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Smith Faculty on the Finance Crisis

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Mar 01, 2009

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Smith School faculty have been actively involved in advising key players and proposing potential solutions to the finance crisis. Albert “Pete” Kyle, Smith Chair Professor of Finance, worked as an expert for the SEC in conjunction with the OIG report on the collapse of Bear Stearns, briefing congressional staffers for Henry Waxman’s Committee on Government Oversight. Kyle and Haluk Unal, professor of finance, held a briefing session for members of the Senate and House Committees on Banking, reporters from Business Week, Dow Jones and U.S. News & World Report, and Department of Justice officials, at the Smith School’s downtown Washington, D.C., campus in the Reagan Building. Lemma Senbet, William E. Mayer Chair Professor of Finance, and N.R. Prabhala, associate professor of finance, were invited by Maryland Congressman John Sarbanes to brief his chief of staff and the legislative staff of the federal Oversight and Government Reform Committee on issues relating to the execution of the Paulson economic rescue plan. They and many other Smith finance faculty have provided expert commentary to numerous press outlets and news programs, including ABC, CNN, the Washington Post, Forbes magazine, Bloomberg, and NPR. 

Here’s a sampling of their opinions: 

Alexander Triantis, Professor and Department Chair of Finance

One of the questions that emerges from all this is what will happen to financial engineering? I’ve heard people say that the whole structured mortgage market will be wiped out; no one will do these packages of securitized loans anymore. That would be unfortunate. Financial engineering in some cases is a way to get around taxes and accounting, and that’s not helpful from a societal aspect. But financial engineering can create a way for people to manage their risks and tailor their risk return, and I don’t want to get rid of that.  

Lemma Senbet, William E. Mayer Chair Professor of Finance

We need to be sure compensation design is providing executives with incentives to perform, as opposed to incentives to manipulate performance. Research and development has a long-term influence on a company, but it does not have a short-term affect on profits, so there may be an incentive to delay R&D in favor of short-term profit…that is why we need to look at how compensation is structured. 

Albert “Pete” Kyle, Smith Chair Professor of Finance

The trend recently, before the last year or so, has been toward deregulation. What you’re going to see in the next two or three years is that the government will be extremely, heavily involved in the financial markets. Fannie Mae and Freddie Mac will continue to be big problems and government will have stakes in banks it will need to decide what to do with. After two or three years of active involvement, I can see the focus shifting toward how to get government regulation into balance. 

N. R. Prabhala, Associate Professor of Finance

This crisis is not entirely about credit or liquidity, but about consumer confidence in the residential home market. Some kind of direct relief to homeowners, or to buyers of homes, such as a tax break or perhaps direct subsidies of closing costs, might stimulate interest in buying homes. Of course that assumes that home prices are depressed below their actual value. 

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