Yale School of Management

Curriculum: Transforming Events

In his 25 years in the finance industry, Mark Manson ’82 learned that markets and industries can be shaken by large-scale events. “When I look back at my time in the industry, I’m amazed at the number of transformative events I’ve had the good fortune to live through first-hand and survive,” he said. “These are events with major long-term implications on financial markets. If you look back 100 years, you’ll see that each generation faced these moments. The key is to recognize the characteristics of such events and to understand them so you can respond to them.”

Manson brought this lesson to students at SOM when he taught a class in the fall of 2007 called Transforming Events. Over seven weeks, it delved deeply into the history of finance, with an emphasis on understanding the mechanisms each event created and exploited. Topics included the 1920s and the Great Depression, the end of white shoe Wall Street in the 1970s, the battle for Disney in the 1980s, the rise and fall of Drexel Burnham, the battle over RJR Nabisco, the implosion of Long Term Capital Management, and the bubble of 2000. To illustrate each moment, Manson brought in practitioners to break down the financial instruments. For example, Bill Donaldson, former chairman of the U.S. Securities and Exchange Commission and founding dean of SOM, spoke about watching his father lose everything during the Great Depression and his own experiences running the SEC between 2003 and 2005.

The class that focused on Long Term Capital started with a presentation from three students on the firm’s rise and fall, explaining how a fund staffed with academics and Nobel Prize winners could spiral out of control. Frank Fabozzi, professor in the practice of finance and an internationally known expert in structured finance, followed with an analysis of the mechanisms that allowed the company to so quickly create massive returns but also left it open to the crushing losses.

David Langer ’86 then took the conversation in a different direction, focusing on the subprime mortgage schemes that have gotten so many banks and hedge funds into trouble in 2007. Langer, the head of proprietary trading at Citicorp, ran the mortgage desk at Salomon Brothers for 10 years. He explained the ways mortgage companies securitized the mortgages, creating investment vehicles that looked as safe as AAA bonds but were in fact very risky. Investors then leveraged these investments under huge amounts of debt to increase returns. When homeowners started defaulting on mortgages in significant numbers, the value of these securities evaporated, taking out investments that were supposed to hold steady even under extreme circumstances. He held open the real possibility that this was another transforming event in finance. “The degree of leverage and lending in credit markers was way more than anyone had seen before,” he said. “When that huge an amount of leverage unwinds things go off explosively.”

Transforming Events focuses not just on the mechanics of deals but also on the motives and ethics of the principals. In discussing Long Term Capital, Kayam Rajaram ’08 argued that the bailout created an instance of moral hazard for Wall Street, because the major figures behind the firm were able to set-up another fund soon after Long Term Capital imploded. As an example, their continuing success on Wall Street would encourage others to act in a risky manner. Langer disagreed, saying that the government didn’t absolve investor losses in the scandal — people got hurt. Instead he pointed to the tech implosion and accounting scandals of this decade as moments when government intervention encouraged Wall Street to take even greater risks, helping set the table for the subprime mortgages crisis. The exchange offered a moment when Manson said the class steps back to consider the broader implications of a transforming event. “Ethics are always central to the discussions,” he said. “It can be very difficult when you’re involved in an event to recognize the ethical questions. After the fact, you can always dissect whether someone acted ethically. By studying these moments, the hope is that students will always remember to consider the ethical side of an issue when they’re working on Wall Street.”

Lisa Howie ’08, who accepted a full-time offer from Merrill Lynch, said the approach of the course really helped her to understand the impact of key events and people on the world of finance. “I think that in the future, we’ll be able to spot these patterns and identify transforming events before they happen, or even change their course,” she said. “The course also fit incredibly well with the SOM curriculum because it covered a huge range of issues, including ethics, accounting, competitive strategy, and finance. The guest speakers were amazing and helped us to see how these events affected individuals and how theory and practice come together. It was a really great course.”