UCLA-Anderson’s Francis Longstaff has spearheaded the creation of a new Masters in Financial Engineering program — just in time for the implosion of much of the U.S. financial sector. I asked Professor Longstaff about the new program, the future demands on financial professionals, and government’s role in helping (or potentially hindering) the healing process of America’s financial institutions.
BNET: What were your reasons for creating the new masters program, and what are the main elements of it?
Longstaff: Our rationale for developing the Masters in Financial Engineering is that there are many tools, models, and techniques that are widely used in practice in the finance sector, and unfortunately many of those tools require a background and skillset that most MBAs don’t have. We’re creating a specialized program around those kinds of financial analytics. We also make sure our students are able to implement some of these tools. MBAs don’t get training in that; they’re more generalists.
BNET: During the financial crisis, many industry experts noted that new financial products are so complex that fewer and fewer people understand them. Some say that given this imbalance of knowledge, there is a real ethical issue that has developed within the sector. How is your program addressing this?
Longstaff: An important part of our curriculum is ethics training. We have a well-known fellow who has taught at law schools for years and who is now focusing on ethics, Michael Josephson. He delivered a very well-received seminar for our students recently. He spent several hours talking about complicated ethical situations they might run into in their careers, and we looked at the issues from all possible sides. He covered a lot of principles and ethical guidelines that professionals need to adapt to their lives.
All of our classes — especially those on asset management — talk seriously about the role of the fiduciary even where they don’t have a specific ethics element. When you’re managing someone’s money, there’s a responsibility to do well for these folk and not take risks that are inappropriate. Within our program, we have a very asset-management-oriented focus that reinforces the fiduciary concept throughout our courses.
A lot of this stuff is very complex. People who don’t embrace the fact that these financial products and instruments are very complex and try to rough their way through probably do a lot more damage than people who have training and can really get their arms around these products.
BNET: Our government and financial institutions are digging themselves out of the previous crisis right now, but in the near future, how do the think the U.S. government’s approach to financial sector regulation will change?
Longstaff: Recent weeks have been very instructive, especially with the bankruptcy of Chrysler. On one side we have government with its aims and objectives. They’re drawing a line, and there is a big gap between them and the private sector. People viewed very favorably by the administration, like labor unions, are almost getting a free ride, and everyone else is supposed to sacrifice. That didn’t play well — it’s not just my opinion, it was all over the financial press. Government is changing the rules, and this might be the underpinning of a lot of the problems we’re seeing right now. Contracts don’t mean anything. Priority [of capital providers within a bankruptcy] doesn’t mean anything. This is creating a lot of adversarial stuff. It’s unnecessary and unwise. People won’t trust government as a business partner.
Then we have TARP [Troubled Asset Relief Program]. There’s another example that’s supposed to be a partnership with the government. The situation is that people are desperate to get rid of the TARP money and are just not being allowed to. It’s turning into the Hotel California. You can check in anytime you like, but you can never leave.
BNET: Has government action over the last few years not allowed financial institutions to do their jobs effectively?
Longstaff: Mortgage lenders were being crowded out by Fannie Mae and Freddie Mac for the best loans. All that was left to them were the loans that didn’t meet those standards. Given those incentives, they went to the only places they could grow their businesses, however unwise it might have been.
BNET: What do you think are going to be the biggest changes for the financial sector over the next five years?
Longstaff: We’re going to need to get this conflict between the government and the private sector resolved. It makes no sense to have our system based on fundamental distrust of government and build our institutions around that distrust. Without that, we’re going to see all kinds of attempts to get around the system. People and businesses might migrate away from the United States. I’m not sure which way it’s going to go at this point.
