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SUMMER 2004
Cover Story

Applying Rocket Science to Business Decisions

What makes the MFE program?
Professors like Mark Rubinstein, the Paul Stephens Professor of Applied Investment Analysis; corporate supporters like Robert Slotpole, chief investment officer of US Equities at Barclays Global Investors; and students like Kin-Fun Lee, MFE 05.

by Marguerite Rigoglioso

They fled to Wall Street from a host of unlikely places: physics labs, mathematics departments, and aerospace companies. Known among bankers and traders somewhat dubiously as “rocket scientists,” they were those intimidatingly smart theorists, researchers, and academics who discovered that their ability to apply mathematical wizardry to investment firms’ portfolios could keep them gainfully employed in the 1970s and 1980s when universities and research institutes could not. Outfitted with calculators, computers, and models for options and asset pricing, they began creating “engineered” financial products – collateralized mortgage obligations, portfolio insurance structures, and structured financial products, to name a few – that would allow firms to hedge risks and garner market-beating returns in ways that had never been possible before.

Today, such technically skilled people are known as “financial engineers,” and, far from being set apart from the regular guys, they now play an integral and expanding role in investment banks, and, increasingly, commercial banks, and even global corporations. With the recent explosive growth in the derivatives markets and proprietary trading, these men and women are in hot demand.

Anticipating this wave has been the Haas School’s Master’s in Financial Engineering Program, which is working to train a whole new generation of professionals to apply quantitative financial economics to financial decisions. The one-year intensive program, developed under the leadership of David Pyle, Willis H. Booth Professor Emeritus of Banking and Finance, and inaugurated in March 2001, is one of the first of its kind at a business school. More than 50 such programs have sprung up, most in the last few years, according to the International Association of Financial Engineers, but Berkeley’s was ranked No. 1 by Global Derivatives last year.

Part of what makes Haas’s MFE program stand out is that it draws on the expertise of some of the pioneers of the financial engineering field itself. Its executive director is none other than John O’Brien, who founded Leland O’Brien Rubinstein Associates with Haas finance professors Mark Rubinstein and Hayne Leland in 1972. It was one of the first commercial investment firms to use theories developed in the areas of diversification and asset-pricing to construct mutual and pension fund portfolios. In 1980, their firm became Leland, O’Brien, and Rubinstein, which played a major role in commercializing portfolio insurance and other sculptured investment tools. Program faculty and Professor Emeritus Mark Garman, who taught the first course combining financial theory, quantitative analysis, and computer science, possibly anywhere in the country, is credited with giving an identity to the entire field by coining the term “financial engineering” in the early 1980s.

Over the past decade, the need for financial engineers has spread from Wall Street to international investment banks such as Deutsche Bank, Barclays Global Investors, and Bank Paribas. Firms in China, Japan, Korea, Taiwan, Thailand, and Singapore are similarly looking for such professionals, as are commercial banks and global corporations.

“At least 50 percent of investment bank operations now involve financial engineering in some respect,” says O’Brien. “Traders, for example, use financial engineers to support their activities. Even corporations are getting into the game. I recently heard the CFO of Starbucks talk about applying financial engineering to hedge the cost of coffee beans in US dollars.”

For Berkeley MFE graduates, this is promising news, indeed. Despite the fact that the recession still lingers in the world of finance, the job outlook is quite good for financial engineers. Firms such as financial institutions, financial service providers and consultancies, financial software and systems providers, and corporate treasurers don’t hesitate to grab these students up. Of the 60 graduates who finished the program this past March, 91 percent had received job offers by June, a trend that has been consistent over the last three years. The average starting salary, including non-guaranteed bonuses, was a substantial $123,000.

Berkeley’s MFE Program, which combines financial economics with financial modeling, gives graduates an advantage even over people with multiple Ph.D.s in narrower fields, according to Terry Benzschawel, director of qualitative credit modeling and analytics for Citigroup Global Markets in New York. “Programs such as Berkeley’s are changing the entire job landscape,” he says. “It’s now actually more difficult for anyone coming right out of science, mathematics, or finance to land a position in this arena.”

Matthew Rodriguez, MFE 04, who holds a master’s in mathematics from Berkeley, discovered this sobering reality first hand. “I had considered leaving the mathematics department and directly entering industry, but the response I received from most firms was less than underwhelming,” he says. “I could never have gotten my present job without first acquiring the skills in quantitative methods and risk management provided by the Berkeley MFE program.” Once he had his degree, Rodriguez was receiving unsolicited job-inquiry phone calls from firms all over the country.

Like Rodriguez, many of the approximately 60 students who come to the Berkeley MFE program each year already possess advanced degrees. More than half the 2004-05 entering class, for example, holds master’s degrees, and 10 percent have doctorates. The MFE program further prepares these students – many of whom hail from Asia, Europe, and Latin America and who have worked in areas such as finance, engineering, R&D, and information systems – for technically sophisticated jobs in part through rigorous coursework that teaches them how to apply theoretical finance and computer modeling skills to pricing, hedging, trading, and portfolio management decisions in a practical business environment.

“We really teach students how to think like financial economists,” says Mark Rubinstein, Paul Stephens Professor of Applied Investment Analysis. “They don’t just learn the formulas, they learn what they mean. We may be better than any other school at doing so, and I think our students will be able to rise farther in the organizations for which they work because they will be more well-rounded.”

Benzschawel notes that Berkeley MFEs tend to have two things, in particular, that are in high demand at Citigroup. One is experience handling structured products such as mortgage-backed and asset-backed securities, and the other is knowledge of models of credit. “Creating products to handle risky debts is, in fact, one of the fastest-growing fields in finance today,” he says. “Academics lag behind industry on these problems, but MFEs have at least enough basic expertise that they can help us work on them.”

The MFE program positions students for jobs through a ten- to twelve-week internship that gives them valuable hands-on experience and connections. It’s a strategy that works. Benzschawel, who, in addition to his other duties coordinates associate-level recruiting for Citigroup, reports that the Berkeley MFE students who work as interns for the company are definitely given more serious consideration for jobs than outsiders. Last year, for example, Justin Zhang, MFE 03, landed a position with the company after interning there. “The internship gives people the chance to prove themselves,” Benzschawel says.

Program director Linda Kreitzman and her small staff work exceedingly hard scouting out both internships and full-time job opportunities for students and helping them to refine resumes, develop interviewing skills, and identify prospects, as well. “Placing students into environments where they have the best opportunities possible is an integral part of our program,” says Kreitzman.

The growing list of companies that have hired Berkeley MFE graduates also includes AIG, AXA Rosenberg, Bank of America, Barclays Global Investors, Credit Suisse First Boston, Deutsche Bank, Fair Isaac, MBIA, Morgan Stanley, and a host of other top financial firms around the world.

“I certainly got interviews through Linda’s office that I could not have obtained otherwise,” says Rodriguez, who has recently taken a position evaluating mortgage prepayment models for BlackRock in Manhattan. Ambika Bisla, MFE 04, echoes, “The passion they put into finding us jobs and internships is truly remarkable.” Bisla is now applying her skills as a mortgage research strategist at Lehman in New York. Says Bisla, “The MFE program is a great experience and an incredibly worthwhile investment.”

Marguerite Rigoglioso is a freelance writer in Larkspur, CA.

Meet some MFE Students

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How Berkeley's Financial Engineers Learn to Create Opportunity in new Financial Markets

More information on the MFE Program

 
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