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DealBook Dialogue

The New York Times DealBook Blog (here) is having a series of articles this week discussing the financial crisis.  There will be twelve participants, each contributing a post.  The moderator of the event is Steven M. Davidoff, Assoc. Prof. of Law at the University of Connecticut.  Prof. Davidoff is an expert in regulatory law, the author of the book, Gods at War:  Shotgun Takeovers, Government by Deal and the Private Equity Implosion (released for sale Oct.5) and contributor to the DealBook Blog , as Prof. Deal.

I will follow this series and post updates each day as articles are published.

Monday October 5

Leo E. Strine Jr.
(Vice Chancellor of the Delaware Court of Chancery)

Strine maintains that the crisis was entirely predictable due to the emphasis on short-term profits demanded by investors and coporate boards.  These pressure produce misdirected incentives and conflicts with longer-term interests, according to Strine.  He says that policies should be instituted that support and encourage boards and management to achieve sustainable growth.  This is a very general discussion with no specific suggestions on how to proceed.  Read the article here.

Howard Marks (Chairman of Oaktree Capital Management)

Marks also provides a 30,000 foot view.  The title of his article "Too Much Trust, Too Little Worry" basically provides a complete summary.  He itemizes a number of sources of misplaced trust.  Credit ratings, incentive systems and stability of trends are some of the items discussed  Solutions are not much in evidence, although I found it almost amusing that Marks suggests a solution is improved memory.  Read the article here.

Gary Gorton (Frederick Frank Class of 1954 Prof. of Management and Finance,  Yale School of Management)

Prof. Gorton's theme is that we just had another in a long string of runs on the banks.  Historically it has been depositors demanding their deposits.  This time it was a shadow world not understood by many media folks, regulators, academics, politicians and just plain citizens.  This time it was banks and other firms making the run.

Gorton's article is also very high level, but shows the hand of an experienced teacher.  He discusses the shadow banking system and credit securitization that is worthwhile, yet still understandable to the neophyte.  He argues that securitization is important for economic growth.  He points out that the reason depositors did not make bank runs is that they were FDIC insured.  The reason that the securitized interest holders made a run was because they had no such protection.  Gorton concludes that some such protection needs to be implemented.  He compares banking today to be analogous to the condition after the crisis of 1837.

Read Prof. Gorton's article here.