Educating Our Financial Future

By Carol Cortright

Imagine rolling downhill in a barrel at breakneck speed. You don’t know when the barrel’s going to stop - or whether you’re going to crash into a rock, jettison off a cliff or come to a gentle halt in a field of daisies.

So it goes with the current state of the banking and finance industry. BABM turned to three experts for a little perspective, from their take on the recent crisis to preparing the next generation of bankers, plus advice for entrepreneurs in this increasingly tumultuous and ever-expanding global economy.

Our contributors include Dr. Irv DeGraw, Professor of Banking and Finance, St. Petersburg College: “I initially got hooked on banking while pursuing my MBA at the University of Connecticut. Using money to do good by fueling commercial and economic development was an especially appealing and noble profession. Upon moving to Florida in 1989, I transitioned to entrepreneurial finance, funding and developing new businesses and industries, and financial markets.”

F. Frank Ghannadian PhD, Dean, John H. Sykes College of Business, and Professor of Finance, University of Tampa, has been watching the impact of banking on economic development since his doctoral dissertation on the subject over twenty years ago at Georgia State University. “Could you imagine if your bank closed its doors even for a week?” he asks. “We know today that without finance and financial institutions the bloodline of capitalism as we know it will be choked off.”

Dr. Cheri Etling, Associate Dean and Associate Professor of Finance, John H. Sykes College of Business, University of Tampa, discovered that she enjoyed and had an aptitude for finance while pursuing her MBA. In 1995, she received her PhD in finance from the University of Missouri. Dr. Etling's areas of expertise include derivative securities, corporate finance, new venture financing, investments and insurance.

What have been some of the more dramatic changes you’ve witnessed during your career?

Dr. DeGraw: By far the changes have been the erosion of the post-Depression controls; the emergence of multi-state branch banking; allowing the “merger” of investment and commercial banking; and the emergence of the financial services holding company. Banking evolved from a rather staid, deposit-driven local focus to a fast growing, risk-taking, global “enterprise.”

Dr. Ghannadian: The existence of resources today is tremendous. A doctoral student had to live in the library in the 1980s and the PC did little more than word processing. Today the info available on my desktop is more powerful than an entire library (was) in those days.

Dr. Etling: There has been a significant increase in the use of derivative securities (futures, options, swaps) without a similar increase in the understanding of these sometimes very complex financial instruments. The level of risk tolerance also increased dramatically up until the last year or so. Many also came to believe that the world had changed and the risk-return trade-off no longer existed. These two factors, coupled with poorly devised government regulations and incentives, led to the issues that the economy is currently facing.

What’s your take on the government bailout of big corporations--isn't that a pretty risky "backup plan" for these troubled companies to rely on?

Dr. DeGraw: Any time the government becomes involved in a commercial enterprise, a very subtle, but very important, shift in the decision-making process occurs. Specifically, economic decision is replaced by political decision-making. As a consequence, the necessary cruelty of “creative destruction” is avoided—at the cost of innovation, leading to a preservation of the “status quo.” While “status quo” is comfortable in the short-term, the long-term consequences are catastrophic.

“Bailouts”—really nationalizations—also have an unintended consequence known as
the “moral hazard.” Firms, knowing they are protected from failure, will engage in risky behaviors or avoid making the tough decisions necessary to correct the underlying problem. Using global history as a reference – the list of successful nationalizations is woefully short.

Dr. Ghannadian: The plan is a good one if it works; the problem is that no one knows if it will work or if it will have the effect intended. However, the alternatives are also weak, so it is a period of trial and error and that is scary for the long run.

Dr. Etling: The market should be allowed to correct itself. Unfortunately, it is not that simple. It was, in part, government actions and incentives that led to the housing boom, the creation of the mortgage-backed structured investment vehicles, and the incredible lack of risk evaluation before granting mortgages. Given that poorly written government regulation and misguided laws led to much of the mess, it may be necessary for the government to help provide temporary help getting out of the mess. However, I am not advocating more government regulation. I am actually advocating less—if there had been fewer laws and regulations that favored writing subprime mortgages, the economy wouldn’t be where it is now. I do not believe that the government should be bailing out non-financial services companies. That is a long-run prescription for trouble.

How do you prepare banking and finance students to tackle what lies ahead when things keep changing?

Dr. DeGraw: Banking, like any economic development activity, will always be subject to “ups and downs.” However, there are several lessons that we emphasize to help students avoid catastrophic consequences: (1) avoiding “herding”—banking relies heavily on peer comparisons, or encouraging everyone to “follow the herd” whether right or wrong. Set clear goals, objectives, and policies—and then have the courage to stick with them; (2) (learning to make) the “risk-return decision”; and (3) clarity: if you do not clearly understand the nature and consequences of a decision, do not make it.

Dr. Ghannadian: Business education for the future relies on innovation, adaptation and ensuring that our students are ready for a competitive world. With the dynamic changes in technology and new business practices globally…we cannot be immune to world trends.

Dr. Etling: I emphasize strongly the need to understand that there is a relationship between the long-run average returns that you earn on an investment and the risk that you take. We also discuss what has happened in the past, what is happening now, and what is likely to happen in the future in order to learn from history and make better decisions going forward.

What are some key skills that will best serve the next generation of bankers?

Dr. DeGraw: Our next generation of bankers will need to understand the four pillars of financial institutions (liquidity, credit, risk, performance) and the four dynamics underlying their behavior (integration, efficiency, endogeneity, reversibility).

Dr. Ghannadian: There is a greater need for venture capital and venture capitalists to help promote innovation and push entrepreneurship. Risk taking is part of our capitalistic system and for various risk levels we need various types of financing. We should remember that banking is also becoming global and that we are moving to an economy where businesses and individuals will shop around globally rather than locally. This opens up entrepreneurship to a global level and banking and finance to a higher level as well.

Dr. Etling: Our future financial services professionals need to be able to effectively identify and manage risk to stay within appropriate levels for their clients and institutions. This requires them to think critically about each situation and develop strategies that meet their fiduciary responsibilities. They also need to be skilled in analyzing copious amounts of information using appropriate technologies and to recognize what information is relevant and what is just noise. Finally, it is critical that they be able to communicate effectively. This includes well-written documents, effective presentations, and good listening skills.

What is the most important thing even a small business can learn to avoid getting itself into a situation like the auto makers?

Dr. DeGraw: Most small businesses will never get themselves into a GM position. That’s because their finances are much “tighter” and much more personal. For the small business, the most critical financial dynamic is the funding of their working capital. Matching growth with working capital capacity is a critical success factor.

Dr. Ghannadian: Evolution theory in biology has shown us that through millions of years, species that survived were not the fittest, but those that were adaptable to change. At one time the auto industry in the U.S. was the fittest. No one made a car as good as GM in the 1950’s and the 1960’s. Then the energy crisis came and American companies started to lose some ground and by the time they started to make more efficient cars, those other car makers started to make a better quality car and then a better designed car and so we fell from leadership. The lesson is for businesses to be continuously adaptive to the environment to survive.

Dr. Etling: It is very easy to be overly optimistic about your business—after all, you believe in your product or service. However, you need to do market research…and you need to pay attention to changes in consumer preferences. Failure to plan for the long-term, in other words, failing to monitor your cash flow, to evaluate the risk of your company and your future projects, and (failure) to do contingency planning can bring any company down—large or small.

What are some entrepreneurial options for people currently or previously employed in banking and finance—what else might they be able to do with their skills?

Dr. DeGraw: Unemployed bankers have a few opportunities. Right now, the “hottest” is…to join the “dark side” and become a regulator. The Fed, the FDIC, and the Treasury are actively recruiting. Locally, services to manage distressed properties and credit advising may be lucrative. Anyone with inside banking knowledge should be at an advantage.

Dr. Ghannadian: As the world is evolving, a lot of jobs are becoming non-traditional. Some are working at home and others are working on the road. The job of the future is less inside a brick and mortar office type of environment. Banking and finance skills can be utilized in consulting or many other types of industries.

Dr. Etling: All new businesses can use banking and finance skills. I always tell my students to find something that they love and develop a business around that. This may be a perfect time to change your career to something that you are truly passionate about. The banking and finance knowledge can help you prepare the financial statements and forecasts that you will need to get financing regardless of what industry you choose.