The key challenge that healthcare enterprise leaders face is determining how to drive innovation while addressing problems of affordability, inefficiency and gaps in quality. This task is now complicated by strong economic headwinds that limit the resources available to attack these problems. Industry executives are also dealing with new sets of competitive and regulatory pressures on their efforts to drive business growth.

At Columbia Business School’s 5th Annual Healthcare Conference held in New York City on November 21, over 500 students, alumni and other professionals heard more than 40 speakers and panelists discuss these issues.

The featured healthcare leaders said they are embracing change to develop creative solutions to the industry’s growing problems and to provide attractive investment opportunities on a global basis. A career strategies panel of executive and corporate recruiters also presented their views on the skills and talents necessary for healthcare professionals to succeed in this dynamic environment. This was followed by a concluding career fair and networking reception with the conference’s 17 corporate sponsors.

Ed Ludwig ’75, chairman and CEO of BD (Becton, Dickinson), gave the opening keynote address. Ludwig said that a successful global healthcare company must use technology, scale, global reach and operational excellence to offer value-added products. These products should reduce costs, enhance the quality of patient care and generate sustainable earnings growth.

Following his remarks, four concurrent panels took place in the morning session on the topics of pharma and biotech, medical devices, diagnostics and payor/provider issues.

The pharma and biotech panel discussed the trend among companies to narrow their therapeutic priorities, focus on biologics, pursue licensing and target acquisitions and seek enhanced productivity and cost savings. Numerous early-stage biotechnology companies are turning to larger pharma and biotechnology firms to survive as they are unable to secure capital from the public market. Global medical device companies are seeking to introduce innovative and cost-effective products in a challenging regulatory and pricing/reimbursement environment and pursuing acquisitions and new markets to meet growth objectives. The consensus of the payor/ provider panel was that any healthcare reform in 2009 would likely be incremental due largely to economic and political headwinds, and that a key focus would be on information technology and expanding access to those without insurance coverage.

Robert Essner, former Chairman and CEO of Wyeth Pharmaceuticals and now executive-in-residence at Columbia Business School, provided the lunchtime keynote speech. He suggested that although the pharma industry faces significant challenges, the combination of new drugs, biologics and vaccines in key areas of unmet need (e.g. Alzheimer’s, cancer, congestive heart failure) and the massive influx of informed baby boomers, who are demanding health solutions, provides favorable long-term growth prospects for innovative global pharmaceutical companies.

Three afternoon panels covered M&A, life science investments and emerging markets. It is anticipated that healthcare M&A will remain active across all sectors and that consolidation among Big Pharma companies appears inevitable. Early-stage life science companies and investors face a capital squeeze, which is threatening the viability of existing companies with lower levels of funds available for new investment. Emerging markets are an increasing focus for global pharmaceutical and medical device companies that are seeking new markets for their products.

The final panel of the day focused on the changing talent acquisition and development strategies of major healthcare enterprises. Panelists commented that successful leaders will need to have global and cross-functional experiences; that employees should be open to lateral moves that broaden their skills and experiences; and that healthcare companies considering new hires are seeking a broader “toolkit” of skills that reach beyond the traditional focus on healthcare backgrounds.

For more information about the conference and sponsors visit www.cbshealthcareconference.com.

Between 2:30 and 3 p.m. on May 6, 2010, the Dow dropped 7 percent before partially restoring itself by the closing bell. In the days following that sudden market shock, regulators have investigated possible causes, looking at a single trade in the Standard & Poor’s e-mini futures contract and other causes for the brief panic. The plunge has telescoped focus on the role of “circuit breakers” and the way high-frequency traders function in response to irregular use of those safety mechanisms.

“I think that market-wide coordination of regulatory mechanisms such as circuit breakers is a very positive thing. The lack of such coordination seems to have had a significantly detrimental effect,” says Professor Ciamac Moallemi, who has studied behavior in financial markets. In his recent research, he created a quantitative model to value latency or the delay between decision and trade execution, finding that the higher frequency of trading, the more impact latency has on transaction costs. (Read more about this research in Ideas at Work.)

Moallemi said the events of May 6 raised a number of unanswered questions, including:

1. Did buy-side firms employing algorithmic trading strategies contribute to the crash? Many mutual funds, pension funds, etc., try to efficiently buy or sell large positions via computerized strategies that buy or sell at a predetermined rate over the course of the day despite market conditions. Such strategies often trade at a faster rate in periods of high volume. Did these strategies accelerate selling just as the market was crashing?
2. High-frequency liquidity providers implement computerized market-making strategies based on the statistical analysis of markets. In periods of market anomaly, where historical statistical relationships may not hold, these traders may withdraw from the market and hence remove liquidity at times when it is most needed. To what extent did high-frequency liquidity providers withdraw liquidity from the market immediately prior to the crash?
3. Given that there does not seem to be any trading “error” involved in the crash, is it a wise policy for the exchanges to cancel trades that occurred at anomalously low prices? This would seem to destroy any incentive for investors to provide liquidity by buying during a crash. What incentives can be created for liquidity provision in turbulent times?

“Equity markets have changed dramatically in recent years, with the proliferation of electronic trading and the decentralization of trading across many new venues,” Moallemi adds. “While these changes have offered investors many benefits, there may be unintended consequences such as the momentary breakdown that occurred on May 6. This event highlights exactly how little we know about the complex and highly interdependent systems that constitute the market.”

Image credit: Google Finance

Professor Bruce Greenwald and top value investors took part in a panel discussion at Columbia Business School on April 16, 2010. The program was hosted and televised by Bloomberg (watch video online).

In the discussion, Greenwald said the financial crisis validated the principles of sound value investing. “Thank God for the last year. … Value investors stayed the course,” he said. “We did not have a Great Depression, which I don’t think was ever the cards.” Greenwald went on to elaborate about the fundamentals of value investing, saying:

You are always buying future returns when you are buying a stock. The question is how you measure them. When you see a return today that you think you want to buy, the fundamental question is how long is going to last? You can see the birds in the bush, but the question is how many are going to die before you get to eat them? … Value investors have always focused on the permanence of the return. To Ben Graham that was asset production. For a business to be viable, if it needed assets, it had to earn a return on those assets or nobody was going to invest. … That’s why [Graham] focused on assets. But what Buffett taught people is that beyond assets, earnings are sustainable if you have barriers to competition.

Frank Byrd ’00 discussed U.S. inflation from an historic perspective and the future prospect of inflation in light of current monetary policies with Professor Emi Nakamura on March 25, 2010. Their presentation was part of Columbia Business School’s ongoing series of community forums on business and the economy.

“Is inflation in our future? I believe being on the right side of the inflation/deflation question could be the single most important investment decision of the coming decade,” Byrd said. “Although many people fear inflation may arise in the future, no one seems to believe it is a problem today. I challenge this belief. It’s not in the future. It is in the present. It’s been with us since at least the late 90s, we just can’t see it — yet. So where is it hidden? How is it hidden?”

Watch the complete video to hear Byrd and Nakamura discuss this issue.

Last Thursday, February 25, Howard Schweitzer and Jim Lambright entered Uris Hall serenely, shook off the snow and immediately began their discussion with a crowd of students and faculty members. While most people would have been dismayed by the travails of taking a train through a blizzard from Washington DC to New York — and just to visit Columbia Business School students! — Schweitzer and Lambright viewed the task as trifling.

Not surprising, given that until recently Schweitzer ran TARP (the Troubled Asset Relief Program) and Lambright, who had been the president of the Ex-Im Bank, served as TARP’s chief investment officer. When Schweitzer took the job in the fall of 2008, Lehman and WaMu had disintegrated, Wachovia had been acquired to stave off a panic and Goldman Sachs and Morgan Stanley, the last two major investment banks, had converted themselves into commercial banks. Running TARP, Lambright said, was like working in the emergency ward of a wartime hospital: lots of blunt instruments and patients enduring a great deal of pain. After that experience, a three-hour journey through a snowstorm was barely worth noticing.

Schweitzer and Lambright spoke to a lively and elite audience as part of the School’s Community Forum on Business and the Economy organized by Dean Glenn Hubbard. They gave an inside account of the beginning of TARP from the day Neel Kashkari first called Schweitzer to start up the program. With no clear mandate and makeshift offices hidden in crevices of the Treasury’s buildings, Schweitzer was given the task of managing the list of firms that the Treasury handed over.

Schweitzer recalled the first days of the program: Another $40 billion for AIG, ok, we’ll work that one out, we’ll do non-voting equity. CITI needs an injection of finance, ok, we’ll work out the warrants and take board seats. The public is in an uproar over compensation packages already in contract. Nothing much can be done; the rule of law prevails but let’s put in place a pay czar to make sure that the public money is spent wisely. Over here, the auto industry is bleeding cash, no credit is forthcoming and the repercussions on the financial system are massive. We’ll work something out, but there is an election happening too and a new guy is taking over January 20. Do I show up for work? Does TARP carry over and do we keep on working? What do I do January 21? Oh, it is business as usual. By the way, will TARP ever fully repay the taxpayer? The estimate is that it will be $120 billion short, but that’s the official estimate. It’s likely to pay back except for autos … and AIG?

Schweitzer and Lambright answered every question. While they were both very modest, there was still a sense that these two men knew how to get a job done. At one point during the heated events in 2009, the Wall Street Journal quoted former Treasury Secretary Henry Paulson, who hired Lambright. Paulson said about Lambright, “He’s unbelievably tough, and … the job is to save the financial system.”

Leaving aside whether one thinks TARP was a good idea (I do) or a bad one, the impression left by these two very amiable and frank government servants was that they took the entrepreneurial challenge and ran with it, steering carefully within the confines of the law that sets out hiring practices (they needed to hire fast) and transparency. Now after stepping down from TARP, Schweitzer has joined the big law firm Cozens O’Connor; Lambright is pursuing green energy at Sapphire Energy.

No revolving door into Wall Street for them. One had to leave the room very impressed.

Photo credit: Flickr/onecle

After last month’s proposal of the Volcker Rule from President Obama — an idea crafted by former Fed chairman Paul Volcker that would limit banks’ investing in speculations with subsidized capital — industry chatter likened the move to a return of the Glass-Steagall era. In the new issue of Ideas at Work, Professor David Beim examines the assumptions of the new rule and suggests a modern adaptation for the Depression-era regulation.

Volcker Rule Assumption 1: Only institutions that take insured deposits need to limit risk. Beim argues that all major financial institutions — not only the ones that take insured deposits — are liable for enormous risk. “We are now living in a world of massive moral hazard in which the government has shown it will bail out systemically important financial institutions whether they take deposits or not,” he writes. “Deposits are not the issue. We are far past that point.”

Volcker Rule Assumption 2: Banking activities must be segregated in order to prevent risk. Beim says, “It’s not the nature of the activity, but the extent of the risk.” He argues that while the rule’s goal of controlling for excessive risk is important, the focus of the rule — and of related regulatory efforts — should shift from activities to asset quality:

An effective modern adaptation of the spirit of Glass-Steagall would place substantive limits not on activities such as trading versus holding but on asset quality — what gets traded or held. Regulators are very cautious about this. It runs counter to modern regulatory thinking to impose such limits.

But some such limits may be appropriate. To adhere to Volcker’s proposal, all private equity investments and many hedge fund investments are both illiquid and themselves highly leveraged. Volcker suggests — and is correct — that such investments are not appropriate for the balance sheet of any financial institution that might have to be bailed out by the government. This idea can be pushed even further. …

Does government have the will to restrain this kind of risky lending, reversing its earlier posture? Time will tell. The current proposal, said to be reviving the spirit of Glass-Steagall, appears to have no political cost. There is no constituency for proprietary trading by banks except the discredited banks themselves. Unfortunately, as it stands, a ban on proprietary trading does little to make banks safer. Substantive restrictions on financial asset quality would go much further, giving the spirit of Glass-Steagall some modern substance.

Read the complete article in Ideas at Work.

Photo credit: Flickr/epicharmus

On November 18, three student teams gathered at Calder Lounge in Uris Hall to compete in the final round of the First Annual Columbia Business School Corporate Social Responsibility Case Competition sponsored by IBM. The winning team of Elizabeth McCarthy ’11, Blaire Fernandez ’11, Justin Kidwell ’11 and Kristin Stepaniak ’11 were awarded a prize of $1,500.

The case competition was organized in a joint effort by the CSR P2P Group, part of the Social Enterprise Club, and the General Management Association with the support of Columbia CaseWorks. It challenged teams of first- and second-year students to apply concepts and theories to a current challenging CSR issue.

This year’s case was “The Norwegian Government Pension Fund: The Divestiture of Wal-Mart Stores Inc.” written by Andrew Ang, the Ann F. Kaplan Professor of Business. The case considered the exclusion of Wal-Mart from the Norwegian Government Pension Fund’s investment universe and the subsequent divestiture of Wal-Mart by the fund; it looks at the issues socially responsible investing raises for portfolio managers.

The student teams presented their evaluations of the fund’s disinvestment and the judges critiqued them on their innovative approaches. Several proposed solutions emerged in each 10-minute presentation followed by a Q&A session. The panel of judges for the competition included Jennifer Crozier, Director, Corporate Citizenship and Corporate Affairs, IBM; Christopher Bishop, IBM; and Professor Ang.

After the students’ presentations, Ang, who has advised the government of Norway on strategic asset allocation for the past four years, expressed his point of view on the case. He has said the country has a history of ethical investing.

“Ethical considerations played an important part in running the fund,” he said. “Norway’s stance on ethical investing comes from the society and they view it as an important issue.” Ang also pointed out that it is not a “static process” but it has evolved and will continue to change in the future.

One of the main issues in the case of Wal-Mart was child labor, said Ang. In the past, the fund has excluded investments in firms that are connected to nuclear weapons and cluster bombs; it also has a history of exclusions based on humanitarian and environmental issues.

This case competition gives Columbia Business School students the unique opportunity to explore CSR topics while learning firsthand what goes into the effective implementations of corporate responsibility policies, and the challenges that companies and advocacies can face in the process. This inaugural competition was truly successful and we hope it has been just the first of many in the years to come!

Photo courtesy of Mara De Monte

Speaking in a community forum with MBA students on February 19, 2009, Professor Joseph Stiglitz vigorously advocated for the government to nationalize banks — temporarily — in order to rein in the financial crisis. That didn’t happen, he laments in his new book, Freefall: America, Free Markets, and the Sinking of the World Economy (W. W. Norton & Company, Jan. 2010), and as a result the conditions that led to the crisis have continued.

“My main criticism of the Fed is not that it kept interest rates too low; it’s that it didn’t implement the regulation that it should have,” Stiglitz said in an interview with Bloomberg radio, broadcast live from Columbia University on February 16, 2010.

In other recent interviews, the Nobel Prize-winning economist has said the government should issue another round of U.S. stimulus spending focused on jobs and has supported proposals from the Obama Administration to restrict banks.

“Unless incentives and constraints are changed through regulation, it is unlikely that behavior on Wall Street will change. And once again, our financial system, our economy and the taxpayer will be in jeopardy,” Stiglitz wrote in the Los Angeles Times on January 29, 2010.

In the December 2009 issue of Finance & Development (a magazine produced by the International Monetary Fund) a thoughtful profile examined Stiglitz’s academic roots, from his early work at Amherst and MIT to his groundbreaking papers with Professor Bruce Greenwald in the 1980s about how changes in financial and credit conditions affect the business cycle.

The profile quoted Fed chairman Ben Bernanke, who has praised Stiglitz and others’ work: “‘[their research] gave economists the tools to think about the central role of financial markets in the real economy’ and led to a better understanding of how ‘extreme disruptions of the normal functioning of financial markets … seem often to have a significant impact on the real economy.’”

UPCOMING EVENT: The Heyman Center for the Humanities will hold the panel “The Continuing Financial Crisis: Perspectives from the North and the South” with Professor Joseph Stiglitz; Prabhat Patnaik, professor of economics at Jawaharlal Nehru University, New Delhi; and Jomo Kwame Sundaram, founder, International Development Economics Associates, at noon on March 25, 2010. Register for the event.

Photo credit: World Economic Forum

The new issue of the Chazen Web Journal — our second in 2010 — highlights several stories that echo a larger discourse currently affecting millions around the globe: the economy’s intersection with regulation. Two recent forums explored the issue with views on the banking industries in Japan and China.

In December, the Sanford C. Bernstein & Co. Center for Leadership and Ethics and the Center on Japanese Economy and Business hosted the panel “Why Was the Financial Crisis Less Enduring in Japan and Other Countries…This Time Around?” Adrian Almazan ’10 reports on the panel’s discussion of Japan’s banking history and exposure to risk, and how reform and regulation in Japan’s financial sector helped set the country apart during the recent economic crisis.

Almazan also reports on the China Business Initiative’s forum, which took place in October and featured Ma Weihua, president and CEO of China Merchants Bank. Weihua gave his insights on the globalization of the Chinese banking sector and how the government’s use of regulatory measures may have helped China avoid a more severe impact from the current crisis.

Mr. Ma compares the current industry dynamic to a marathon race: Those runners that once led the pack have fallen down, and the Chinese banking industry has an opportunity to sprint to the front. One of those potential sprinters is Mr. Ma’s own China Merchants Bank (CMB). CMB began 20 years ago with RMB 100 million in capital and a single office of 36 people. Today, CMB is a national commercial bank listed on both Shanghai and Hong Kong Stock Exchanges. CMB has net capital exceeding RMB 100 billion and total assets approaching RMB 2 trillion, with a network of 700 outlets and employee headcount of 37,000.

This issue also features an interview by James Walsh ’10 with Professor Ray Horton about the defining political events and trends that have shaped — and continue to shape — the world’s economy. In addition, Brian Hindo ’10 shares a discussion with Professor Gita Johar on the application the “4Ps” of marketing to the world’s the poor.

Read more in the February issue of the Chazen Web Journal

Photo courtesy of Chazen Institute

New research from Professor Shang-Jin Wei featured in the latest issue of Columbia Ideas at Work attributes the high savings rate in China to the severely skewed gender ratio — 100 girls born for approximately every 122 boys — that has emerged under the country’s one-child policy, which was instituted in 1980. The result is that today, 30 years later, there is a very competitive marriage market. Parents save at high levels in order to give their sons every possible advantage in attracting a wife, Wei says. It is clear that a rise in the sex ratio imbalance would lead to more unmarried men. In January, China’s state media reported that the government anticipates that at least 24 million men of reproductive age will remain single by 2020.

Wei’s research points to a new macroeconomic implication of China’s gender imbalance. The very high savings rate in China is unparalled in the world. On the economic front, the high savings rate has many implications for global business and there is discussion about whether China can adjust its growth models toward more dependence on domestic consumption, Wei says. While exchange rates are part of that policy toolbox, Wei says that it will be important for China to find a more equal balance between males and females if it expects to change savings behavior. He adds that there are several changes that can be influenced by social policy, including increasing the social preference for female babies; improving the status of women in China and reducing sex-selective abortions by controlling information about a fetus’s gender.

“The research suggests that a serious macroeconomic discussion cannot be divorced from an understanding of the social issues,” Wei says.

Photo credit: bebouchard

“When I left Columbia, they told me I’d probably have to come back and repeat a few classes,” Warren Buffett, MS ’51, deadpanned as he took the stage with Bill Gates on Thursday as part of a community forum at Columbia Business School. More than 700 students from the Business School were in attendance at the event, which was filmed for global broadcast by CNBC.

A major theme of the 90-minute Q&A session was optimism about U.S. economic prosperity in the long-term, with a nod to future energy issues. That theme underscored Buffett’s comments about Berkshire Hathaway’s recent acquisition of Burlington Northern Santa Fe for $34 billion last week.

“The railroads are tied to the future prosperity of this country. You can’t move a railroad to China or India or anywhere else,” he said. “As the country grows, the transport of goods will grow — [people] will be moving more and more goods back and forth to each other. And you have the most environmentally friendly and the most efficient way of doing that on the railroads.”

The theme returned later in Gates’ discussion about areas he sees with the most growth potential in the United States. He said those include information technology, energy and medicine. Gates discussed the growing field of alternative energy as a driver for a long-term economic development.

“Solar-thermal, solar-electric, nuclear [energy] is going to go through some of the revival and see if it can solve some of its cost challenges. As a country, we want to make sure all of those get lots of R&D and regulatory enablement because one of them is going to give us much cheaper power,” he said. “We don’t have quite as much R&D going into those things as I’d like to see. We have quite a bit, but I think the government policies could drive for more.” He added that he foresees an energy revolution and the United States is expected to lead the way.

Buffett also discussed his value-investing strategy, saying that it had not changed in light of the financial crisis and the fundamentals were the same. “We like companies with a durable, competitive advantage,” he said. On the economy, both Buffett and Gates lauded the actions of the government and the Federal Reserve.

Both men offered advice and inspiration to students. (Marry the right person, said Buffett. Act on your self-confidence, Gates added). Buffett signaled his optimism for future MBA graduates of Columbia Business School, making a promising offer to those in the audience.

“I would pay a $100,000 dollars for 10 percent of the future earnings of any of you,” Buffett said. “If that’s true, you’re a million-dollar asset right now.”

CNBC will broadcast “Warren Buffett and Bill Gates: Keeping America Great” moderated by Becky Quick on November 12 at 9 p.m. and 12 a.m. ET . Join the conversation with other students on Facebook and on Twitter.

Photo credit: Eileen Baroso

	From left: Clinton Chang ’11, Eric Hagemann ’11 and Dan Kaskawits ’11 at the 8th Annual Cornell-Fidelity Stock Pitch Competition.

Last month, Clinton Chang ’11, Dan Kaskawits ’11 and I had the privilege of representing Columbia Business School’s Equity Research Club at the 8th Annual Cornell-Fidelity Stock Pitch Competition on November 5-6. We came in third place out of 12 participating MBA programs and the competition pitted us against worthy adversaries, including Booth, Fuqua, Ross, Stern, Tuck, Notre Dame’s Mendoza College of Business and Wharton, among others.

The competition’s design was unusual in that it required condensing what is weeks, if not months, of work into just 12 hours. At the opening of the event, we were assigned one company stock (Caterpillar) and two industries (railroads and casual dining) from which to select one stock each; we were then given from noon to midnight to conduct research and develop pitches (long or short) on the three stocks, to be presented at some cruel hour the following morning in front of a panel of professional investors, no doubt armed with incisive questions and piquant remarks. To do our research, we were given access to Capital IQ, FactSet and other research materials in the very impressive trading room at the Johnson School’s Parker Center for Investment Research.

Without hesitation, I can say that in the first six hours of our allotted research time, we accomplished nothing, at which point we were called to eat dinner — which was mandatory — comprising all manner of sleep aids such as ricotta-filled pasta shells and something like chicken français, followed by cheesecake. Following this nourishing repast, and notwithstanding our rapidly deteriorating physical states — caffeine had long since ceased to be effective due to overuse — we succeeded in assembling presentable pitches on all three stocks by 11:59 p.m., one minute short of the deadline. It was now unarguably time to hit the proverbial hay and regain some strength for the task awaiting us in the morning.

Rosy-fingered dawn swiftly arrived, and before we knew it, Clinton, Dan and I were standing before a panel of judges including a senior Fidelity portfolio manager, a Fidelity managing director of research, analysts from Putnam and Wellington and a private investor. We decided to pitch a long on Norfolk Southern Corporation; a long on Brinker International, owner of Chili’s and other franchises; and, contrary to the noted long-term value investor James Cramer, a short on Caterpillar.

Participating in this contest made me truly proud to attend Columbia. We brought to bear on our presentations certain ideas that are distinct to the heterodox approach to investing taught in some of School’s courses. Specifically, while pitching Caterpillar I believe that we were the only team to deliberately avoid using a discounted cash flow (DCF) or comparable multiples. In this, we followed Professor Bruce Greenwald’s argument that when using a DCF to value stocks, altering the input assumptions even within one’s margin of error produces wildly different output values. Instead, we tried to focus on strategic considerations and returns on incremental capital used to finance growth. Curiously, this decision invited the following written feedback post-competition: “Try to use more traditional approaches like DCF and multiples.”

Here, perhaps the apt quotation would be Bill Cosby’s: “I don’t know the key to success, but the key to failure is trying to please everybody.”

In the end, our team placed into the final four, losing in the last round to esteemed peers at Stern and Wharton. On behalf of all three of us, I would like to express our thanks to the Equity Research Club for trusting us to represent Columbia Business School; Fidelity Investments for their sponsorship of the event; and all the good folks at the Johnson School who were such hospitable and accommodating hosts.

Photo courtesy of Eric Hagemann ’11

	Professor Paul Glasserman moderated the panel “Does the Practice of Quantitative Finance Need to Be Changed?” at the research symposium on December 4 .

The research symposium “The Quantitative Revolution and the Crisis: How Have Quantitative Financial Models Been Used and Misused” at Columbia Business School on December 4 explored the causes and effects of the proliferation of quantitative finance. Donald MacKenzie, a professor of sociology at the University of Edinburgh, gave the keynote speech (PDF).

Professor Bruce Kogut, in his opening remarks, acknowledged that financial engineering and innovation have received an onerous rap in the fallout from the financial crisis. However, he suggested that the field was ripe for public debate.

“It might be easy to leap to the conclusion that the subtext of today is that financial models created the crisis and hence innovation is bad. But such a deduction is in fact deeply complex and largely suspect,” he said. “Why is there such debate over financial innovations? After all, innovation is a driver of economic growth and wealth, so why all the fuss?” Kogut suggested three possibilites, including the disparity between private and social value, unanswered questions about systemic risk and the speed at which innovation takes place.

Professor Paul Glasserman pointed to popular media portrayals, like WIRED’s “The Secret Formula That Destroyed Wall Street and Nuked Your 401(k)” (Feb. 2009), which excoriated the financial industry’s use of models, as perpetuating misunderstanding about the uses and capabilities of quantitative finance.

“The article sets the record for the most incorrect statements packed into a title,” Glasserman said. “In a very short time there has been a dramatic shift in perception of quantitative finance.”

Glasserman moderated the panel “Does the Practice of Quantitative Finance Need to Be Changed?”, which comprised Professor Emanuel Derman, Department of Industrial Engineering and Operations Research at Columbia University; Professor Daniel Beunza, London School of Economics; Kent Daniel, Director of Research at Goldman Sachs; and Adam Parker, Director of Reserch and Chief Investment Strategist at Sanford C. Bernstein & Co. LLC.

Much of the panel’s discussion focused on when models are useful — and not useful — in financial markets. Derman, author of My Life as a Quant, led the discussion and offered a discourse on what models are and how they can be applied (download presentation PDF). He cautioned that there is never a “right” model but rather ”somewhere north of common sense and south of hubris lies the appropriate use of models.”

Beunza, formerly a visiting professor at the Business School, cautioned that the use of models is a “doubled-edged sword”; his research shows that they lead both to increased arbritrage and better reflexiveness.

Goldman Sachs’ research director Kent Daniel argued that models benefit many fields, such as airline safety, and not only financial markets. However, he cautioned that exacting data was fundamental to the use of models. “A successful quant model has to be subjected to every kind of scrutiny you have,” he said. “If your organization doesn’t do that, you’ll have a failure.”

The symposium "The Quantitative Revolution and the Crisis: How Have Quantitative Financial Models Been Used and Misused" took place on December 4 and was co-hosted by the Center on Japanese Economy and Business and the Sanford C. Bernstein & Co. Center for Leadership and Ethics.

Photo credit: Leslye Smith

What is the future of private equity? If the direction of Kohlberg Kravis Roberts (KKR) holds a clue, it may start looking a lot more like Berkshire Hathaway, founding partner Henry R. Kravis ’69 said in a recent interview with BusinessWeek.

The cover story in the December 10 issue of the magazine (“Can KKR Make Like Berkshire Hathaway?”) reported that KKR is reshaping its playbook as a result of lessons learned from the financial crisis. Taking a cue from Warren Buffett MS ’51, the firm is positioning itself to become more cash-ready and nimble to complement its past strategy of leveraged buyouts.

Kravis, who has been the cochair of the School’s Board of Overseers since 2005, says the ability to make acquisitions and minority investments in any economic environment is a key strategy. To raise the cash to do that, the firm is expected to go public in early 2010.

“We’re not just a private equity firm,” he said in the article. “We’re an asset management firm. … If all you’re going to do is say you’ll buy 100% of companies, you’re passing up a lot of opportunities where you can make a lot of money.”

The firm is also building an in-house investment bank, placing more emphasis on minority stakes and joint ventures and adopting new management strategies to align with its expanding size.

“Our job today is to create value,” Kravis said. “Private equity, to me, is acting and thinking like an industrialist.”

One issue where progress could be made in Copenhagen is with the adoption of a deforestation policy or Reduced Emission from Deforestation and Degradation (REDD). Heal says that stopping deforestation by providing incentives for forest-rich countries can reduce 20 percent of greenhouse-gas emissions. He adds that it is relatively easy to accomplish because no new technology is needed.

The other step is to de-carbonize electricity supplies, which account for 30 percent of emissions says Heal. This can be accomplished through the use of renewable and nuclear energy, a better grid and carbon-storage technology. “Between deforestation and decarbonization of the electricity supply, you can basically remove enough CO2 emissions to stop the problem,” he says.

Chris Mayer, Senior Vice Dean, moderated a panel discussion on environmental policy and climate change on November 19. Speakers included Professors Geoff Heal, Elke Weber and Bruce Usher as well as Kevin Parker, Head of Asset Management, Deutsche Bank.