Thursday, December 06, 2007

Don't hire an engineer when you need an accountant

Ashish K Bhattacharya rants on the poor accounting literacy of MBAs. He seems to be quite modest in that he restricts it to students not wanting to specialize in finance; but I go even the specialists are no better.

Map it to reality. It’s almost six months since MBA bankers in Wall Street began counting losses on CDO’s built into sub-prime mortgages. Heads roll, albeit with bumper payoff. Numbers fly. Here, here and here. But they’re still counting. Most of these MBAs have engineering background and they are supposed to be good, sorry; brilliant at math….!

But look at what these “financial engineers” have done to the credit markets. They invented the time bomb – subprime derivative time bombs I mean. The exotic derivatives that the MBA designed, called CDOs kept all liabilities off balance sheet and investors had no idea what they were letting themselves in for if borrowers go broke. They did and that’s why they are still counting.

This is the leitmotif of this whole thing: Half baked MBAs played havoc with mortgage banking. They write loans just to build the book, thinking they will worry about risks later. But now it's later.

Financial Risk management has long ceased to be the preserve of conscientious accountants that feared risks, knew the law, respected disclosure, and lost sleep over declining ROI. Now it’s the domain of MBAs that contrive fabulous stock options and packages for themselves. Or worse, it’s usurped by robots and algorithms. That’s how it becomes financial engineering. Shareholder who? They ask. Look at the exotic derivatives that hid more than they revealed. A shareholder is often the last to know the exact liabilities of the business, a piece of which he actually owns.

Hire MBAs by all means. But make sure they have their fundamentals right and their feet stays rooted to the ground.

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