Finance Faculty Turn the Global Crisis Economic
Into a Learning Opportunity

The ongoing global financial crisis—the subprime lending fiasco, a painful credit crunch, and the collapse of major investment banks and multinational companies—poses interesting challenges and questions for a finance professor.

How do you train young bankers about credit risk, knowing that banks share the blame for the current situation? And where do you begin, considering that even the newest textbooks are already out of date?

Michael Oberstein, chair of the finance department in the SCPS Division of Programs in Business, says “We’ve been updating all our courses in real time, 24/7, to respond to what’s happening out there.“

Just look at some of our new classes for spring 2009: Understanding the Financial Crisis of 2008, What Is That Derivative Really Worth?, and BrokerDealer Operations and Compliance. These attest to the particular ability of continuing professional education in finance and business to address in substantive and relevant ways hot button issues as they arise.”

With 25 years experience in the field—first at Lehman Brothers, Kuhn Loeb, and Bear Stearns, then at the investment bank he founded, Wharton Income Group—Oberstein stresses it is not only young, would-be bankers who need help. The firms that employ them need help, too.

In the 1980s and before, banks had extensive in-house credit training programs. But over the last couple of decades, these were cut back or eliminated, leaving young credit managers unprepared.

“It was partly a question of cost,” Oberstein notes, “but it is more than that. It is mobility—people constantly moving from bank to bank. Nobody wants to train somebody who’s going to move somewhere else. It’s also hard for a firm to get all the people who need training in the same place, at the same time.” One answer, he notes, is to do more training online—as SCPS already does.

Adjunct Professor Bill Smith, longtime portfolio teacher in the credit analysis certificate program, agrees: “If the financial crisis has taught us anything, it’s that bankers need to be better trained. I mean, back to basics,” he says. “Bankers have to be reeducated to make real loans, not virtual loans.”

As the credit debacle worsened, Smith had a ringside seat as chief lending officer for the Bank of China. He points out that for the last 5 or 10 years banks stopped lending for their own balance sheets.

“They originated loans, their sales force distributed the loans, and the last holder of the loan was the greater fool,” he says. “It was a game of musical chairs.”

Someone who saw the crisis coming was Edward J. Grebeck, who teaches an SCPS course that he nicknamed, “Credit Default Swaps 101.” He called attention to the dangerous risks bankers were taking in a Euromoney article back in 2006, a couple of years before the global financial meltdown.

Credit risk managers relied solely on “quantitative, actuarial models,” Grebeck says. They ignored the “behavioral, transactional” side, which is to say, the real-life motivations behind a lending transaction.

Grebeck brings to his SCPS classes insights gained from more than 20 years in the credit trenches, managing loan portfolios for JPMorgan, Chase Manhattan, and GE Capital. This included long stints in South Africa and Liberia—experiences that taught him the value of skepticism.

“Credit isn’t just numbers,” he reminds students. “The risk managers of tomorrow will require different skill sets—a schooling in traditional credit underwriting, an awareness that credit can be gamed, an understanding of the documentation you need to protect the underlying lender.”

This emphasis on fundamentals—and knowing the context in which credit risks are taken—is reflected throughout SCPS’s finance curriculum. And portfolio managers with such training will be in big demand as banks dig their way out of today’s financial morass.

“The next big wave of opportunity,” Smith says, “will be in exit financing—negotiating workouts for all these loans gone bad. And smart young bankers will develop the skills for that.”