Professor Scott Keating delivered a lecture on the current US financial crisis to Tsinghua International MBA (IMBA) first-year students on 24 October 2008. Breaking down the workings of financial products such as CMOs (Collateralized Mortgage Obligations), CDOs (Collateralized Debt Obligations), (CDSs) Credit Default Swaps, he provided an elucidating account on how the financial crisis came about.

Keating started the class describing the US financial innovation from pre-Depression times, recounting the emergence of Fannie Mae, Freddie Mac, the secondary mortgage industry and financial products such as CMOs, CDOs and CDSs. Comparing against usual insurance systems, the underlying problem with CDSs was that the buyers did not have to own the basic assets i.e. bonds, and these instruments had potentially exponential risk exposures. Eventually downward movements in the property markets brought about catastrophic consequences for major CDS holders like AIG, Bear Stearns and Lehman Brothers.

Professor Keating then related the issue back to a fundamental human behavioural economic model. While financial innovation proved that humans were smart, i.e. possessing the ability to find solutions to problem, other behaviourial aspects such as serving self-interests coupled with incomplete regulations created widening fault lines in the system. The recent unraveling of events has thrown up critical questions about financial market’s ability to creating wealth for the economy as opposed to creating wealth for the individual. Keating concluded that trust had collapsed during the crisis, and it was key for the market to build it up again in order to recover.

Professor Keating teaches accounting at the MIT Sloan School of Management. His key interests are on the links between accounting information and firm management and decision making, as well as the theory of the firm.

Professor Keating’s lecture was part of a series of lectures by four visiting professors from the MIT Sloan School of Management for the semester. Tsinghua and the MIT Sloan School have collaborated closely to build up Tsinghua’s IMBA program. The two schools also jointly organize forums and promote student collaboration through initiatives like China Lab.