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‘We soon realized that things were worse than it had ever been:’ Baruch professors remember the 2008 financial crisis

Ten years ago, the American financial system turned upside down as the stock market crashed, leaving the world reeling with shock and fear. The 2008 financial crisis was one of the worst times in history for financial markets across the world.

Many Baruch College professors were not only active members of the economy during the crisis but were caught in the heart of it, directly impacted by unfortunate circumstances.

One such professor whose role changed drastically following the crisis — and who now teaches a class solely dedicated to the financial crisis — is Kenneth Abbott, professor and distinguished
lecturer.

Abbott worked as a chief risk officer at Morgan Stanley in 2008 and shared his experience of the crisis.

“The bankruptcy of Lehman was the scariest moment for me,” he said. “It meant if Lehman Brothers could fall, we at Morgan Stanley could too. Any bank could.”

He said the environment during the crisis was filled with “unpredictability, anxiety and fear for the future. We soon realized that things were worse than it had ever been.” Abbott, who worked in the risk department, saw the biggest changes after the government implemented policies to curb the crisis.

“My job changed entirely after the crisis. The risk department was expanded and communication with the FEDs became our biggest responsibility.” While Morgan Stanley remained largely unscathed following the crisis, other banks struggled to survive.

Jim Gatheral, graduate professor of mathematics in the, worked at Merrill Lynch during the crisis, a company that might have gone bankrupt if it hadn’t been bought by Bank of America.

“I was a managing director in the equity division,” he said. “We had lost $65 billion, so while we were terrified, we were prepared to lose our jobs. When we were saved by Bank of America, finally our relief replaced the panic.”

Although his job was saved, Gatheral soon left Bank of America to pursue a career in academia.

“The environment became risk averse to an extreme degree. The excitement was gone and the opportunity to become an academic became more attractive.” The crisis of 2008 didn’t just affect banks; it also left many other institutions in debt and near bankruptcy.

Gideon Pell, professor and distinguished lecturer of information technology, was a chief risk officer at New York Life Insurance Company. Although the insurance firm wasn’t directly involved in the crisis, the dread of what was to come of it was still present.

“Yes, we at New York Life Insurance had a very strong balance sheet,” Pell said. “The percentage of our losses were significantly smaller than other companies, but after AIG’s involvement in the crisis, I was scared we would be painted with the same brush, viewed in the same tainted manner as AIG was.”

However, one thing that differentiated New York Life Insurance from other companies, as Pell recounted, was the approach it took during and after the crisis.

He said, “I was responsible for creating crisis tracking reports daily, track the cash flows of the business. The PR department was writing reports to rating agencies to explain why we were different and we weren’t suffering the same kind of losses. We, as a company, came together.”

Pell also said that it was the company’s strong culture and risk management philosophy that saved the company from an unfortunate fate.

Abbott, Pell and Gatheral all believe that the Great Recession of 2008 taught the financial market many lessons and has left the banks “more resilient and safer.”

Another crisis of such magnitude is certain, they said, but only time will tell when that may happen.

In the meantime, Pell imparted an important piece of advice. “You don’t know what you don’t know; there are risks you haven’t thought of,” he said.

“From a risk perspective, think of all the extreme scenarios and how they could occur and what impact they might have and build defenses accordingly. Be as prepared as you can be.”

October 9, 2018

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Sheron Virani


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