Haas Newsroom
Haas Faculty Hold Impromptu Teach-in on Financial Turmoil
As soon as the collapse of Lehman Brothers became news, on the very same morning AIG’s federal bailout was announced, and amidst the market’s ongoing meltdown, faculty at UC Berkeley’s Haas School of Business reacted by holding an impromptu discussion of the causes, consequences, and impact of the current financial crisis.
"We are in a financial hurricane," Haas School Professor Jim Wilcox told a crowd of students packed into the school's Bank of America Forum during the Financial Forum teach-in held during the lunch hour Sept. 16. "This is going to be a very uncomfortable winter coming up."
In addition to Wilcox, the panel included Hayne Leland, Arno Rayner Professor of Finance and Management; Dwight Jaffee, Willis Booth Professor of Banking, Finance and Real Estate; and Linda Kreitzman, executive director of the Haas School Master's in Financial Engineering Program.
Dean Rich Lyons introduced the panel and answered students’ questions following the discussion. The goal of the discussion: To help students determine how they can adapt to these changing world markets to better navigate the job market, manage their financial portfolio, and become a stronger business leader.
"The bad times have arrived," Kreitzman acknowledged. However, she also stressed that she believes in any economy, there are always jobs and firms looking for talent. "There are a lot of companies that are doing very well," she pointed out. And "the students are very good."
Indeed, although the demise of three of the five top investment banks in such a short time is a historical first during peace-time, the companies remaining are thinking about how to snap up the top talent at the firms that have folded, noted Lyons, who before becoming dean was chief learning officer at Goldman Sachs in New York.
Jaffee predicted consequences of the turmoil would likely include inflation, higher interest rates, and more defaults on mortgages that are one level above subprime status. He also predicted that the real turmoil could spread to the commercial real estate market. That's because many big building owners have loans that must be paid off in full in five years or else refinanced -- and the credit crunch means they won't be able to refinance, he said.
Jaffee noted that banks and the US Treasury may be touting programs such as Hope Now to help homeowners in trouble, but called those efforts "smoke and mirrors." "It's not hope, it's hopeless," he said.
Leland, however, pointed out that inflation could actually bring some relief in the housing market by raising real estate values back above water.
Still, Leland called the financial turmoil "the worst crisis seen since the Great Depression." In terms of solutions, he argued that if the government is bailing out companies, "there has to be a quid pro quo" in the form of regulation and more transparency. "Limiting leverage would be the key," he said.
Jaffee pointed out how too much leverage – a 200-to-1 leverage ratio -- was a huge contributor to the troubles of Freddie Mac and Fannie Mae, whose collapse he had been predicting for years. "I told you so," he said.
Wilcox, the Kruttschnitt Family Professor of Financial Institutions, noted that macroeconomists had been "baffled" by extent of the leverage and lack of volatility in the markets in the years leading up to what he called "the recession of 2008."
"People got lulled into thinking … risks were smaller," added Leland. Now as a result of the turmoil, "leverage will be cut back," he predicted.
To see a video excerpt of the discussion, visit http://www.haas.berkeley.edu/haas/video_room/financialforum.html.
