Scan the headlines of stories on the banking industry and you’ll undoubtedly come across Anat Admati’s name. The Stanford GSB finance professor is widely known for being a vocal critic of existing banking regulations. She’s been invited to share her views at the World Economic Forum in Davos, and last fall was invited to a small-group lunch with President Obama to do the same with five other economists. Her message is simple, yet provocative, and best summed up in an excerpt of her testimony to the Senate Committee on Banking, Housing and Urban Affairs Subcommittee on Financial Institutions and Consumer Protection in July 2014:
The crisis of 2007-2009 was an implosion of a system that had become too fragile, reckless, and distorted. Regulatory failures, including flawed and ineffectively enforced regulations, must take much of the blame for the excessive fragility and the buildup of risk. These failures can be corrected, and regulators have authority to do so under current laws, but, remarkably, obvious lessons have not been learned, and not enough has been done to make the system as safe as it can and should be. Some counterproductive laws have also remained in place.
At Stanford, Admati works tirelessly to arm MBA and undergraduate students with the information and perspectives they need to understand and critically analyze the economic and human implications of finance. Through an interdisciplinary elective course called Finance and Society, Admati has brought together varying viewpoints coming from experts and veterans of banking, law, accounting, politics, regulation, and the media to examine the issues.
“Required finance courses are more about business decisions and center around understanding the tools to make money. This course focuses on the negative consequences associated with that; it pushes you to think about the societal implications,” says Jarrad Aguirre, MBA/MD ’16, who plans to become a physician but is drawn to health policy. “I chose the course to understand the language and lift the veil on something important.”
There is no math, though the main principles taught elsewhere are reviewed and underlie the discussion. Readings are drawn from Admati’s book (with Martin Hellwig) The Bankers' New Clothes: What's Wrong with Banking and What to Do about It and from documents such as Federal Reserve statements, media stories, essays by guests, news stories, and commentary. In the graduate class, a series of carefully curated guest speakers enrich the course with real-world perspectives and insights into the industry and the policy issues (the undergraduate course has fewer guest speakers and focuses more on understanding finance basics).
“You can’t quite understand the implications unless you understand the underlying forces that come to bear,” Admati says. “A problem in the financial system is that too few people understand it. We all interact with this system and we need to be better educated about it, because otherwise it does not serve us as well.”
The guest line-up starts with experts inside the industry, and then works its way outward into politics, media, economics, and law to create an impactful narrative arc. For example, early in the winter 2015 course, the class welcomed Ayman Hindy of Capula Investment Management LLP, who provided insight on how hedge funds work and about the interconnected financial system. Other speakers included Bob Jenkins, a former banker, fund manager, and regulator, and now vocal advocate for strong, sensible regulation of the financial industry. Frank Partnoy described his career in investment banking and discussed the opacity of banks’ disclosures. Later speakers included ex-banker, author, and journalist William Cohan, ex-auditor Francine McKenna, and former president of the New York Fed Peter Fisher. Former California Treasurer Phil Angelides, who chaired the Financial Crisis Inquiry Commission, said he was “shocked at the power of industry and the crudity with which they exercised that power,” and that “Wall Street learned nothing” from the financial crisis. Former member of the Board of Governors of the Federal Reserve System Kevin Warsh also visited toward the end of the quarter and offered observations from within the Fed and thoughts on financial regulation.
Assignments often include critical analyses of media, where students dissect a seemingly straightforward news story or commentary to examine its validity and context. Students say the course gives them new insight that builds on the basics of finance. The final paper allows students to dig deeper into one of the numerous topics that come up during the discussion. Students wrote, for example, on executive compensation in banking, stress tests, the unbanked in the United States, the use of environmental, social, and governance (ESG) data, subprime auto loans, and more.
For Katherine Edwards, MBA ’17, the course was one of her first electives chosen and she says it broadened her horizons: “It’s the first time that I’ve felt like I understand the financial crisis, where it’s been broken down into something I can follow and understand. [The course] has shifted my perspective; I used to be more drawn to the status quo of finance and business. It’s refreshing to have permission to question and push back.”
Lisa Forssell, MS Environmental Resources/MBA ’15, says the course and its focus on social fallout from the fiscal crisis ties closely with global climate change, where foreseen risks that imperil people are noted and ignored.
“It’s a really hard problem and there are so many reasons why it works the way it works and so many stakeholders are fine the way they are,” she says. “I would say something I’ve taken away from the course is use your own judgment. Just because something is in the Wall Street Journal every day doesn’t mean it’s true.”
That lifting of the veil, exploring with students the big picture issues as well as the granular legal details and incentives, is why Admati created the course. She believes this is important for students wherever their careers take them, and even as educated citizens. The course was a finalist for the 2014 Aspen Institute Faculty Pioneer Awards.
Pushing students to critically think is a key component of the MBA program, says Senior Associate Dean for Academic Affairs Madhav Rajan. “The Finance and Society course is one of a new type of electives we introduced based on student feedback. Courses like this impart a rich perspective that can’t be found in a textbook or from reciting the basics of finance. They offer real-world insights to guide their careers years into the future.”
Ivan Tomic, MBA ’16, echoes Dean Rajan’s sentiments: “I think understanding both the positive as well as negative aspects of the financial system ultimately makes for a much better learning experience and will allow us to make better decisions when we have the power to make them.”
By Heather Lynch Hansen
Admati initiated a conference taking place May 5-6, 2015 in Washington D.C. also called Finance and Society. The conference, sponsored by the Institute for New Economic Thinking, will feature U.S. Senator Elizabeth Warren, Federal Reserve Chair Janet Yellen, International Monetary Fund (IMF) Managing Director Christine Lagarde, Chair, Huffington Post Media Group President and Editor-In-Chief Arianna Huffington and U.S. Department of the Treasury Deputy Secretary Sarah Bloom Raskin. Admati and Stanford Alum and Commodity Futures Trading Commission Former Chairperson Brooksley Born will have a joint speaking appearance at the conference, titled Making Financial Regulation Work for Society.