- IBS Curriculum
- Innovation and the Value of Privacy
- Financial Innovation: A Risky Business
- Diversity and Inclusion for All
- Growth for Entrepreneurs
- Can My Company Change?
- Business and Politics
- Small Worlds of Governance
- Bolder Policies for Diversity?
- Governance and Compensation
- The Quantitative Revolution
- Inclusive Leadership
- Preventing the Next Crisis
- Universities and Women
Since the global financial meltdown of 2008, a great debate has ensued over how best to regulate Wall Street’s excesses. What better format, then, to address such a thorny topic than the role-playing Socratic dialogue pioneered by the late Fred Friendly, former president of CBS News and a longtime professor and legend at Columbia Journalism School?
Last fall a panel of high-powered finance experts—including bank executives, regulators, politicians, journalists and a Nobel laureate in economics—assembled at Columbia’s Miller Theatre to participate in a panel titled “Financial Innovation: A Risky Business?” It was moderated by Robert J. Jackson Jr., associate professor of law and a co-director of the Ira M. Millstein Center for Global Markets and Corporate Ownership at Columbia Law School, who guided panelists through hypothetical scenarios that delved into the problems, choices and decision-making processes of key players in the financial collapse.
The discussion was sponsored by the Business School’s Sanford C. Bernstein & Co. Center for Leadership and Ethics. Bruce Kogut, the Sanford C. Bernstein Professor of Leadership and Ethics and director of the Bernstein Center, noted that even as the financial crisis recedes into history, “there is still a great deal of confusion about the role of finance and the value of finance in the economy.”
“We wanted to provide a balanced approach to the discussion,” he said. “It was not only about the past but about the future.” The recently released video of the seminar, edited down to about an hour, has already received tens of thousands of hits on YouTube. It will be broadcast on PBS at a date still to be determined.
In one role-play, Bruce Greenwald, the Robert Heilbrunn Professor of Finance and Asset Management, and Ed Conard, a former managing director of Bain Capital, were assigned to portray managers of “magnificently successful” hedge funds faced with deciding which of two employees of a big bank to hire.
Greenwald and Conard agreed that neither candidate was ideal for the job. But the comments the make-believe job applicants made about their current employer’s recent sale of securities to small community banks led to a larger discussion of the responsibilities of securities buyers and sellers and the need for regulation.
“Banks are institutions that lend and lending affects what happens in the economy,” said Robert Solow, a Nobel Prize winner in economics and professor emeritus at M.I.T. “When a bank goes down, a whole lot of transactions are in trouble.
“One panelist was Barney Frank, former chairman of the House Financial Services Committee and co-author of the Dodd-Frank Financial Reform Act. “People thought they had found a way to hide risk, to pass risk along. They thought they could make risk disappear,” he said. New rules seek to “keep people from making risky decisions for which they are not accountable and getting other people to back them up.”
Most of the panel said banks should be allowed to fail and many said smaller banks would be better.
“Too big to fail is too big,” stated David Abrams, managing director of Abrams Capital. Solow agreed, saying there is no evidence that big banks offer economies of scale and that there would be no adverse consequences to breaking them up.
Others weren’t so sure. “It’s a tough decision,” said New York Times columnist Andrew Ross Sorkin, noting that smaller banks in the U.S. could have trouble competing with the likes of Deutsche Bank and other giants around the world. “If I could cut down the size of every bank in the world, maybe I would do it.”
Other case studies Jackson put to the group involved a small city looking for ways to rescue its underfunded pension plan and the risks of an investment banker’s “no-risk” plan to provide funding for the city’s school system, as well as compensation for traders and reasons they are leaving banks for hedge funds.
Panelists spoke of the need to restore trust in the banking system. “Eighty-five percent of what’s in Dodd-Frank is good,” said Blythe Masters, global head of commodities and former chief financial officer for the investment bank at J.P. Morgan Chase. “We need to better communicate the good about the role of the financial services sector and banks—that they drive jobs, homes, education, towns, countries,” she said. “Then we have to acknowledge the ugly—the lack of accountability, the extraordinary mistakes that were made, the lack of transparency and the interconnectedness that led to extraordinary fear.”
—by Georgette Jasen