Monthly Archives: November 2009

Welcome to the interview series 24 to 25 Minutes With…  These interviews are meant to provide an understanding of the positions that members of the Zicklin community hold on the pressing issues of the day, as well as the issues’ relationships to graduate management education.

To kick off the series, Lexington 24:25 sat down with Professor Terry Martell.  As a longstanding member of the Economics and Finance faculty, Chair of the Zicklin Graduate Curriculum Committee, Director of the Weissman Center for International Business, President of the Faculty Senate, and faithful fan of the Alabama Crimson Tide, Professor Martell is perfectly suited to speak for 24 to 25 minutes about the financial crisis and its effects on management education.

The following is the transcript from our conversation.

Q. Zicklin’s mission is to create and disseminate knowledge and to promote ethical business practices while capitalizing on the school’s diversity, our excellent teaching, and our NYC location.  Zicklin accomplishes this by delivering top quality MBA and other Master’s level programs, supporting scholarly research, and service to the community.  What, if anything, will change in our academic programs, scholarship generation, and service as a result of last September?

A. Well by the 4^th Quarter I assume you mean the financial meltdown and the consequences associated therewith.  I have thought about this a great deal and I am not sure there is a heck of a lot we ought to be doing from a curriculum perspective with the issues related to the fourth quarter of ’08.  Where do I see a need in developing graduate education?  Perhaps a better understanding of risk management at the 5,000 foot level. The question is not what’s the right distribution to model the tail of events but, rather, simplify questions, ones that have been raised for years before the blowup, for example the relationship between the risk on the balance sheet and the way we compensate senior managers.  I think that is a discussion for an HR kind of track but also a discussion for general managers who need to understand how behavior and compensation interact to produce results that were not necessarily fully understood.

At Zicklin, we don’t allow a course through the curriculum without an explicit treatment of ethics, whether it be in the context of Statistics, CIS, Finance, Marketing, etc.  So, students should be exposed to ethical thinking and how that impacts business decisions.  Beyond that, I am not sure that any fundamental changes in the curriculum are required.

Q. What about in terms of scholarly activities?

Other than policy issues, like what’s the appropriate relationship between capital structure and compensation, I don’t see the events of last year generating the kinds of scholarship that I traditionally think of as associated with the Zicklin faculty.  Our research tends to be empirically based.  I haven’t seen much of that as of yet. Where you would see it is in the corporate governance literature, the interaction between corporate governance and finance.

Q. And in terms of service to the community?

Is it clear that people didn’t understand credit? It looks like no one understood credit.  I think that an executive program that dealt with risk issues would be quite useful, and to take a look at some of the unintended consequences of some of the regulatory proposals also would be helpful.  An appropriately structured executive education course in that area would be incredibly useful.  Risk management is part of management and managers cannot be overwhelmed by the details.  I chair a risk management committee that deals with credit default swaps – some of the things that almost took down AIG and certainly affected Lehman.  We sit and talk about mean absolute deviation, and what is the appropriate distribution of capital – that’s all useful important information, but I fear that managers, who do not have that statistical background tend to shy away from that discussion.  There are some basic issues that any risk manager will contend with on a proposal that you do not need to be a statistician to ask thoughtful questions about.  A short-term executive program dealing with those issues would be helpful to the business community.

Terry Martell, Professor of Economics and Finance

Q. I have heard you describe the crisis as an agency issue.  Please elaborate.

A. If you look back 20 years many of the firms that got into trouble – Bear Stearns, Lehman – these firms had more of a partner culture than a stockholder culture.  We did not fully appreciate that change from a partnership organization to an equity driven organization would significantly increase a firm’s appetite for risk.

One of the reasons I think that Goldman came through this better than most is that they retained a greater degree of this partnership culture.  They kept this idea of sharing in the overall success of the firm to the degree that other firms did not.  What that means is you are not playing with other peoples’ money; you are playing with my money. If it is my money at risk, I am going to be much more conscience of what the downside may be.  So keeping this partnership mentality is useful from a risk management perspective because it keeps people more in check.

Q. You lead the Mitsui Lunchtime Series.  Have there been any speakers in the last year who have spoken about direct experience with the crisis?

A. We had here last year the lead director for Bear Stearns came in to speak and he said, “Every model that we ran, we survived.  We ran the Crash of ’29 scenario.  We ran the Crash of ’87 scenario.  We ran all the scenarios.  We didn’t run the scenario where billions of dollars of our funds went out the door in a week.  Nobody can withstand that.”  Having said that, Peter Kellogg – this is 3^rd hand – sold Speer Leeds and Kellogg to Goldman because he said that the day the market stops lending us over night money is the day we are out of business.  We fund this billion dollar portfolio in the repo market every night.  The day someone says no, that’s the day that all of our jobs are gone.  So, he sold that firm because he understood that while he had a great business, the Achilles heel of that business was his ability to get short-term financing.  Bear was a much more sophisticated firm than Spear was, but they did not fully appreciate how quickly credit lines could disappear.

How long will we remember this?  I don’t know.  We had another Mitsui speaker come in last year – Todd Petzel who ran a hedge fund. He refused to invest in high risk instruments which ultimately blew up.  However, initially, he did not perform as well as other money managers.  So, Todd’s money left him to more “exciting opportunities” and Todd found another job.  Was he right?  Yes.  Was he out of work?  Yes.  So, how do you balance all of that?  Are people smarter today than they were a year ago?  I hope so.

Q. Which brings me to the next question: have we already forgotten the lessons learned?

If you fix the compensation problem – and don’t get me wrong, I don’t support a compensation czar, but this is where I think the Boards have to step to the plate.  Public Company boards are well compensated.  As a board member, you can have an easy life or a hard life.  You can raise difficult questions or you can sit through a two-hour meeting and go and have drinks with the chairman.  How you exercise your responsibility is your choice.  But, if the board is doing its job appropriately, then it balances the form of compensation to encourage longer term performance.

Q. Leadership is central to management education.  At Zicklin, we run a monthly Leadership Lecture Series.  If you were to look at the best examples of leadership over the last year, how would that be defined?  And if there is an individual that embodies that level of leadership, who would it be?

A. I don’t know how we define leadership.  Do we define leadership in terms of success for stockholders?  If that is the definition, then you think about someone like John Thain, who has been raked over the coals over a stupid decision about how he outfitted his office, but managed to sell Merrill Lynch at substantially above what it was probably worth when he sold it.

I don’t see obvious heroes here that I would put out for public accolades.  I see a lot of people who worked extraordinarily hard to keep firms together and funds together.  Some successful – some not.  I am hopeful that the liquidity crisis that we face will teach everyone a significant lesson.  I am more concerned about the over reaction.  If the credit markets don’t thaw up a bit, we are going to see another very serious problem as this stimulus money comes out of the economy.

Q. What is future for regulation?  Will we ever achieve global regulation?  Or will there be more regulatory arbitrage on the horizon?

A. Everyone wants enough regulation so that people have confidence in your market.  I am not optimistic we are going to see a global regulatory structure.  If we even had a global coordinating committee that could act in a reasonably consistent manner, then that would be a step in the right direction.  Let’s take for example a financial transactions tax and let’s put the cities in the game.  You have London, New York, Singapore, Shanghai, Hong Kong, Tokyo, and then lesser places.  All that has to happen is for one of them to say no and all we’ll have to do is restructure the whole business and the business will take place out of wherever the financial transaction tax is lowest.  People are already setting up in Singapore in anticipation of what’s likely to happen here in the United States.  My worry is that we create a comparative advantage for another capital market and that clearly isn’t good for us.

Do we need regulation?  Obviously.  We have Basel II which is supposedly a worldwide capital requirement for the large banks.  Did it help the large banks?  If it did, I missed it.  Clearly there is going to be some regulatory changes but is Washington really going to solve this problem?  I doubt it.

Lightning Round

Time Person of the Year? Steve Jobs

2025: Dollar or Renminbi? Dollar

FT or WSJ? WSJ

College football Champion? Alabama

What book is on your bed stand? Malcolm Gladwell’s Outliers

Don Draper or Henry Francis? Who?

Bordeaux or Piemonte? Bordeaux

Best Central Banker? Ben Bernanke.  In 2009 anyway. He could be the worst in 2010.

V/U/W/L? L

2010 World Cup Champion? Brazil

Terrence Martell, Phd

Terrence F. Martell is the Director of the Weissman Center for International Business at Baruch College/CUNY where he is also the Saxe Distinguished Professor of Finance. As Director, he oversees a myriad of international programs and projects. He received his BA in Economics from Iona College and his Ph.D. in Finance from the Pennsylvania State University.

His particular area of expertise is international commodity markets. He teaches and conducts research in this area. He is a Director of the IntercontinentalExchange (ICE) which is listed on the NYSE. He serves on the Audit Committee of ICE. He is Vice Chair of ICE Futures U.S., the domestic regulated futures exchange of ICE. He is Chairman of  ICE Clear US. He is a director of ICE Trust US which clears credit default swaps. He is chair of the Risk Committee for ICE Trust. He serves as a board member of the Manhattan Chamber of Commerce and is a member of the Executive Committee of the Chamber. He is a trustee of the PSC/CUNY Welfare Fund which manages health benefits for the employees of the City University of New York. He serves on the Audit Committee of the Fund. He is a member of the New York City District Export Council of the US Department of Commerce. He is Chair of the Baruch Faculty Senate. He serves on the CUNY Board of Trustees Committees on Fiscal Affairs, Investments and Audits.

A resident of Pelham, New York, he served as President of the Pelham School Board and the United Way of Pelham. He is married to Rita Simpson and they have three children Kathryn, Laura and Alex.

Welcome to Lexington 24:25.  This blog is meant to serve the Baruch College Zicklin School of Business Graduate Program Community.  From the 2600 graduate students, to the 185 full-time faculty, to the 200+ adjunct faculty, to the tens of thousands alumni, to our corporate partners, the Zicklin community is one that serves New York City and the world.  

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