September 23, 2008

Cornell Feels Ripples From Financial Crisis

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Correction Appended

Last week, Wall Street experienced its most severe credit crisis since the Great Depression. Several long-standing monetary institutions, including investment banks Lehman Brothers and Merrill Lynch, and American International Group, crashed, and the Dow Jones Industrial average fell over 800 points by mid-week before rebounding significantly on Thursday and Friday.
Fearing a potentially disastrous crunch in the amount of liquidity available in the market, the federal government provided AIG with an emergency bailout of $85 billion on Sept. 16 to maintain the insurance corporation’s solvency, and coordinated with the central banks of Europe, Japan, Canada, Switzerland and Britain to inject roughly $200 billion into the global economy on Thursday.
The collapse of several of Wall Street’s giant banking and loan companies — including two of the twelve highest hiring firms for Cornell students graduating in 2007 (Lehman Brothers and Merrill Lynch) — has caused immediate concern about shrinking job opportunities for students pursuing a career in finance. The wider implication, however, of these developments may be the large-scale restructuring of the nation’s political economy that has taken place over the last several days.
“I’m not confident that my job offerings won’t disappear,” said William Schuh ’09, an applied economics and management major, who is applying for positions at Wall Street firms, “but you need to be able to adapt when the market hits the bottom of its cycle. There are still plenty of jobs in consulting and abroad right now, and the market will always need financial distribution services.”
Rebecca Sparrow, director of Cornell’s Career Services Office, similarly said that while there has been a reduction in hiring, there are still many options available for students entering the finance sector. “We would encourage students to focus on the skill they want to use on Wall Street, and find other employers who perform that function but maybe without the big name appeal.”
From a policy perspective, however, Prof. Theodore Lowi, the J.L. Senior Professor of American Studies, said the government bailouts, engineered by U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, revealed the weakness of the United State’s current financial standing in the global market. “America’s place as the dominant hegemonic state in the world is slipping,” Lowi said.
He suggested that the government’s ­unwillingness to allow a corporation it determines to have strategic economic position — such as AIG — to fail if it becomes insolvent, damages the credibility of the free-market principles to which politicians have adhered for several decades. “We are in a state of permanent receivership,” Lowi said. “These bailouts send the message that we will require more regulation of corporate business practices for now, but once the market stabilizes, they can go back to doing business as usual.”
Prof. Rick Geddes, policy analysis and management, also felt that an implicit cooperation between government and businesses in recent years contributed to the investment risk-taking. This prompted the failure of the loan corporations Fannie Mae and Freddie Mac earlier this month, and a plethora of other banking firms last week.
“[Former Federal Reserve Chairman Alan] Greenspan maintained an accommodative monetary policy by keeping interest rates at an absurdly low 1 percent for years on end. Freddie and Fannie were able to take huge risks because they knew their debt would be guaranteed by taxpayers.”
Geddes attributes the practice of buying “subprime” mortgages that had low chances of being repaid to this guarantee, as well as a rapid rise in the amount of capital available globally since the early 2000s. These mortgages were then repackaged into complex securities which represented financially toxic assets to the banks because it was difficult to know what their value actually was, according to Geddes.
Because much of Cornell’s endowment is tied up in investments in order to produce a profit for the University, Executive Vice President for Finance and Administration Stephan Golding said that his office has been taking steps since last spring to protect its investments from risk.
“The University manages its market risk through its highly diversified portfolio, both in terms of financial sectors and the managers we deal with. We’re careful not to let ourselves be exposed to any single one from an asset allocation perspective,” Golding said.
Chief Investment Officer James Walsh confirmed that the University had had financial dealings with both AIG and Lehman Brothers, but not any direct investment, and had reduced its exposure with managers that had dealings with these firms.
Many students, on the other hand, sustained heavy monetary losses to their stock portfolios. Josh Neifeld ’11 said that he lost the majority of the money he had earned from his summer employment within two or three days last week.
“The companies that I had stock in lost over half their value in the downturn caused when Lehman Brothers and AIG went under,” Neifeld said.
Despite Cornell’s relatively strong market position, Golding predicted that statewide taxpayer funding would be cut as a result of the economic downturn, which itself would result in necessitating Cornell to re-allocate funds or make budget cuts in the future.
Though the stock market has continued to go downhill since the major financial collapses – the Dow Jones closed down nearly 400 points yesterday — many are hopeful that the $700 billion market bailout plan proposed by President George Bush on Saturday will help to stabilize the economy. For now, though, few students are holding out hope of landing jobs in the investment-banking sector.

Correction: In the original version of this article, The Sun wrote that AIG stands for American Insurance Group. Rather, it is an acronym for American International Group. The Sun regrets this Error