MEAFA Forum on the Financial Crisis, 2nd April
2009
Introductory Remarks
Graeme Dean
MEAFA Forum on the Financial Crisis
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Forum Overview:
Examining the global financial crisis several forum
speakers (including MEAFA members and other invited
scholars from The University of Sydney) will cover many
aspects of the crisis, responding to questions such as:
what the crisis says at a technical level concerning finance
theory and practice; what part accounting reforms have
played; what individual behavioural forces are at work; what
sociological problems have been revealed in the business
and wider communities; what role US and other house
prices have played; who are the winners and losers; how
corporate, banking and regulatory sectors of society should
respond; what ever happened in the US to cause all this
and what will happen next; and whether markets will learn
from the casualties or will it all happen again soon enough?
MEAFA Forum on the Financial Crisis
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This brief introduction to the crisis is
influenced, perhaps overly, by the
thoughts of the contemporary financial
critics and commentators, Nicholas
Taleb who in his 2007 The Black Swan,
forecast the problems Fannie Mae
would face; and Robert Shiller in his
Irrational Exuberance. Both take issue
with the paucity of the financial press in
discussing financial issues.
MEAFA Forum on the Financial Crisis
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 Regarding academic and finance practitioners
Taleb was especially critical of what he (as a
student of Mandelbrot’s chaos theory and fractals
analyses) saw as the inherent weaknesses of the
Gaussian 'bell curve' notion evident in many
financial models which are under current scrutiny
worldwide. It will be interesting to hear what the
finance specialists and others might have to say
about such concerns. It is hoped that this forum
will identify systemic lessons from this ongoing
crisis.
MEAFA Forum on the Financial Crisis
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notoriously lax and fraudulent lending [e.g., no doc loans, etc],
excess leverage [generally – gearing levels, credit cards, etc],
the creation of complex and risky investments through
securitization and derivatives [CDOs squared, CDSs, etc],
the global distribution of such instruments across rapidly growing
unregulated and opaque markets lacking a proper infrastructure
for clearing mechanisms and price discovery [thus counterparties
became more intertwined],
faulty ratings [by recognised ratings agencies making the
assessment of whether assets had uncorrelated risks nigh
impossible], and
the absence of appropriate risk management and valuation
processes at many financial institutions [faulty modelling that,
arguably, failed to stress test for significant downside risk].
MEAFA Forum on the Financial Crisis
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1. The apparent conflict regarding government regulation in a socalled market economy. Is the incongruous resort to market
manipulations through bailout mechanisms a repeat of FDR’s
‘New Deal’ tactics? And will it be any more successful?
Conundrum: Seemingly, ex post attempts (to mitigate
the outcomes of the market's excesses) is fine, but to put a
potential brake on an 'out of control' market (before it crashes) is
(arguably) an anathema - anti free market. Contemplate whether
the 'innovative', the so-called synthetic, products (CDOs, CDOs
squared, etc and related CDSs) designed by the financial
engineering 'masters of the universe' are similar (in principle) to
(say) medical products - and hence should they have been subject
to regulatory controlled stress testing. What is unique about a
financial product? Is this why ‘genius failed’ in 1998 at LTCM?
MEAFA Forum on the Financial Crisis
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2. Conundrum: The corporation good guy - bad guy. What
role did the corporation (with its inherent structural
financial and operational complexities as well as risk
minimisation benefits) play in this regard? – consider, for
example, the (or the lack of) information flows (and hence
controls by the AIG parent company) related to the
operational and financial activities of AIG’s subsidiaries
worldwide - especially regarding the London Structured
Products division which created the infamous CDSs (on a
scale apparently unimaginable), with their now notorious
short term bonus incentives.
MEAFA Forum on the Financial Crisis
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3. Conundrum: Whilst many regard it appropriate for
the US Government to bail out the largest finance
houses (with first the US$25 billion direct payout
and then the additional indirect funds received as
counterparties through the ad-hoc bailout
schemes, such as AIG’s US$200 billion bailouts),
there has been an outcry from some at
suggestions that the executives bonuses should
in some way be 'clawed back' - even though
without the government bailouts those executives
would be lining up in the queue with other
creditors of failed financial houses like
AIG. Whilst I do not view this a priority issue – it
is till a conundrum.
MEAFA Forum on the Financial Crisis
cont’d
A unique teaching focus has been handed to academics on
a golden platter. Surely for academics the up-side of the
crisis is that it creates a setting in which virtually every
aspect of the conventional business setting is contestable.
As educators we should be able to draw upon current
events (particularly something as massive as the global
financial crisis) in classroom discussions. We have an
opportunity not only for engaging students but also
potentially for some (stronger) synergies to develop
between teaching and research activities.