I think Calvin Trillin--or at least his bar-room companion--is really on to something here:
“The financial system nearly collapsed,” he said, “because smart guys had started working on Wall Street.” ...
I reflected on my own college class, of roughly the same era. The top student had been appointed a federal appeals court judge — earning, by Wall Street standards, tip money. A lot of the people with similarly impressive academic records became professors. I could picture the future titans of Wall Street dozing in the back rows of some gut course like Geology 101, popularly known as Rocks for Jocks. ...
“Two things happened. One is that the amount of money that could be made on Wall Street with hedge fund and private equity operations became just mind-blowing. At the same time, college was getting so expensive that people from reasonably prosperous families were graduating with huge debts. So even the smart guys went to Wall Street, maybe telling themselves that in a few years they’d have so much money they could then become professors or legal-services lawyers or whatever they’d wanted to be in the first place. That’s when you started reading stories about the percentage of the graduating class of Harvard College who planned to go into the financial industry or go to business school so they could then go into the financial industry. That’s when you started reading about these geniuses from M.I.T. and Caltech who instead of going to graduate school in physics went to Wall Street to calculate arbitrage odds.”
I'd put it just slightly differently (and I realize Trillin is only about three-quarters serious): The key change on Wall Street was more sociological than intellectual. That is, it wasn't so much that the smart guys went to Wall Street--though the intellectual caliber of the financial sector certainly increased with all those quants running around. The relevant change was that a lot of "outsiders" suddenly came to Wall Street, which had previously been dominated by insiders.
Until about the 1970s, the firms that held most of the power on Wall Street were establishment institutions. The downside of this is that Wall Street tended to be inbred, clique-ish, unimaginative, inefficient, intellectually flabby, self-satisfied, and effete. (This was largely the three-martini-lunch crowd that had gone to elite schools and whose fathers and grandfathers had held more or less the same jobs.) The upside was that it was inbred, clique-ish, unimaginative, inefficient, intellectually flabby, self-satisfied, and effete. Which is to say, the global economy wasn't exactly at risk of being super-charged by these guys. But neither were they going to flame out spectacularly.
But, during the seventies, the power on Wall Street started to shift to the outsiders. Some of this was the rising prominence of non-traditional, non-WASP (some would say blue-collar) firms on Wall Street, which various structural changes in the industry, like the end of fixed commissions, were suddenly empowering. (Think Salomon Brothers and Drexel Burnham.) Some of it had to do with the rise of proprietary trading desks at more traditional firms (rather than old, white-shoe "relationship" banking), which the same structural changes were propelling forward. (The trading desks had traditionally been a bit marginalized and declasse--populated by white ethnics from no-name schools.) And some of it had to do with the kinds of people--again, usually white ethnics--who were starting to graduate from elite universities as those schools became more meritocratic. The same old firms may have recruited from the same old schools, but those schools were beginning to produce a new type of graduate.
