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Turmoil on the Street

September 23rd, 2008 · 3 Comments · Uncategorized

So, I really should be trying to do a particularly difficult analysis of a cranberry processing facility, but I thought I’d take a moment and mention an awesome event from earlier today.  HBS put together a faculty panel to talk about the recent financial market meltdown.  This wasn’t just any collection of random faculty… we’re talking about some big names in the field:

  • Robert Merton: Nobel Prize in Economics
  • Nicholas Retsinas: Former Director at both Freddie Mac & HUD
  • Clayton Rose: Former Director of JP Morgan, Chair of a $27 B hedge fund
  • David Moss: Author of several books on economic history

Even our dean, who chaired the discussion, is a director of Harvard’s $40 B fund (that saw double-digit returns this past year).  It was a standing-room audience in Burden auditorium:

Turmoil in Markets Panel

Turmoil in Markets Panel

For those of you who don’t follow the markets, let me briefly summarize.  On a very basic level, the chaos we’ve seen recently followed this timeline:

  1. Housing values were increasing rapidly.
  2. A new way of packaging mortgages into tradeable financial instruments is created.
  3. Investment banks buy & sell these instruments.
  4. Housing values collapse as the bubble finally bursts (not a surprise).
  5. Investment banks realize they made lots of really bad investments (surprise!).
  6. Because they’re so highly leveraged (that is, they invested with borrowed money), they quickly try to sell everything.
  7. Everyone’s selling and no one’s buying.  The market loses liquidity and banks are stuck with “worthless” assets that can’t be sold.

Anyway, that’s the gist of it.  A lot of the current proposals on the table have the goal of “re-liquifying” the markets.  In other words, getting people to start buying & selling again.

The panel was strongly divided on the best way to handle this process.  Rose and Retsinas were strongly in the “we should’ve had more regulations, and we better create some more ASAP” camp.  Merton and Moss were more of the regulations may be needed, yes, but they might do more harm than good.  Moss emphasized that by bailing-out these banks, we may be incentivizing future increased risk-taking — the exact opposite of our goal.  Merton noted that there’s a trade-off between innovation and stability, with the implicit conclusion that we might be giving up too many benefits of innovation out of a political desire for stability.

All of it very interesting… I would like to have seen more back-and-forth between the panelists, but it definitely clarified a few things I haven’t picked up from the news and ‘net.  There’s another panel on Thursday with Dean Light, Greg Mankiw, and others… I’m not sure I’ll be able to make it, but it sounds amazing.  So many opportunities!

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3 Comments so far ↓

  • H

    Thank you for all of your postings.
    I will be applying for b-schools next year and it’s truly wonderful to take a peek at what’s going on inside HBS. 🙂

  • SR

    Merton of LTCM talking about innovation at this time……….how ironic 😉

  • admin

    SR: that’s a great point — I’ve read the classic book but didn’t make the linkage! Funny…

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