of goldman sachs, john whitehead, in the 1970swrote down a list of principles that guidegoldman sachs. and ellis seems admiringof these principles. not everyone would agree. it's a matter of taste,i guess, if anything. whitehead is now -- i just looked it up --
he's 88 years old, and isretired from goldman, must have retired some years ago. what kind of an organization? ellis says, that the thingthat struck him about the organization is loyalty. but that's not alone, thatpeople feel a strong loyalty toward their company. that's not on whitehead'slist. so, whitehead's list.what is his first
principle of goldman sachs? "our client's interests alwayscome first." these sound a little bit like bromides. i'm sorry, but i read themthinking, it is the most successful investment bank inthe world, so maybe there's something beyond -- i think, there is somethingbeyond platitudes here. second, "our assets arepeople, capital, and reputation." that's a coincidentwith what i said.
"uncompromising determination toachieve excellence." well, everybody says that, so maybewe'll discount that. "we stress creativity andimagination." well, those are sort of bromides, maybe. then, whitehead issuedsome guidelines -- this is also in thatchapter later -- for goldman sachs employees, andthese seem to be a little bit more candid. ''the boss usually decides, notthe assistant treasurer.
do you know the boss?'' that'ssomething i've learned from my own interaction with people -- the boss really does decide,and goldman sachs goes for the top. and maybe this is obnoxious, idon't know -- they don't want to talk with underlings. ''you never learn anything whenyou're talking.'' that means, be a good listener. ''the respect of one personis worth more than the
acquaintance with 100.''''there's nothing worse than an unhappy client.'' theone thing that -- i don't if it's on whitehead'slist -- but i think it says somethingabout investment banking, and that ellis says, is thatthey shun publicity. they don't want to be in thenewspaper, they want to be known by the president. they want to be known bya few prominent people. they're kind of socialclimbers, in a way.
but it's all built around somebasic principles of service, and they want to be talking tothe top guy, and they don't want to be in the newspaper. i'm going to quoteellis on this. now i'm quoting charlie ellis. i call him charlie. i know him. he's a friend of mine. "making money, always and noexceptions, was a principle of
goldman sachs. nothing was ever donefor prestige. in fact, the most prestigiousclients were often charged the most. absolute loyalty to thefirm and to the partnership was expected. personal anonymity wasalmost a core value. the real culture of goldmansachs was a unique blend of drive for making money and thecharacteristics of family, in ways that the chinese, arabs,and old europeans would well
understand.'' so, i'm giving you a flavor ofwhat an investment bank is. you might be repelled by it. you know, is making moneyso important? and if you are repelled by it,you probably don't want to work for goldman sachs. on the other hand, they'rekind of respecting some economic principles, right? working for a firm like this,you can make huge amounts of
money, and then at theend, you can give it all away to charity. and that's the new capitalism,right? so, what's wrong with that? what are you going todo with all this? if you make $100 million, whatare you going to do with it? you're going to giveit away, right? i mentioned at the beginning, imentioned andrew carnegie's book, the gospel of wealth.
maybe that's, what thisis all about. on the other hand, some of themdon't give it away, and some of them live lavishly. different people have differentimpressions of this business -- but i want to make sure i havetime for our guest and i'm sort of running out of time. i wanted to talk about what hashappened in the crisis. there's so much to sayabout this topic.
maybe, i should talk firstabout the first crisis. in 1933, the us congress passedthe glass-stegall act, which forced investmentbanks -- it prevented investment banksfrom doing commercial banking, or commercial banks from doinginvestment banking. it split them in two, and itsaid you have to decide, are you a commercial back, or areyou an investment bank? the glass-steagall act was theact that created the fdic, the federal deposit insurancecorporation, the first
successful national depositinsurance act in the world. and part of it -- it makes sense-- if you're going to insure the commercial banks, youbetter watch what they're doing and prevent them fromdoing dangerous business. so, the dangerous business wasinvestment banking, and they forced companies to decide. so, j.p. morgan, which was doingboth investment banking and commercial banking in1933 had to decide. what is it?
investment banking orcommercial banking? so, they picked commercialbanking, and that means, they fired all their investmentbankers. so, these guys regrouped andthey formed an investment bank, called morgan stanley. stanley was a yale graduate andmorgan was, i think -- not j.p. morgan, it washis grandson. morgan died around 1911. and so, those were twoseparate ones.
j.p. morgan, commercial bank. morgan stanley, investmentbank. but since then, we've repealedthe glass-steagall act, and that occurred with thegramm-leach act [correction: gramm-leach-bliley act] of -- what was that -- 1999. well, gramm-leach[-bliley] repealed glass-steagall, andnow these businesses, they
generally do the samebusiness, both commercial and -- yes, gramm-leach[-bliley] was 1999. since then, as you recall, we'vehad a financial crisis. and in that financial crisis,glass-steagall got brought up again, because it seemed thatthe crisis was related to a number of shenanigans thatfirms were undertaking. and the government had to bailout commercial banks.
we talked about this, andit's very controversial. so, the question is, did thesebanks get in trouble, because we repealed glass-steagall? a lot of people cameon saying that. these banks were doing all kindsof screwy things that were dangerous, and we'reinsuring them, so it can't be. so, a lot of people said,we have to go back. there was some inherent wisdomin glass-steagall that we've lost. and this was debated.
now incidentally -- i didn't mention this -- glass-steagall was somehowconfined to the united states. outside of the united states, idon't know if there was any country, but as far as i knowthe u.s. was the only one that did it. so, outside of the unitedstates they had what was called universal banking. and these banks outside ofthe u.s. were doing both
investment banking andcommercial banking. they sailed right through thewhole century without being divided up. so, the reason why we gotgramm-leach[-bliley] was, that people started tosay, you know, we're at a competitive disadvantage. we americans are at acompetitive disadvantage to europe, because we can't doboth, and they have more freedom than we.
and so eventually, in 1999, wesaid, they could do both, so that the u.s. also became auniversal banking country. but then problems arose. and the problems were -- paul volcker, who was chairmanof the federal reserve board in the late '70s, early '80sproposed something called the volcker rule. and the volcker rule wasnot a full return to glass-steagall, but --
and this is now in thedodd-frank act. it's section 619. it doesn't say volcker rulethere, but that's what it is, and it prohibits proprietarytrading at commercial banks. and it also says, thatcommercial banks can't own hedge funds or privateequity [addition: private equity funds]. so, that was the volckerrule that was put in. there was also another ruleadded, which is analogous to
the dodd-frank act [correction:analogous to the volcker rule], also. and this is in the dodd-frankact of 2010. there was a senator. her name was blanche lincoln, ademocrat from arkansas, who proposed the lincoln rule -- unrelated to abraham lincoln,as far as i know. and the lincoln rule was -- or lincoln amendment, and thatis section 716 of dodd-frank.
it says that -- it doesn't prohibit banksdealing in swaps, but it said swap dealers are barredaccess to fed window, discount window. and so effectively, it preventsbanks from dealing in swaps anymore. as a result of this, goldmansachs has got to shut down -- or it appears that -- the volcker rule saysbanks have until
october 2011 to comply. so, it means that goldman sachshas to shut down -- goldman sachs had to become acommercial bank, too, so it's no longer -- it's an official commercialbank now. and because of the volcker rule,it appears that it has to shut down its proprietarytrading, which was a huge part of its profits. and goldman sachs will never bethe same again, apparently.
but it's not clear,what will happen. it depends all on how dodd-frankis enforced. i think, that the people thatare in the banking industry are going to try to claim, thatsome of the activity that was done by their proprietarytraders -- that is, people who were tradingthe market on -- true investment bankingshouldn't involve the investment banker buying andselling securities trying to make a profit.
that's not underwritingof securities, that's proprietary trading. the volcker rule says, that youpretty much can't do it anymore, unless you're a pureinvestment bank, but if you're a commercial bank, you can'tdo it anymore, and they're kind of forced to becomea commercial bank. but they're going to try tosteer around these rules, and i think that maybe they can. they'll re-define somethingthat looks something like
proprietary trading, andthen continue to do what they're doing. we'll have to see. these things are longand arduous. you know, one thing that strikesme about finance is, that it's so rules-based. there are so many laws, thereare so many lawyers, that nobody can grasp the magnitudeof the regulations that these people live under.
and you see these landmarkbills, but none of us understands them, because thereal content of them is involved in hundreds of pages oflegal documents, that never cease to amaze me withtheir complexity. let me tell you something aboutshadow banking, which is relevant here. the term ''shadow banking,'' ithink of that as coming from a term that i first heard frompeople at pimco just within the last five years or so.
or maybe it goes backfurther than that. it refers to a new kind ofsemi-banking system. what are shadow banks? these are companies that areacting like commercial banks, but they're technically not. so, they're not regulatedas commercial banks. and in many cases,the investment banks were shadow banks. i'll give you an example oflehman brothers, which was a
pure investment bank. it's now bankrupt, it's gone. it was a pure investment bank,so it wasn't regulated as a commercial bank. this was before the volckerrule, before dodd-frank, and they went bankrupt in 2008, andit was the worst moment in the financial crisis. why did they go bankrupt? well, there's a reading on yourreading list by professor
gary gorton here at yale, whoargues that lehman, like many other investment banks, wasfinancing a lot of proprietary investments by issuing repos,or by dealing in repos. what is a repo? that's short for repurchaseagreement. the banking crisis, that we sawin 2008, was substantially a run on the repo. so, here's what happened,according to gorton and others who agree with him.
investment banks, like lehmanbrothers, were not regulated like commercial banks, and aslong as they didn't accept deposits, they didn'thave to be regulated as commercial banks. so, they could do what theywant, and they were considered underwriters, so fine,do whatever you want. well, not quite, but theyweren't heavily regulated, the way commercial banks were. and what lehman brother startedto do is, to make
heavy investments in subprimesecurities and other securities by effectivelyborrowing through the repo market. what is the repo market? it's a market, in which acompany effectively borrows money by effectively sellingsome securities it owns with an agreement to repurchase thesecurity at a later date. they're short-term loans, andin fact, collateralized by some security that they own.
what it was, it was almostthe same as a deposit. they were short-term loansthat someone could withdraw at any time. the someone wouldn't be somemother and father with their small savings account. it would be some bigger,probably institutional investor. but these were acting likebanks, like commercial banks, because there could be a runon these banks the same way
there's a run on thecommercial banks. if anyone starts fearing thatlehman brothers is going to fail, they all want to taketheir money out, which means, they don't renew their repos. and so lehman brothers failed,when the housing market declined, the value of itssubprime securities declined. people, who were lending itmoney through repos, got wind of this, and they stoppedwanting to do it, so it was like a run on lehman brothers.
and lehman brothers couldnot be saved, if it weren't for a bailout. the government had alreadybailed out bear sterns, and it had helped merrill lynch, whichwas failing as well, and they decided not to baileverybody out, so they let lehman brothers fail. so now, the reaction to that is,that we can't let shadow banking go unregulated,and dodd-frank is part of that reaction.
so now, investment bankingis substantially altered by these laws. and still, of course, it's avery important business. the united states hastraditionally been the most important country in investmentbanking, but it continues that europe and asiaare also important, very important participants ininvestment banking. growing, i think. the financial crisis has putsomething of a damper on the
business for a while, buti think, it seems to be coming back. the latest news is, that theinvestment banking business is starting to look more stableand prosperous. so, what i want to donow is invite -- let me just do a briefintroduction. so, jon fougner took this class,i think it was 2002, and then, he served as myresearch assistant for a book i was writing, called the newfinancial order, so i got to
know him better. the important thing for thislecture is, that you worked for goldman sachs, and got toknow people there, and now he's working for facebook. you've heard of thiscompany, right? i thought it would beinteresting to have him back to give his impressions of whatlife was like after econ 252, of what goldmansachs was like -- at least the oldgoldman sachs.
and i think, it's interestingto hear about facebook, too, because it's a different kind ofculture, and i'm interested in culture. it's more of a tech business. i'm interested to hear, if theyhave anything like the goldman sachs principles,or they enunciate them the same way. so, i'll bring jon up, andi'll let him continue. jon fougner: very well.
thank you professor shiller. and professor shiller haspromised, that i'll be well-spoken, and well-dressed,and a bunch of other things, good, bad, or otherwise. i'm not sure, if i'll live up toany of those expectations, but hopefully i canshare a little bit about this business. how many of you are consideringgoing into investment banking?
maybe about 30%, or so. and how many of youare on facebook? and how many of you are considering working at facebook? ok, so maybe we'll adda few more to that by the end of this. the goal for the next half houris really to help you think about, whether bankingmight be the right next step for you after college, and forthose of you who say yes, to
share a few tips onhow to think about getting into the business. i'll give a little bit of mybackground, kind of a context for my reflections on theindustry, so you can take them with a grain of salt, share someanecdotes from banking during the debt boom, and thenalso give a few tips, or steps that you could take today, ifyou're interested in it. so, a little bit onmy background. junior summer, i went to workfor a large investment bank,
as professor shiller mentioned,and i really enjoyed the work, knew thati wanted to go back to it. but i had never lived abroad,because, as you all know, your junior year here at yale,there's a lot going on with extracurriculars, and so manypeople don't go abroad. i went to see charles hill -- now how many folks are familiarwith charles hill? fabulous negotiator. and i said, professor hill, howcan i negotiate to go back
to this job a year later,so i can do a fulbright in the meantime? so, he taught me all thisjiu-jitsu, and it ended up working out, and i did a year innorway, and then came back full time to banking. now, as you probably know,a lot of analysts go into banking, they do it for twoyears, maybe do private equity, hedge fund, maybe doan mba afterwards, and something like 15% might stayon, get promoted, and become
career-track bankers. when i was working on wallstreet, this was the peak of the most recent privateequity boom and the associated debt boom. and so, recruiting to privateequity had reached such a fever pitch, that literally 16months before the start date for these jobs, analysts weregetting calls from recruiters, doing interviews, andactually making commitments to joining companies.
and i knew, i was interested intech, and so i became very close to signing with atechnology private equity fund, that i admire still verymuch to this day, but i actually decided that i wantedto work in tech itself, and so the last three and a half years,as you mentioned, i've been working at facebookworking on our social advertisement strategy. so, a little bit about insidethe banking role. it may sound a little bitfunny to talk about the
investment banking division ofan investment bank, but that's what we'll do for thenext 15 minutes. and by that, i really mean, justthe part of the business that professor shillermentioned, giving advice to ceos and cfos about financing,and mergers and acquisitions. so if you see this logo-- and that makes you smile -- i see a few smiles, maybea couple grimaces -- if it makes you smile,it's a good sign that
banking may be for you. you think about two,three, four -- professor robert shiller: theydon't understand that. that's an excel logo. jon fougner: that'san excel logo. professor robert shiller:what are you driving at? jon fougner: that's an excellogo, and these are excel models, and they go on and on. professor robert shiller:you mean, they're
going to be a nerd. is that what you're saying? jon fougner: yes, if by thatyou mean you want to feel comfortable with the technicalaspect of the role, yes, absolutely. especially at the juniorlevel, where -- you mentioned some of therelationship aspects of banking, but at the juniorlevel, really your core responsibility is buildingout these models.
so, if you think about workingon that until 4 in the morning maybe two nights in a row, maybe20 nights in a row, and that's exciting to you,that's a good sign. so, how many of you have goneonline to open yale to see stephen schwarzman's talkfrom this class from three years ago? one, two. two enterprising usersof the internet. i would strongly encourageeveryone to do that.
one of the things, that hetalks about is that in banking, there's not a ton offlexibility for getting the numbers wrong. as the analyst, you reallyneed to nail the details. and primarily, what we'retalking about there, is building operating transactionand valuation models that describe your clients,and other companies, and their industry. and then, the information fromthose models, along with
research you find by hook and bycrook on the internet, from your colleague, wherever youcan, kind of comes together into presentations, polishedpitch books to help win a piece of business. so, that could be an ipo, amerger advisory, as you mentioned, and once you've wonthat piece of business, then you as the analyst really arethe organizing principal for getting this deal acrossthe finish line. dealing with the accountants,working with the lawyers,
other bankers, even competitorswho might also be working on the deal, and then,of course, your client, and whichever counter-partyyour client is selling to or buying from. so, it's a fair amountof responsibility. typical investment banking dealteam, the core team is pretty lean. maybe one each of an analyst,associate vp, and md, and if you decide to and are given theopportunity to continue
working in investment bankingon a career basis, then you will gain a little bit morecontrol over your week to week and month to month scheduleas you become more senior. but even at a senior level,investment banking is really considered an always on-callclient service profession. now, one of the advantages ofthis very lean deal team is, that there's plenty ofresponsibility to go around. so, if you raise your hand andsay, yes, i can take on some of this work, that might bydefault fall to some of my
associates, and you do itwithout making mistakes, you're going to be able to getmore and more responsibility, learn more and moreon the job. one of my favorite projectsthat i worked on was a proposed venture capitaltransaction, where we were looking at investing in eightdifferent operating companies, and because the team was thatlean, i was actually able to basically take on leading thedue diligence on these eight different companies.
professor robert shiller: beforeyou go ahead, why do the managing directorshave zero grey hairs? jon fougner: well,i'm just assuming it's all gone by then. that's a median, the mean mightbe a little bit higher. high variance. so, i would -- was that the nerdy commentyou were looking for? so, i might encourage you tothink about these roles as an
investment in your career,where what you put in, of course, is long hours -- maybe100 hours a week for a couple of years -- and what you get out, is anumber of things, including a skill set that's really valuedand respected, not just in finance, but around the businessworld, exposures to cfos and how they think aboutproblems. if you decide to continue on as a career banker,participation and success that you'll help createfor your company.
and then, of course, a networkof very smart, eager peers, like the folks in this room,who then fan out across the finance industry. so, as i mentioned, i was inbanking during the debt boom, and there was such a peak intransaction that people started calling it mergermondays, this expectation that before the bell at the beginningof the week, there'd be a $20 billion, or $30billion, $40 billion transaction that wouldbe announced.
and there was so much enthusiasmfor this sort of transaction that even financialinstitutions, which, conventional wisdom toldus, couldn't be lbo'ed [clarification: lbo stands forleveraged buyout], because their balance sheets werealready so levered, actually became considered targetsfor leveraged buyouts. and arguably the peak of thiswas, when blackstone themselves, one of the fathersof the buyout industry, filed an s1, and in fact became apublicly traded company, which
they are to this day. your final task as a bankinganalyst is to create a deal toy, when you successfullycreated a transaction. now, this particular one usedto have water in it and glittering fish, and at thetime i thought it was very pretty, but i would just inviteyou maybe, when you create your deals toys, don'tpicture your client swimming with the fishes. not the best idea.
and then, this is a safe for abank, which, of course, is logical, safes are in a bank. but this is actually anespecially fun toy, because you pull this handle here,and then actually this one opens up. that was my idea of fun when iwas a banker, so you again should take it witha grain of salt. this is a snow globe -- youshake it upside down, which is a lot of fun, as well.
but again, just in terms of themetaphor, and i have only myself blame -- maybe iwas sleep deprived -- i guess, maybe don't show yourclient's capital structure literally under water, whenyou design your deal toys. professor robert shiller: areyou saying that investment bankers have a childish side? you say, deal toys. i was presenting them asgoing to the symphony. what are you presentingthem as?
jon fougner: i can't claim, iever made it to the symphony, when i was an analyst, but anumber of my colleagues were on the boards, involvedphilanthropically with those organizations. but yes, i think that we havethis creative energy and creative spirit. i think, there's a lot ofcreativity in finance that, as stephen schwarzman mentionedin his talk, at the senior levels, when you're dreaming howto combine companies, how
to finance companies, how todeal with new regulation, as you mentioned. but at the analyst level,maybe not quite as much. so maybe, there is that creativespark, that's just trying to find its way out, one mischievous way or another. but anyway, this was the landscape, when i left banking. that was september 2007.
and then six months after that,as professor shiller mentioned, bear sterns sold ina fire sale to j.p. morgan, and then six months after that,september 2008, we saw merrill lynch narrowly avertliquidation, become the asset management brand ofbank of america, which it still is today. that same week, lehman brotherscollapsed under the weight of those mortgages,suffered a bank run, and was not bailed out, was liquidated,some of their
investment banking and capitalmarkets assets sold to barclays in bankruptcy. a week after that, what a lot ofpeople thought would never happen, did happen, and goldmansachs and morgan stanley went to the federalreserve, and asked to become commercial banks, whichtechnically they still are today, as professorshiller mentioned. now, that having been said, ifyou take charles gasparino's account of this era, thiswas the end of an
era for wall street. that having been said,investment banking continued at firms all around the world,some of these diversified conglomerates, and also at aburgeoning slate of so-called independent advisory shops. so, these are folks likeevercore, lazard, greenhill. and if you're interested inlearning about finance, investment banking is not theonly way to get into it. there are also, for example,the so-called alternative
asset managers, privateequity hedge funds. folks like kkr, carlyle,bridgewater, who i believe still recruits here on campus. and then, out where i live incalifornia, you have the heart of the venture capital industry,especially around the information technologyindustry. so, folks like kleiner,sequoia, benchmark. they may not be recruiting oncampus, and they may not even be open to hiringundergraduates, but some of
their competitors are. so, if that's interesting toyou, maybe we'll just touch on a few steps that youcan take today. obviously, you're already doingplenty of this, without anyone having to remind you. things like taking the rightclasses, doing well in them, researching the firms youwant to apply to. just three that i'll touch on. taking advantage of theincredible resource you have
in the professors here today,which you really don't want to take for granted. learning a little bit aboutyourself -- and i know that sounds touchy-feely, buti'll give a couple specifics around that. and then, of course, there's nosubstitute for trying this hands-on to see whetherit suits you. so, this is pretty much exactlyas i remember john geanakoplos --
genius mad scientist. you canfind him on open yale now, and if you have not yet taken hisclass, and it's offered next year, i would strongly recommendthat you do so. david swensen, i understandyou've had the distinct pleasure of hearing fromalready, the most successful endowment manager ever, thereason that we get to have nice things here at yale. and i just keep coming back timeand again to pioneering portfolio management, thebedrock of core investing
principles that he articulatesin that book. even if you never become aninstitutional investor and are only thinking as a retailinvestor, it's still incredibly useful stuff. and he does teach asenior seminar. and then, in addition to thisclass, as you probably know, professor shiller has a graduateseminar, which i think you have promisedto let students apply to, to get into to.
professor robert shiller:yes, i had about eight last semester. jon fougner: ok. and how did they do? professor robert shiller: that'san embarrassing thing. they did pretty well, againstour graduate students. i won't rank them. embarrassing to ourgraduate students. jon fougner: but flatteringto all of you.
as professor shiller mentioned,i got to work a little bit on the new financialorder as an undergraduate, and i juststill consider it such a rewarding experience, becausethe tenets that you talk about in this book, around how financecan be a technology for societal innovation,everything from the micro level of personal incomeinsurance to encouraging people to take more risks earlyon in their careers, to the macro level of gdp insuranceare some really
visionary ideas. i, of course, remain dismayedthat some of them have not been put into practice yet,but that really is an opportunity for all of you whoare interested in finance for idealists to think about that asa potential career option. other useful courses, of course,anything with math, probabilities, stats,econometrics, excel modeling, especially using the threefinancial statements, computer science, computer programmingis going to serve you well,
not just in investment banking,which we're talking about this morning, but alsoin those other aspects of financial serviceslike trading. now, kind of switchinggears a little bit. how many you have eitherdone myers-briggs or strengths finder? a few. maybe 20 -- maybe 30% or so. so, these are tools that i thinkhave become a little bit
more popular in recent years,which are basically psychological inventorieswhere you spend an hour answering multiple choicequestions, then they literally spit out a profile of howyou like to work. obviously, there's no right orwrong answers, they're really just preferences. it's a pretty modest investmentof your time -- maybe an hour each -- to gain insight not just intowhat you're good at, but also
to helping you articulate topotential employers really what you can bringto the table. and then, of course, where therubber meets the road, is actually applying for thatinternship or that job, and getting your foot in the door. career services on campus area fabulous resource, but because of that they are veryscarce resource, because almost everyone is using them. so, if you want to find jobsthat don't get 200 other yale
resumes coming in their frontdoor, you want to look a little further afield. so, you've got things like listsof investment management firms, from institutionalinvestors, american banker, hedge fund research. there are plentyof these lists. and i'd say, don't be shyabout cold calling, cold emailing -- just kind of be persistent.
we touched on professors here. i am incredibly grateful toprofessor shiller, ray fair, david swensen, folks who havehelped me in my career, even at this extremely early stagein my career, and it was really just because i asked. and i would encourage you todo the same thing, because once you've left campus,it gets a lot harder to get that help. and then the alumnidirectory --
how many folks have been usingthe alumni directory to reach out for jobs? maybe 15%. i'd encourage you to do so, andall i would add to that is, think about what you sharein common with the people you're reaching out to, thinkabout whether you can reciprocate the help that you'reasking for, even if that might not be obvious now,because they're established in their career and you'rejust starting out.
i had a student in this classreach out to me three weeks ago interested in advice, andi was happy to share that. and actually, he ended up beingreally helpful, helping me understand in where you allare in your decision making process and your careerright now. so, there are always ways thatyou can help, and you'll find a much more welcome hand ifyou're about to do that. and then lastly, recruiters. these large, so-called ''twoand 20'' funds, the
alternative asset managers,typically use third party recruiters to find the talentthat they want to interview. and they are typically targetingcurrent banking analysts and associates, butthere's nothing to say that, if you have a strong finance andtechnical background as an undergraduate, that you couldn'tactually get on their radar and try to use themfor a placement. the only caveat i would add tothat is, that you want to be really clear and confident whenyou speak to them about
what is that you'relooking for. because if you go in therewaffling, asking them to sort of be your mentor and yourcareer coach, they're really not going to get that senseof confidence for you, and they're not going to want toput you in front of one of their clients, who are theasset management firms. professor robert shiller:we're having questions in just a minute. jon fougner: oh, great.
yes. [side conversation] professor robert shiller: we'regoing to open it up for questions in a minute, butgo ahead and interpose. student: it could probably alsocome at the end, i was just wondering, whois keith ferrazzi? jon fougner: how many folksare familiar with keith ferrazzi in the room? some people are -- theirarms are getting tired.
maybe 20%. so, keith was the youngestever fortune 500 cmo. and he's a fellow yalie, newyork times best-selling author, written a lot about therole that relationships play in business. and you hear this wordnetworking, which, i think, all of us now get sort of a sortof unctuous feel around. it seems very, sort of,superficial and self-serving, and what he's really helpedelucidate is, how the basic
tenets of psychology -- and in this respect, he remindsme of professor shiller -- applying the basictenets of psychology to how you actually build real,meaningful business relationships, and breaking downthis artificial barrier between relationshipsand business. because business isrelationships. as professor shiller mentioned,one of the things that investment bankers try todo is, establish senior level
relationships, because it'sultimately individuals, not entire companies, who aremaking decisions. so, just to share a couple ofanecdotes about my transition from banking, after banking, asi said, i knew i wanted to work in tech, and i veryfortuitously got a phone call from a lifelong friend of minearound that time, who was an engineer who had startedworking at facebook. and what he convinced me was,that i could help him and his colleagues change howpeople communicate.
i was pretty sort of anxiousabout this, pretty intimidated by the prospect of beinga business guy doing engineering. and what he told me, and iultimately think this proved true, is that you don't have tobe an engineer in silicon valley to have an impact, youjust have to be able to think rigorously like anengineer does. i think the training, thatyou're doing here at yale, and then the potential training atinvestment banking, both have
the potential to serve youwell in that respect. so, what we're trying to do atfacebook is get people the power to share and make theworld more open and connected. pretty simple, in principle. and our strategy for doing thisis mapping out what we call the social graph. now, we didn't create this. this exists out in the world,all we're trying to do is draw a mathematical representationof it, and that's basically
who likes whom, andwho likes what? and then, we push informationas efficiently as possible along the edges ofthat ground. so, this is kind of where ispend most of my day, not just over here in farmville, but alsoover here in ads-land. and what my role is called is''local inbound product marketing.'' so, to kind ofparse that out, what we mean is basically, i go and talk tolocal businesses, restaurants, plumbers, understand what theirpain points are, what
other advertising products theyuse, what they're trying to accomplish as a localbusiness owner, and then basically synthesize that withdata analysis, and ultimately present it to the engineers asa case for what we should build next. so, these are questions like,what do the ads that you see on facebook look like? how should they interact withthe rest of the product? how can we target them tomake them more relevant?
a whole bunch more. the real guiding precept hereis that, it's basically what henry ford said, right? he didn't want to build thefaster horse, even if that's what his clients might haveasked for, he wanted to build something that was dramaticallymore useful, and for him that was a car, and forus it's something that we call social advertising. i am happy to chat a littlebit more about that during
questions, if folksare interested. so finally, just to kind ofcompare these two roles, and how one might have prepared mefor the other, i think the three things from banking thathave served me best working on internet products are: one, thiscross function of process management, which is aubiquitous part of the business world. two, building polishedpresentations, this one notwithstanding.
and three, being resourcefulabout tracking down data points to help make theright decisions. on the other hand, there's someparts of the job that were totally new. thinking from the mindset of thecmo, the chief marketing officer, rather than the cfo,the chief financial officer, just the pace of theenvironment, banking is fast-paced, but the rate atwhich products evolve in the internet is dramaticallyfaster.
and the fundamental job itself,which is basically creating new products, buildingthe business case for them, validating that case withdata, trying to actually mock them up -- and i assureyou, i'm not good in photoshop -- and then actually use thosemocks and that case to inspire engineers and product managersto want to build them. so, it's an environment thatis much more ambiguous. the yardsticks for whether ornot you're going in the right
direction, especially inthe short term, are not nearly as clear. but if that's actually somethingthat's appealing to you, then i strongly encourageyou to check out jobs around silicon valley, and especiallyat facebook. so, you can actually go tofacebook.com/careers -- quick plug -- to check out about theinternships and the full time jobs that we have available.
so, professor shiller, did youwant to use the rest of the time for questions. professor robert shiller:well, yes. i'm opening it up to allof you for questions. ok, you have a questionback there. student: before you did yourjunior summer in investment banking, how did you evenknow you wanted to -- jon fougner: i caught some ofthat, and then the screen caught some of it, so just bearwith us for one second,
and then i'll beright with you. you said, before i did my juniorsummer, what did i do? student: before you didyour junior summer. or how did you figure out thatinvestment banking was the field you wanted to be in? jon fougner: well, you know, iknew that some of the stuff on the right hand column of theroi chart was stuff i was interested in. i was interested in thetechnical side of the work,
working on math, basically,but also interested in the relationship side of it, thestrategic side, thinking about basically how you helpthese companies vet the company decisions. and during the first week oftraining, one of the partners of the firm came in -- and we use this term partnerkind of as a term of art, because, as the professormentioned, it's no longer a partnership --
but he came in and said, whenour clients want to do really important things,they come to us. and when they want to thinkabout important things, they come to fill-in-the-blankname of top tier consulting company. and that kind of action, andactually physically seeing the results that you create inthe world was really appealing to me. and i hadn't done strengthsfinder yet at the time, but i
did it subsequently, and found,not surprisingly, that that's where my psychologicalreward structure was kind of geared towards. professor robert shiller: yes? student: so, peter thiel, whowas the first investor in facebook, and is currently ontheir board, is now offering 20 people under the age of 20each $100,000 to drop out of school for two years and starttheir own companies. and since you actually work forfacebook, i was wondering
what you thought of that. jon fougner: yes, i thinkthat's fascinating. and obviously, i don't workwith peter thiel. look, i think, whateverwe can do to promote innovation is great. now, if you're sitting here inthis room and you're saying, well, do i want to take thisrisk of sacrificing this signaling device of this collegedegree, and also potentially sacrificing somestructured classroom
experience, in order to rapidlyaccelerate, how quickly i got into entrepreneurship, i don't know. that's a personal decision thatis for you to make, and i don't really have anyopinion on it. ultimately, for me it'll comedown to, do these companies actually end up doing reallycool things and building really cool stuff? professor robert shiller: andi'd add, it isn't as risky as
you might think, because yalewill take you back, if it fails in a couple of years. jon fougner: one of our veryearly employees was a yalie, who had had an undergraduateexperience somewhat like you're describing, where, ithink, he had actually taken some time off to workon startups. i think he came back, finishedhis degree, and is now a partner at benchmark, oneof the firms that i had on that slide.
professor robert shiller: well,while they're thinking, can i ask you -- i emphasized the core valuesat goldman sachs, and it strikes me that facebookis totally different. maybe i'm wrong. can you tell me, what are thecore values at facebook? if i were to read that listthat i just gave you from goldman sachs, how would itsound to the facebook people? jon fougner: yes, so i thinkthere are similarities and
differences. i think, each of us has a coreconstituency, who we wake up thinking about them, go to bedthinking about them, probably dream about them, and know thatwhether or not we serve that constituency will determinethe success or failure of the company. and at goldman thatwas the clients. and at facebook, our number onefocus is the users and the user experience.
and we care a lot about ourpartners, we care a lot about our advertisers, we care alot about everyone in the ecosystem, but ultimatelywe know we have to serve the user as well. so, each company, i think, hasalmost a maniacal focus on serving one core constituency,albeit they're different. now, in terms of the day-to-dayexperience, i do think they're quite different. i think that whati'm doing now is
quite a bit more creative. professor robert shiller: you'renot doing spreadsheets. jon fougner: a littlebit, but -- professor robert shiller:you're doing it, still. jon fougner: yes, not as much. and i really love the creativeside of the work. if you think back to stevenschwarzman's lecture, where he mentions that there's noflexibility for getting the numbers wrong, i mean certainlywe feel the same
way, all the analysis needs tobe correct, but there's almost an ominous tone, when he saysthat, whereas the way that we operate is knowing that we haveto move really fast in order to continue to innovate,continue to stay relevant. and so, that means thatsometimes you make mistakes, and it's no secret that we'vemade mistakes, and some of them have been big mistakes. and we just try to minimizethe number of times that happens, try to fix them as soonas they do happen, and
just be honest about them, andadmit them when we make them. professor robert shiller: can iask a question of the class? you set the example. how many in this class areengineering majors? not many. like 5% maybe. what about science majors? that looks like 10%. see, you're kind of in anengineering company, right?
i mean, i don't know exactlywhat facebook is, but is there some kind of division here? why aren't there more engineersin this class? jon fougner: that sounds likea question for the class. professor robert shiller:well, i can't ask them, because they're not here. jon fougner: all the engineers,who are not in the room, why are younot in the room? professor robert shiller: buti mean, is there a big
cultural difference? i mean, are engineersprejudiced against us finance people? you're there, so -- jon fougner: look, i thinkthat product design and software engineering is at theheart of the company, but as i mentioned, i was prettyintimidated going in and saying, huh, i'm going tobe a business guy here. am i not really going to beable to have an impact?
and i think the things that areimportant for the business people are: one, to rememberwhat the core mission of the company is, which for us isreally all about the users. two, to have a sense ofwhat is feasible. so, you don't actually have toknow how to write the code, or even necessarily how to mock upthe product, but if you're making recommendations that weshould build things that are simply technologically notfeasible, you're going to waste people's time and losecredibility pretty quickly.
and then, three, i think, whenyou do the analysis, engineers are going to want to see asrigorous analysis as possible, quantitative analysis whenthat's relevant, when that's possible, and to the extent thatyou can bring that to the table, i think that's helpful. if you think about the businessworld at large, one of the things, that's justgoing to be increasingly important, is the ability todesign, conduct, and interpret statistically significant,valid experiments.
and this sounds like a prettystraightforward thing, that you might learn by maybesecond or third year of college, and yet you get outinto the business world, and you'll find that many of yourcolleagues, whether they're coming from mbas or otherbackgrounds, may not actually have that background. so, being able to bring thatsort of rigor to the table, whether it's at a consumerinternet company or an industrial company, anythingelse, i think is very helpful.
professor robert shiller: youknow, i'm thinking, maybe i should change the name ofthis course to financial engineering. that would bringin the others. because to me, engineering andfinance have a certain connection. they're both designingdevices. i think, we have anotherquestion. student: have you thought ofgoing back to graduate school,
and how do you see that playinginto a career like jon fougner: yes, i have thoughtabout going back to graduate school. i think that all of us wantto be lifelong learners throughout our career. there's a number of waysyou can do that. graduate school isone of them. another is, going intoindustries where you're just confident that everyone you'reworking with is really smart,
and they're going to push youhard, and not settle for mediocrity, so you just knowyou're going to learn by that pressure and that osmosis. and then, i think, there'ssome kind of simple, structured things thatyou can do, as well. i threw a slide up of a couplethat you can do in the comfort of your own living room-- the meyers-briggs and strengths finder. but then also, you can leveragehaving a workplace to
do things like peercoaching, career coaching, executive coaching. so, i kind of take a somewhatagnostic point of view as to which of these tools i'm goingto use at any given time. i just know, that i constantlywant to be challenging myself and constantly want tobe learning more. professor robert shiller: ok. student: i've heard a lotabout issues with click-through rates on varioussocial networking sites, so if
you could talk about, what youthink the putative value of facebook should be, and whetherthe current valuation is appropriate. jon fougner: yes, so, i'm happyto share a little bit about click-through rates. i'll probably defer on thequestion of how much the company should be valued at. is everyone familiar with whata click-through rate is? no, not everyone.
so, this is justa simple ratio. let's say, you show an ad somenumber of times to users on the internet. it's the ratio of the numberof times the user clicks on that ad to the total numberof times you showed it. so, if you show an ad 100 times,and you get one click, you have a 1% click-throughrate. and if you think about, well,why are people advertising? in marketing there's kind ofthis concept of this marketing
funnel, which is a little bitsilly, but it actually conveys a useful concept. up here is everyone in theworld, and then here is the people we can actually makeaware of our product. and then here is the people whowe can actually make have an affinity for our product. and here is the people who wecan actually make consider purchasing our product. and then people who actually buyit, and then repeat, loyal
customers who buy itmore and more. so, we get to a narrowerand narrower pool. and what marketers areconstantly trying to do is, push people through this funnel,so they can actually start with someone, who may notknow about the product at all, and then actuallyget them to buy it again and again. so, marketers use a varietyof different tools. online advertising is one, butthat represents maybe 15% of
the market, but it's arelatively new one, and there's plenty of others that goback decades or centuries. things like television,radio, print. these different media playdifferent roles in getting people through thismarketing funnel. and if you think about, whereonline advertising originally grew up, it was reallytowards the very bottom of this funnel. of, ok, i am looking for a blueipod at the best price,
that i can either order onlineor that it's within five miles of my home. so, i search that on a searchengine, i see a list of vendors, and in that case, it'sreally important whether i click through, becausethat's basically the determinant of whether or notwe get them through the next stage in the marketing funnel. if you think about facebookadvertising, that is one of the roles that it can play, butit can also actually play
throughout this entire marketingfunnel, where we have a reach of 500 millionpeople, and then you can target within that. and then you can use things likesocial context, telling you that your friend mightreally love a product, to help build your affinity for it, onthrough this whole funnel. so, for some of it,click-through rate is relevant, for other of it,click-through rate really isn't relevant, and you need tothink about other sorts of
measurement. things like companieslike nielsen do. like polling people and askingthem, ok, you saw this media, did it increase your likelihood to buy this product? or did it make you aware of themessage, that the brand is trying to convey, that youweren't aware of before? i think, it's one of a numberof metrics that go into assessing the health of thebusiness as a whole.
professor robert shiller: ithink we're essentially out of time, but let me just say,click-through rates and marketing sound profit-oriented,but it seems to me they have a socialpurpose -- one thing is that capitalism isbeing transformed by this kind of thing, because it getspeople to buy things that they really need. it's like your strengthsfinder or needs finder. and i have to applaud facebookand other companies.
finally, i'm going to invite youback in another 10 years. this was great. jon fougner: thanks.
