Paint it Black: Avoiding the Financial Beast of Burden in 2009 and Beyond
James Poterba, MIT Mitsui Professor of Economics; David Tabak, '90, Senior VP, National Economic Research Associates; Alan Cohen, '82, Senior Managing Director, York Capital Management
Description: "Paint it Black" is all about red -- the mountain of debt challenging the viability of all the nation's institutions. James Poterba takes a scholarly approach to moderating this detailed discussion of the unfolding economic collapse, its ramifications on business and the possible impact of governmental remedies.
"From the standpoint of economic analysis," says Poterba, "this appears to be a once"in"a "generation or perhaps longer global storm." He expands on this statement throughout, with forays into macroeconomics, credit and equity markets, the tools historically and currently wielded by government to interfere with economic crises, and an occasional joke (at the expense of economists). He engages his speakers in their areas of expertise.
Alan Cohen discusses how the practice of "shadow banking" helped trigger the subprime mortgage crisis. Non"financial institutions invented ways to package mortgages, slicing and dicing them into securities that could be traded without oversight. These credit derivative instruments existed without adequate capital backing, and so were exceedingly risky. Cohen also blames rating agencies for becoming complicit in the game, talking to investment bankers "about what was necessary to get AAA." There were warning signs, says Cohen, as early as 2006 of "deteriorating housing numbers, but the rating agencies didn't downgrade." Suddenly, in 2007, these packaged, unregulated securities lost their value, and banks, faced with debt, ended up selling assets under pressure.
Cohen says that TARP funds won't necessarily free up credit for small business or the mortgage market, since banks and other institutions are still trying to pay off vast debt. In this over"leveraged environment, no financial institution trusts another, and companies seeking loans must demonstrate they represent extremely low risk. Some lenders worried about "getting hurt by entrepreneurial activity" may ask for rights, or participation, in the venture. "To attract the more disciplined lender, you must provide more bang for the buck," says Cohen.
David Tabak reckons that volatility poses the premiere challenge for small business. At a time of great flux for all markets, firms must attempt to calculate what their patents and investments will be worth months and years down the road. He remains guarded about whether government intervention will calm the waters. For one thing, bank stress tests must decide how much value actually exists in different tiers of assets held by banks -- including loans to small business. Some banks may be partly nationalized if they fail to meet capital reserve requirements. This won't fuel stability and growth in the private sector. Also, Tabak sees some businesses holding out for a second round of government funding, or for investment tax credits.
Tabak's advice for the government: "Put in an option clearing corporation, and ban credit default swaps for speculators." To businesses, Tabak says, "Get your financial statements right," and "ask, 'What do I need in the short and long run, what are the differences between the two, and plan out.'" There are strong opportunities for those who survive.
About the Speaker(s): James Poterba is also the President of the National Bureau of Economic Research and a Fellow of the American Academy of Arts and Sciences and the Econometric Society. He is the President of the National Tax Association, a Vice President of the American Economic Association, and has served as a Director of the American Finance Association.
Poterba's research focuses on how taxation affects the economic decisions of households and firms. His recent work has emphasized the effect of taxation on the financial behavior of households, particularly their saving and portfolio decisions. He has been especially interested in the analysis of tax"deferred retirement saving programs such as 401(k) plans and in the role of annuities in financing retirement consumption.
Poterba served as a member of the President's Advisory Panel on Federal Tax Reform in 2005. He is a trustee of the College Retirement Equity Fund (CREF), and a former member of the MIT 401(k) Plan Oversight Committee. He edited the Journal of Public Economics, the leading international journal for research on taxation and government spending, between 1997 and 2006. He is a member of the advisory board of the Journal of Wealth Management. He is a co"author of The Role of Annuity Markets in Financing Retirement (2001), and an editor or co"editor of Global Warming: Economic Policy Responses (1991), among other publications.
Poterba studied Economics as an undergraduate at Harvard, and received the Doctor of Philosophy degree in Economics from Oxford University, where he was a Marshall Scholar. He has been an Alfred P. Sloan Foundation Fellow, a Batterymarch Fellow, a Fellow at the Center for Advanced Study in Behavioral Sciences, and a Distinguished Visiting Fellow at the Hoover Institution at Stanford University. David Tabak is a member of NERA's Securities and Finance Practice. In the area of securities class actions, Tabak has performed analyses involving issues of class certification, liability, materiality, affected trading volume, and damage calculations in cases with allegations ranging from product issues to the value of an issuer of subprime mortgages. He has appeared as an expert in state, federal, and bankruptcy court, and before arbitration panels, including the National Association of Securities Dealers, the American Arbitration Association, and the International Chamber of Commerce International Court of Arbitration. His publications in journals and books cover such topics as the use of event studies to measure damages in commercial disputes, economic analysis of market efficiency, valuation discounts for lack of marketability, and the application of statistics in litigation analyses.
Tabak earned his Ph.D. and M.A. degrees in Economics from Harvard University and his B.S. in Economics and B.S. in Physics from MIT. Alan Cohen joined York Capital in March 1998 and is a partner of the Firm. He is also the Portfolio Manager of the York Credit Opportunities funds. From 1996 to 1998, he worked as a Vice President and Analyst for Franklin Mutual Advisers Inc. For the two years prior, Cohen was a Director in the High Yield Trading Group at Smith Barney Holdings Inc.
From 1991 to 1994, he was a Vice President at Donaldson, Lufkin & Jenrette, Inc., where he traded high yield and distressed bonds. For the five years prior, Cohen was a Vice President at Goldman, Sachs & Co., where he analyzed and traded high yield bonds. Cohen currently is a member of the Board of Directors, in his capacity as a York employee, of the Hundred Acre Group, LLC.
Cohen received a B.S. in Economics from MIT and an M.B.A. from the Harvard Business School.
Host(s): Alumni Association, MIT Enterprise Forum
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