Policy & Strategy Issues in Financial Engineering
(Same as ECON152/252, PUBLPOL364,STATS238) This is a non-technical course that will focus on a series of case studies each designed to illuminate a serious public policy issue raised by the evolution of modern financial engineering. These will include discussions of Freddie Mac, Fannie Mae, sub-prime and Alt-A mortgages and the flaws of AAA CDOs; the spectacular losses by Orange County and the Florida Local Government Investment Pool and the challenges posed by unregulated investment pools; how credit default swaps are likely to change with central clearing using the PIIGS (Portugal/ Ireland/ Iceland/ Greece/ Spain), the monolines, AIG, Lehman and MF Global as examples; views of rogue trading using the similarities and disparities of Askin, Madoff, Barings, Soc Gen and UBS for discussion; and Risk Management 101 : the why/ how/ where/ when firms went wrong plus what to keep and what to throw out in the next phase of risk programs among other case studies. The subject matter, by necessity, is multi-disciplinary and so the course is particularly suited to those students having an interest in public policy and the evolution of modern financial markets. This includes students from the law or business schools, or the public policy, economics, EES, political science, or financial math and engineering programs among others. Several themes will tie the case studies, reading and discussions together:-Is this an example of an innovation that got too far ahead of existing operations, risk management, legal, accounting, regulatory or supervisory oversight?-How might temporary infrastructure be implemented without stifling innovation or growth?-How might losses be avoided by requiring permanent infrastructure sooner? Will Dodd-Frank, Basel III, etc., help to prevent such problems? What are the potential unintended consequences?-Is this an example of improperly viewing exposures that are subject to uncertainty or incorrectly modeling risk or both? Guest speakers will be invited to share their experiences. This course will aim to provide a practitioner(s) view of financial engineering over the past 3 ½ decades as well as a broad understanding of what went right and what went wrong plus cutting edge views of the future of financial engineering.