What the Financial Crisis Means To HBS

“It is an anxious time. A worrisome time. Probably even a dangerous time. It’s a historic time. A time that we will be teaching about in our classrooms for some time.” And so began Dean Jay Light presenting to a packed Burden Auditorium on Tuesday, September 23 for “Turmoil on the Street: Fathoming the Financial Crisis”, a panel discussion featuring University Professor Robert Merton, Professor David Moss, Lecturer Nicolas Retsinas, and Senior Lecturer Clayton Rose.
“I’ve never seen Burden as full,” said Qahir Dhanani (OH). “It goes to show how concerned students are. ” A poll of just over 100 students who attended the event found that although many have been following the crisis closely, they still wanted to learn more. They were not disappointed. Each of the blockbuster presenters came to the table with a unique perspective. Mike Zhang (OB) found that each was “very effective in discussing [his] particular area of experience as it relates to the current financial crisis.”

Dean Light began the talk by breaking down the complex interrelated issues. As Dhanani described it, “In typical HBS fashion, he effectively reduced the entire crisis we’re facing to three letters: LTL. Too much Leverage and too little Transparency resulted in drying up of Liquidity, which in turn resulted in the write-downs and collapse of some of the stalwarts of American finance. That sound bite was useful in explaining what’s going on to my mother.”

Nicholas Retsinas, Director of Harvard University’s Joint Center for Housing Studies, and with deep practical experience in the housing market and government administration, spoke eloquently on the history of the crisis. He didn’t mince words about the current situation. “Today we are at a bad place. We estimate that we have one million more homes than we need now.” He concluded with the short-term solution of nationalizing the housing market. He then discussed the associated risks and raised the question, “How do you balance between extending credit and making sure that you have safety and soundness?”

ÿClayton Rose, a former Vice Chairman and COO of J.P. Morgan Chase, spoke next about the crisis from a banking perspective. Rose echoed Dean Light’s comments on the problem of illiquidity. On some of the dramatic actions that the Fed and Treasury took the previous week he commented, “We were staring into the face where there was going to be no access to liquid funds – either through your investments, your money market account or through the lending markets.” He expects some major changes in investment banking industry as the major banks transform into bank holding companies; He predicts that the return profiles will go down and the cultures of the firms will change dramatically over the next couple of years.

David Moss, the John G. McLean Professor of Business Administration – who student poll respondents identified as the panelist who most helped their understanding of the crisis – spoke of his concerns with the efforts of the federal government to bail out the system and the moral hazard that such an action would promote. “My concern about it is that in trying to address the crisis of confidence. If we don’t structure this bail out correctly, we could end up, in fact, exacerbating the very problem. We could create a riskier financial system and encourage greater incentives for risk taking.”

Nobel Prize winner Professor Robert Merton, the last speaker on the panel, touched briefly on some of the analytics involved in the crisis and did not sugarcoat the situation. Referring to just the housing market alone, he noted, “We are talking about losses that are not offset by anyone’s gains of three to four trillion dollars.” Offering his advice to students, he stated with a wry smile, “If you are interested in finance as a field of occupation, it’s going to be tough getting jobs on Wall Street.” But there was some good news as well. “Innovation is going to continue. and the financial functions of the system still have to be preformed.”

Some students were surprised that Professor Merton believed that advancements in the financial markets should continue unregulated. As Dhananiÿput it, “This seems counterintuitive to me as it was innovation — particularly in the credit and subprime mortgage derivatives that got us into the crisis we currently face. To think that Professor Merton believes that innovation in the sector should continue unfettered is a little alarming to me.”

Generally, students were pleased with the presentation, but wished there had been more discussion between the speakers. Said Allen Hughes, “A healthy debate is needed on where this mess will take the American taxpayers and what could go right to pull us out and what could go wrong to further hurt our country. A debate between such educated minds with vast experiences would have offered students alternative points of view and provided more details for future discussions with classmates.”

October 6, 2008
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