Yale SOM Faculty Discuss the Causes of the Turmoil on Wall Street

Gary Gorton saw the trouble coming three years ago. Gorton, a professor of finance, watched how more and more home mortgages — often given to people who might not be able to afford the payments — were being turned into risky securities and then sold around the world. Any drop in housing prices posed a huge threat to the economy, especially considering how no one knew what the mortgage-backed securities were actually worth, or who held them. "It's a freight train wreck," he said. "And it's one you could've seen coming."

Gorton joined four other SOM faculty — Stan Garstka, Andrew Metrick, Richard Foster, and Mark Manson — for a discussion on the Wall Street turmoil and what the future of the world economy looked like. The panel spoke before a packed room on October 7, touching on all aspects of the crisis, from the fate of major U.S. banks to the role recent accounting rules might have played in making things worse. Three weeks after the fall of Lehman Brothers, the conversation came back time and again to the fact banks wouldn't lend to each other, threatening to transform a Wall Street problem into a worldwide economic contagion. Chiding a lack of leadership in Washington, Metrick said, "The probability is now high for the financial system to go into a meltdown. There's no natural bottom for it."