1. WALL STREET CAREER TREK
VISITS WITH ALUMNI AND FRIENDS:
Mentoring session with recent graduates
Credit Suisse
Goldman Sachs
Victory Capital (KeyCorp) [equity side research]
Hedge Funds & Private Equity
Fox-Pitt Kelton (focus on financial services industry)
Former Bear Sterns MD
Millennium Partners (short-term energy trading)

2. THREE PRINCIPLES OF FINANCE
Risk Versus Return:
A trade-off exists between expected return and investment risk (volatility)
Diversification of Risk:
Some investment risk can be removed or diversified away by investing in different (low co-variance) assets or securities
Reputation Matters:
Greed versus ethical behavior (treating others legally, fairly, and honestly)

3. FINANCIAL CRISIS 2008: Who Should be Blamed?
All of Us!
Financial institutions invest in long-term assets but finance (borrow) short-term
Problem compounded by excess financial leverage and lack of diversification of assets
Congress & Politicians
Financial institutions deregulation in early 1980s (S&Ls permitted to invest in riskier mortgages and junk bonds)
Repeal of separation of commercial banking and investment banking in U.S. in 1999

4. Who Should be Blamed? (cont’d)
The S&L Crisis Example:
Excess financial leverage, junk bond market failed, and greed and fraud was present
Resolution Trust Corporation (RTC) created in 1988
Over 2000 S&Ls failed at end of 1980s and early-1990s

5. Who Should be Blamed? (cont’d)
Bank Regulators:
Federal Reserve, Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC)
Securities and Exchange Commission (SEC):
Responsible for regulating independent investment banks (Bear Stearns, Merrill Lynch, Lehman Brothers, Morgan Stanley, & Goldman Sachs) [MS & GS are now Bank Holding Cos.]

6. Who Should be Blamed? (cont’d)
Financial Engineering:
Premise: Higher equity returns while mitigating investment risk
Long-Term Capital failed in 1998 when their quant models failed to estimate degree of risk spreads
Others are still trying (and hedge funds are failing)

7. Who Should be Blamed? (cont’d)
Main Street:
Mortgage lenders made adjustable rate mortgage loans to sub-prime borrowers
Borrowers actively sought mortgage loans which they were likely to default on
Wall Street:
Financial institutions packaged (bundled) risky mortgage loans and sold them to others
Investment banks, hedge funds, and private equity firms took on excessive amounts of leverage

8. Who Should be Blamed? (cont’d)
Credit Rating Agencies:
Rated packaged sub-prime mortgage loans as investment grade
Now claim they did not understand the financial engineering behind collateralized debt obligations (CDOs)
We Were All Part of the Problem
It is now time to adopt the economic rescue plan and re-think the trade-off between greed and ethical behavior