WALL STREET CAREER TREK VISITS WITH ALUMNI AND FRIENDS: Mentoring session with recent graduates Credit Suisse Goldman Sachs Victory Capital (KeyCorp) [equity side research] Hedge Funds & Private Equity Fox-Pitt Kelton (focus on financial services industry) Former Bear Sterns MD Millennium Partners (short-term energy trading)

THREE PRINCIPLES OF FINANCE Risk Versus Return: A trade-off exists between expected return and investment risk (volatility) Diversification of Risk: Some investment risk can be removed or diversified away by investing in different (low co-variance) assets or securities Reputation Matters: Greed versus ethical behavior (treating others legally, fairly, and honestly)

FINANCIAL CRISIS 2008: Who Should be Blamed? All of Us! Financial institutions invest in long-term assets but finance (borrow) short-term Problem compounded by excess financial leverage and lack of diversification of assets Congress & Politicians Financial institutions deregulation in early 1980s (S&Ls permitted to invest in riskier mortgages and junk bonds) Repeal of separation of commercial banking and investment banking in U.S. in 1999

Who Should be Blamed? (cont’d) The S&L Crisis Example: Excess financial leverage, junk bond market failed, and greed and fraud was present Resolution Trust Corporation (RTC) created in 1988 Over 2000 S&Ls failed at end of 1980s and early-1990s

Who Should be Blamed? (cont’d) Bank Regulators: Federal Reserve, Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) Securities and Exchange Commission (SEC): Responsible for regulating independent investment banks (Bear Stearns, Merrill Lynch, Lehman Brothers, Morgan Stanley, & Goldman Sachs) [MS & GS are now Bank Holding Cos.]

Who Should be Blamed? (cont’d) Financial Engineering: Premise: Higher equity returns while mitigating investment risk Long-Term Capital failed in 1998 when their quant models failed to estimate degree of risk spreads Others are still trying (and hedge funds are failing)

Who Should be Blamed? (cont’d) Main Street: Mortgage lenders made adjustable rate mortgage loans to sub-prime borrowers Borrowers actively sought mortgage loans which they were likely to default on Wall Street: Financial institutions packaged (bundled) risky mortgage loans and sold them to others Investment banks, hedge funds, and private equity firms took on excessive amounts of leverage

Who Should be Blamed? (cont’d) Credit Rating Agencies: Rated packaged sub-prime mortgage loans as investment grade Now claim they did not understand the financial engineering behind collateralized debt obligations (CDOs) We Were All Part of the Problem It is now time to adopt the economic rescue plan and re-think the trade-off between greed and ethical behavior