A Place for History

History-making economist Henry Kaufman helps bring the past to life for students

Henry Kaufman speaks to Smith School students

The Smith School’s entering Class of 2011 was born in 1990, for the most part. The world as they know it always had credit cards, cell phones, Microsoft, the Internet, digital cameras.

Economist and author Henry Kaufman, on the other hand, was born in 1927 in Germany, into a society whose political climate was made even more unstable by economic turbulence. In 1937, he immigrated to New York to escape the Nazis, only to struggle with the misery of the Great Depression. When he grew up he earned prestigious graduate degrees and pursued a calling as an economist. He began a fabled career with Salomon Brothers in 1962, rose through the ranks, and famously left them in 1988 because he disagreed with the firm’s expansionary policies. (The company was acquired by Citicorp in the 1990s). He has worked in the finance industry at its most-regulated and its least-regulated, and witnessed every boom and bust since World War II. He is a living, breathing lesson in the history of Wall Street.

Kaufman has lived through more history than most business school students will ever read about.

And that, Kaufman says, made him aware that the past needs to be studied.

Why History?

Last winter, the Smith School received a $1 million endowment from the Henry & Elaine Kaufman Foundation to support a fellowship in business history, in affiliation with the school’s Center for Financial Policy. University of Maryland history professor David Sicilia was appointed the first Henry Kaufman Fellow in Business History last summer.

The fellowship addresses what Kaufman views as a major deficiency in the way most business schools teach. “I always thought business history should be taught at a more prominent level in universities. You know what they say, those who don’t know their history are doomed to repeat it,” says Kaufman. Kaufman also supports the teaching of business history at New York University’s Stern School of Business and Columbia University. “Not teaching economic and financial history has contributed to the problems today in economics and finance. I push everywhere I can to raise the relevance of history in business school curriculum.”

That is especially important as the world continues to struggle through the aftershocks of the global economic meltdown. Understanding similar incidents in the past will help students connect-the-dots between financial excesses and their consequences. “Students who go into the field of business and finance should have an historical perspective, a feeling for what happened in the past. What happens in a recession? What happened in the Depression? Why did those problems come about? Who were the heroes of those times that were later revealed to be villains?” says Kaufman. Mike Millken was a temporary hero of the junk bond era, Kaufman points out, but eventually wound up in jail. “Young people ought to learn about these people—what they were trying to do, why they failed, and what the consequences were, for themselves and for the economic system.”

For the past 50 years or so, business education has veered toward the quantitative, equipping students with a variety of tools and techniques for amassing and understanding data. Kaufman believes that a generous dose of historical perspective would help young leaders understand the human motivations behind the movement of capital. That’s because economics is such an imprecise science. “Mathematical equations cannot fully encompass the behavior of markets and individuals. There is no actual technique that you can put into your analysis to tell you if things are going right or wrong,” says Kaufman. “Leaders and supervisors and regulators need to use their judgment.”

Studying history can also help students understand the linkages between wise regulations, good corporate behavior, and individual and societal prosperity—as well as the consequences of ill-considered regulations and bad corporate behavior on individual and societal turbulence. Listening to his grandfather talk about hyperinflation in Germany made a profound impact on Kaufman’s developing intellect. He credits these stories, his own experiences during the Great Depression and watching financial scandals come and go, with his lifelong advocacy for sensible, effective, rigorously-enforced regulation in the finance industry.

Living History

Kaufman has witnessed an enormous amount of economic and financial change during his lifetime. In 1949, when Kaufman started his career as a credit analyst at an industrial bank in New York, the finance industry was much more stringently regulated. So the activities of an industrial bank—financing accounts receivable, factoring, commercial mortgage or warehousing loans—were very different from that of a commercial bank or an investment bank.

In the 1930s, legislation prevented commercial banks from paying market rates for deposits, dictated where they could open up branches, and set maximums on mortgage loans. They couldn’t underwrite corporate bonds or invest in hedge fund operations. All those limitations were gradually lifted and abandoned by the Federal Reserve after World War II.

“In the early post-war period, a commercial bank was a commercial bank, a savings bank was a savings bank, and an insurance company was an insurance company,” explains Kaufman. “That all changed with the development of huge financial conglomerates where the name on the institution doesn’t really tell you what activities they engage in.”

After a four-year stint at the Federal Reserve Bank of New York, Kaufman was hired as an economist by Salomon Brothers in 1962 and started the first real fixed-income research effort on Wall Street. Kaufman built the research organization up to 400 people and established a reputation as a very influential voice. They also called him “Dr. Doom” for predicting higher inflation and interest rates. Turns out he was right. So his prediction in 1982 that interest rates would fall touched off a stock market rally that some have pinpointed as the beginning of that decade’s bull market.

By then Salomon Brothers ruled the bond market, and Kaufman, now managing director and a member of the executive committee, was renowned for his analysis and his uncanny ability to read interest rate trends. But in late 1980s he became concerned about Salomon’s risk-taking, eventually choosing to resign. Even then he was giving warnings about derivatives and cautioning that the industry needed better regulatory oversight.

His many years in the industry have given Kaufman a unique historical perspective on Wall Street and a deep appreciation for the lessons you can learn from other people’s mistakes. Helping students achieve that same sense of perspective is one of his great passions. Today Kaufman is the president of Henry Kaufman and Company, Inc. He is committed to higher education and has worked for many years with the Institute of International Education, particularly to advance academic freedom through support of its Scholar Rescue Fund. And he plans to continue to advocate for and support the teaching of business history to undergraduates and MBAs at business schools.

The impact of his generosity will be felt on Smith School students for many years to come. “The Kaufman Fellowship signifies an important new direction in the educational mission of the Smith School’s curriculum,” says Dean G. “Anand” Anandalingam. “It ensures that our current business students are taught critically important lessons from the history of finance and the capitalist system, and that current policy makers understand the importance of business history when making decisions.” Teaching students to view the present through the perspective of hard-won wisdom from our collective financial past will help the Smith School prepare students to meet the challenges of the future.

Dr. Kaufman’s RX for the Finance Industry

“Today the ten largest financial institutions hold more than 65% of the total assets of the United States. It was 10% back in 1990. I would advocate that the size of financial institutions be substantially reduced so that no one institution is too big to fail. The Too Big to Fail doctrine harms competition, promotes monopolistic practices and negatively affects the distribution of credit among those who need credit in the United States and elsewhere.

“I also agree with the Paul Volcker rule: Institutions that have within their conglomerate entity a deposit facility—savings deposits, checking accounts—should not be allowed to do proprietary trading for their own accounts. Those institutions really benefit from the guarantee of the federal government through the FDIC, which provides them with a significant advantage and makes them too big to fail. That is also harmful for the system.

“I’ve always felt that there should be a gap in the relationship between official supervisory bodies, such as the Federal Reserve or the Controller of the Currency, and the marketplace. As the guardians of the financial system, they are not friends; they are parents. It should not be a buddy-buddy relationship.”

Center for Financial Policy

The Henry Kaufman Fellow in Business History is a first for the Smith School’s Center for Financial Policy: its first Academic Fellows program, a program intended to help foster cross-disciplinary research and thought leadership.

Kaufman first became involved with the Center for Financial Policy last fall when he spoke to business leaders, policy makers, faculty and students at two separate events about the financial crisis and his recent book, The Road to Financial Reformation: Warnings, Consequences, Reforms. He found himself interested in the center’s work and also in its proximity to Washington, D.C., because he wanted to encourage the teaching of business history outside of New York City. “I’m hoping this will have an influence beyond the University of Maryland into the nation’s capital,” says Kaufman.