As a student currently registered at Berkeley in the Haas School of Business program on Structured Greed, Negotiations in Gluttony, and Probability Modeling of Excess, perhaps I should take umbrage at having my “poor” choices in higher education so publicly exposed.  But my real gripe is this: the scribblings of these business “pundits” are a) neither novel nor profound, and b) suffer from an obvious confirmation bias.  Why business bloggers suddenly believe – and with such uniform timing!  Almost as if, say, they are doing their data-gathering from the same second-hand internet sources and/or rehashing each other’s work! – that the current crisis fundamentally calls into question the core business school curriculum is at best presumptuous, and at worst, poor research.

As a first point, there is nothing “new” to these observations:  Prospective students of professional programs have been performing cost/benefit analyses on their educational investment as long as professional degrees have existed.  A student can find a number of online worksheets that delineate salary upon entering Field X, expected salary upon graduation, savings growth, and hiring prospects – all generating a rough measure of that degree’s “value”.  (I myself used one of these in comparing the Chartered Financial Analyst (CFA) certification with the MBA degree.)  As far as soft-dollar value, for those wishing to change industry, function or geography, an MBA still serves as one of the ‘great erasers,’ deemphasizing past roles while underscoring new capabilities.

In regards to the second difficulty I have with these writers’ conclusions – selectively seeking out only confirming evidence — let’s start first with a discussion on the causes of this particular economic crisis.  Unquestionably the failure points are still up for debate, and likely won’t be agreed upon until the next investment bubble bounces along.  But for the purposes of my point, we can separate proximate causes from ultimate causes.  The proximate causes of this disaster involve financial concepts such as an overdose of yield-chasing, structured products and securitization.  Statistical concepts such as risk disaggregation and risk correlation can certainly be considered causes as well.  The ultimate causes of failure are much more opaque, however, and in all likelihood involve policy decisions and consumer behaviors in effect for three decades.

While these writers cite business schools as one of the failure nodes, they do not provide any serious analysis to back up this assertion. 

So let’s do a quick back-of-the envelope calculation using some of the numbers Slate throws out, those 140,000 business students that graduate annually.  How many of those 140,000 are actually affiliated with this mess?  Is it 30%  (the percentage of business school grads that typically ends up in finance) of 140,000, or 42,000?  Not even close.  The vast majority of MBA grads entering finance go into corporate finance, working in groups such as research and development finance, mergers and acquisition analytics, or cash management. In fact, these financiers are very often the ones buying complex derivatives and swaps from investment banks to hedge against foreign exchange and raw material price volatility.  As IRA, 401(k), and brokerage account holders, the general public should actually be very approving of corporations that hire such workers to control their earnings uncertainty.

The question we should be asking: of the 30% that choose finance as a career path, how many enter capital markets, and within that, how many end up in structured finance?  At Berkeley, even with its well-regarded program in financial engineering, one to two percent, or less than five students each year out of a graduating class of almost 250 full-time students, end up either building securitized time-bombs or trading them as part of a bank’s proprietary trading arm.  This percentage will be slightly higher the closer you get to New York, at venues such as Columbia Business School or New York University’s Stern School.  However, it will be considerably less – the majority of business schools send only a trickle of students into structured finance – at schools that do not have strong recruiting ties with alternative investment firms.  Blaming these few thousand graduates for this mess is equivalent to laying blame for the dot-com collapse on the computer scientist foot-soldiers.

As for a remodeling of American business education, it is grossly naïve to assert that the “standard” MBA curricula are responsible for this mess, or that an MBA is suddenly devalued.  Even the financial innovations that had a large part in the current crisis still represent a remarkable mechanism for distributing the returns generated from an investment back to those that bore its risk.  There is real value in statistically understanding the nature of risk, from case analyses to mastering quantitative risk management tools.  As Google Chief Economist, and Berkeley professor, Hal Varian recently noted, “I keep saying the sexy job in the next ten years will be statisticians. People think I’m joking, but who would’ve guessed that computer engineers would’ve been the sexy job of the 1990s?”  A chemical engineer, civil engineer, or socially responsible investor thinking big impact would be well-served to understand how structured finance can be applied to large projects.

Consider this tiny fact: a large percentage of the recent $800 billion fiscal spending package is targeted towards energy, physical infrastructure and healthcare, and MBAs are going to be very useful to a greater subset of workers.

New York Times columnist Thomas Friedman said it best: “We have to subsidize Detroit so that it will innovate? What business were you people in, other than innovation?  If we give you another $25 billion, will you also do accounting?”

Some argue that should federal first-aid come through, what little remains of GM’s equity should be summarily requisitioned, with debt holders given both control of the company’s balance sheet and the option to purge current management. How even the most seasoned turnaround artist can change a US auto company’s fortunes — recall that Bob Nardelli was considered a turnaround artist! — is beyond the scope of this brief analysis. Still, examining GM’s past shines considerable light on how they ended up on Capitol Hill, on bended, broken knee.

One can certainly argue that GM was never a “good enough” company to be considered a “good company gone bad.” At GM, imprudence has been a core competence for over two decades: executive myopia, brand confusion, talent defection, slow death by union strangulation, and foreign competitor xenophobia are just a handful of the historical failure points. Egregious missteps include a fuzzy branding position and engaging in a race to the bottom, by competing on price rather than perceived customer benefit. GM’s failure mechanics are largely due to what London Business School’s Donald Sull describes as active inertia: the organizational tendency to follow established patterns of behavior, even in the face of dramatic environmental shifts.

GM’s first failure point was maintaining a strategic frame (a set of assumptions that determine how managers view the business) that actually became a blinder. The most blatant example of GM’s dysfunction is generally considered to be its failure to gauge the looming Japanese threat. But consider its response to the oil shock of the 1970’s. GM and the entire US auto industry could have shifted their fleet to aluminum chassis following the arresting scare of uncontrolled oil prices. Aluminum is one-third the weight of steel, and vehicle weight is arguably the most influential driver of fuel efficiency. But GM management did not have the foresight to regard oil as a depleting resource, and never anticipated the impact of a permanent rise in either steel or oil prices. Moving to aluminum was never seriously considered — the short-term machining alteration costs blinded management to the long-term value. Instead, the industry continued to manufacture heavy, steel-framed cars, in fact increasing the average weight of its cars over the next twenty years. Honda, in contrast, learned to cut engine blocks out of aluminum, dramatically increasing engine operating efficiency and reducing engine weight.

As flawed processes settle into routines, failure dynamics progress. Throughout its history, GM believed it was the final arbiter of customer needs, a self-assurance that worked during the post war boom years of the 1950’s. By the 1990s, rendered inflexible after decades of superficial success and a virtual dearth of any serious foreign competition, GM was completely unaware of how to address an evolving purchasing environment in which the customer increasingly determined product features.

Still, perhaps nothing else encapsulates GM’s inability and unwillingness to adapt to changing customer preferences more so than the unfiltered remarks of the VP of Product Development Bob Lutz, recently quoted as calling global warming a “crock of shit.” Regardless of the consumer public’s (in terms of Lutz’s job description, the only opinion that matters) own assessment of the issue, it is clear that GM bet entirely against lighter, more efficient vehicles. What did they place their bet on? An array of big ticket SUV’s that were nothing more than simple modifications of a single chassis design.

Investment portfolio managers frequently buy out-of-the-money call options at a low price to benefit from low-probability, high-return changes in the investment environment. GM did not have a single hedge – a call option — in their product portfolio that would benefit from changes in the buying environment. No bets on aluminum, no bets on hybrids. As CK Prahalad and Gary Hamel note in their seminal manuscript on core competence, “In the short run a company’s competitiveness derives from the price/performance attributes of current products. But in the long run, competitiveness derives from an ability to build at lower cost and more speedily than competitors, the core competencies that spawn unanticipated products.” Ultimately, GM’s core competence was its ability to have archaic plants churn out a single chassis design that could in turn be applied to an array of ever-more confusing product offerings.

Next in line in the failure process were the relationships to employees, shareholders, suppliers and distributors that actually act as shackles. GM likely entered into a number of irrevocable sourcing agreements with its suppliers that left it unable to go to the market for superior alternatives. Two certainties in GM’s network of parasitic relationships especially stand out: its contracts with union employees and its ties to existing shareholders. The auto industry’s tortured relationships with its union employees rivals only that of the domestic airlines. GM now has over two million current retirees, comprising a permanent obligation that can only be forgiven via bankruptcy. Additionally, its current workforce is considerably less healthy than the general population, representing a health care expense that drives its overall labor expense to levels that prohibit any serious R&D investment.

Consider also that even as GM’s earnings outlook was precipitously collapsing beginning in 2007, the company continued to pay out dividends to shareholders, instead of slashing payouts and hoarding cash for debt servicing and the inevitable supplier payments. There is no rational fiduciary explanation for this perplexing behavior, other than a flawed worldview that the earnings outlook would self-correct, combined with the influence of dividend-hungry investors with board representation.

Final failure point? “Corporate values” that morphed into ineffective dogmas. GM propagated a xenophobic worldview, trafficking the stereotype of Japanese and Korean manufacturing as too shabby for the hardy American consumer. More disturbingly, and largely based on this strategy’s success in the Midwest region, GM embraced a core value that “Buying American” was a sustainable customer value proposition. Certainly this message had success with more insular, lower-earning and less-educated portions of the country, those easily incentivized by symbols of patriotism. But how would the “patriotism for sale” strategy work with the more urbane, coastal residents who valued performance, quality and style?  Again the notion of portfolio hedging has relevance: GM chose to bet against the very customer segment that had the fastest growing disposable income rates.

The long list of GM’s failure points will likely be exposed as Congress debates its fate this month. I have touched on only a handful here. Regardless of whether GM gets its (our) funds, it is too late for triage: we are all witness to the slow, welcome decline of a value-destroying industry.

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