Did Academic Finance Play a Role in the Global Financial Crisis?

Abstract

A decade after the Global Financial Crisis, there is little consensus on its primary cause. Some blame bad actors, à la The Big Short. Others finger the collapse of residential real estate prices. More nuanced views consider prolonged policy framework uncertainties in the 2000s, including monetary, accountancy, and home ownership policies as factors. This article looks at the role of academic finance. This argument is similar to the theme of Michael Lewis’s 2004 book Moneyball: The Art of Winning an Unfair Game, where Oakland A’s manager Billy Beane can’t afford to pay market prices for highly ranked players—prices that are shaped by conventional baseball statistics. Beane uses Bill James’ evolved baseball statistics (“sabermetrics”) to game the market by picking up valuable players for a song and reaps extraordinary results. In the same way, savvy securitization market participants turned the archaic playbook of academic finance on itself and profited exorbitantly, with serious consequences.

TOPICS: CLOs, CDOs, and other structured credit, financial crises and financial market history, real estate