For Macalester alumni working in the financial industry, the last two years have been a ride.
by Jack Gordon
Illustrations by David Hopkins/Phosphor Art
The economic meltdown of September 2008 looked scary to anyone who could read a newspaper. But to the people who work in the financial sector—Macalester alumni included—it looked at times like an outright apocalypse.
Trouble clearly had been brewing for a while. The subprime mortgage crisis began to reveal itself in 2007. Investment bank Bear Stearns collapsed in March 2008. But nobody was prepared for the events of September. In that appalling month alone, Fannie Mae and Freddie Mac, the big government-sponsored mortgage-lending enterprises, were placed into conservatorship. Lehman Brothers collapsed. Merrill Lynch was forced into a shotgun wedding with Bank of America. Taxpayers were introduced to the phrase “too big to fail” when they were told they would have to bail out insurance giant AIG . Washington Mutual, the country’s sixth largest bank, was seized by the FDIC . To avoid the same fate, Wachovia Bank sold itself to Wells Fargo.
By the end of that gruesome September, the credit markets had essentially shut down. The world economy plunged into a deep recession from which we are still recovering in a sputtering and uncertain fashion. For some the phrase “Wall Street Greed” vied with Osama bin Laden for the title of Public Enemy No. 1. As this is written, in early summer, Congress is arguing about a new regulatory framework for the national financial system.
New worries continue to arise. Americans spent the spring of 2010 learning that the phrase global economy, tossed about so glibly, means that financial problems in a country the size of Greece can threaten to cripple the entire economy of Europe and exert a huge drag on our own.
What impact has all of this had on Macalester alumni who work in the financial industry? How has it changed their lives and their jobs? Do they agree that “Wall Street greed” was the primary cause of the 2008 meltdown? Was there a silver lining? `And what lessons do they think should be imparted to current students of economics? Here is what we learned from four of them.
Scott Barrington ’90
Managing partner, Piper Jaffray Private Capital
After graduating from Macalester with a degree in math and economics, Scott Barrington earned a law degree from the University of Michigan. As an attorney at Dorsey & Whitney in Minneapolis, he advised startup companies and private equity firms about leveraged buyouts, acquisitions, and initial public offerings.
After a few years he moved to Piper Jaffray, and in 2000 he helped launch the company’s fund of funds team for private equity investing. He explains his role as creating investment opportunities similar to mutual funds, but with the investments going into private companies instead of public ones. “We’ll pool $100 million or $200 million in capital and invest with 10 fund managers, who in turn will invest in maybe 200 private companies for one of our funds,” Barrington says. For instance, in 2005 Piper Jaffray launched the first private equity fund of funds devoted entirely to clean technology. That portfolio includes investments in everything from water-treatment companies like Seven Seas to Tesla Motors, the California– based outfit that makes a fast-accelerating electric sports car.
Thus Barrington was pretty far removed from the mortgage-backed securities business that precipitated the events of Black September. But he remembers 2008 vividly. Early in the year, his team was raising money for its second clean-tech fund of funds. The usual sources for that money—foundations, college endowments, pension plans, and wealthy individuals—were very interested. On September 1 he had $500 million in “indications of interest” for the new clean-tech fund. By October 1 that interest had evaporated. “We eventually ended up with only a $100 million fund, and it took all of 2009 to raise that capital,” he says. “The world kind of came to a stop for about a year, not just for us, but for everybody.”
Business has improved greatly since, he says, but fund raising remains more difficult in the private-equity niche because investors are still nervous, and nervous investors like liquidity. “When you invest in private equity, which is what we do, it’s not uncommon for your money to be tied up for five to seven years,” Barrington explains. “You’re investing in private companies to help them grow. That takes time.”
Uncertainty makes his proposition a harder sell, even with the prospect of higher returns. Institutional investors “who are worried about what will happen if Greece blows up, followed by Spain and Portugal,” are reluctant to tie up their funds for five years, he says.
Barrington remains close to Macalester, volunteering annually as a guest speaker in Karl Egge’s economics classes. What would he tell students today about the causes of the 2008 crash? For one thing, he’d say that “Wall Street greed” is largely a red herring. Yes, he says, “some Wall Street bankers were greedy and maybe even immoral” for packaging up collateralized debt obligations and various bundles of what became known as “toxic assets,” and selling them to other institutions. And yes, he agrees that some new financial regulations probably are necessary.
But he is outraged that Washington’s proposed solutions do not address the root cause of the subprime mortgage debacle that brought on the meltdown. “At the core of it was bad government policy, as implemented by HUD, Fannie Mae, and Freddie Mac,” he says. “The unintended consequences of Washington’s social engineering policies— policies that interfere with the free market—led to Fannie and Freddie directly and indirectly making mortgages to people who never should have been given one in the first place. These policies allowed mortgage originators to sell all their loans to Fannie, Freddie, and Wall Street, which led to ever decreasing lending standards and loans to people who could not afford them, all just to keep the money-making machine turned on. None of this would have happened without Washington’s tinkering and if loan originators had born a substantial amount of the risk that the loans they originate might someday default.”
Denitza Batchvarova ’06
Associate, Citigroup Global Markets Inc.
New York City
Denitza Batchvarova came to Macalester directly from her native Bulgaria, attracted by the school’s reputation for friendliness toward international students. She majored in economics and math. When she graduated in 2006, at age 21, Batchvarova accepted a job with Citigroup. A year later she found herself in a ringside seat at the epicenter of the subprime mortgage fiasco.
Citigroup was one of the bellwethers of disasters yet to come. Its former CEO , Chuck Prince, resigned in November 2007 as losses from the company’s mortgage-backed securities mounted into the billions. By April 2008 the company had announced layoffs totaling at least 13,000 jobs. By the end of 2008, Citigroup reportedly suffered at least $65 billion in losses, most of them mortgage-related. Its stock tanked to such a extent that at one point 73 percent of the company’s value had disappeared. As one of the too-big-to-fail institutions eligible for taxpayer rescue, Citigroup received $45 billion in federal bailout money.
Scary is the word Batchvarova uses to describe the period. Even after it was clear that the subprime bubble was bursting, she says, nobody anticipated a freefall so horrendous that it would wipe out Bear Stearns and Lehman Brothers. “It was scary to think that Citigroup might be next to come down. We had confidence that we could refocus and find our way out of the hole, and that we should survive, but the market wasn’t rational at that point. You didn’t feel that the most rational thing would be what happened next.”
Batchvarova works on the investment-banking side of Citigroup. Her group specializes in the paper and packaging industry, helping companies acquire other companies, sell divisions, and raise capital. “We work with real companies that make real products,” she stresses, as opposed to companies that create exotic financial instruments. “But the blowup on the mortgage side scared investors away from everything, not just from risky investments…. The markets froze entirely.” Frightening though the period was, she discovered a silver lining. “For me, what changed was that we started working on more interesting things,” Batchvarova says. Before the meltdown, she explains, with capital for mergers and acquisitions readily available, “all deals were pretty much the same.” Life was easy, but the work involved little creativity.
After the meltdown, “we had to think more strategically about how to create value and how to fund deals,” she says. “It used to be, ‘here’s a deal, here’s how we’ll fund it.’ With new projects, it’s now, ‘Okay, how can we do this?’”
Batchvarova is surprised but happy at the stock market’s recovery since 2009. Despite continuing jitters, “I think investors’ sentiment is that the economy has bottomed out. They’re asking, ‘How do we invest in companies that will benefit from an economic recovery?’” That’s good for her niche in the financial world, she says, because what kind of firms are those? “Real companies with real products.”
Elizabeth Hoffm an ’93
Principal, Berkshire Partners
After graduating with an economics degree from Macalester, Elizabeth (Beth) Hoffman earned an MBA from Northwestern University’s Kellogg School of Business. She worked as a financial analyst for Morgan Stanley & Co. and for two venture capital firms before joining Berkshire Partners in 2003. Boston-based Berkshire Partners is a private equity firm, with seven institutional funds totaling $6.5 billion. Berkshire has invested in a wide range of industries for more than 25 years, frequently by acquiring a majority or minority equity ownership position in mid-sized private companies. “Often we utilize leverage to enhance potential equity returns,” Hoffman says. “Without available credit, there is more pressure on earnings growth alone to generate equity returns.”
For months following September 2008, “the credit markets effectively shut down,” she recalls. The nature of her dayto- day work changed dramatically. “Our focus was on maintaining liquidity for our existing portfolio companies,” Hoffman says. Many companies operate with revolving lines of credit, for instance, and “there was some uncertainty about whether the bank would be there tomorrow to honor its revolver commitments.”
Without functioning capital markets, leveraged buyouts are difficult to complete. “With the new-deal market dormant, we were forced to think more creatively about where new opportunities might exist,” Hoffman says. That translates to figuring out where the next phase of growth will be in a sector. She was involved in Berkshire’s creation last year of Tower Development Corporation, a new entity formed in partnership with Crown Castle International Corporation of Houston to pursue new wireless tower builds and acquisitions. Within the communications sector, they are betting that demand for new wireless infrastructure will continue to be strong.
The markets have come back more quickly than she and others expected, Hoffman says. “There’s a lot of worry about Greece, so right now it’s a little fickle, but generally the credit markets are open again.” For Berkshire, that’s actually a double-edged sword, because it can lead to price inflation. “When credit is available, people can and will pay more for companies, so valuations tend to creep up. Right now, we’re trying not to overpay.”
Who is to blame for the 2008 meltdown and how can we prevent a repeat? The government push to increase home ownership played a role by “fostering an environment of extremely relaxed credit-writing standards,” she says.
Also central to the problem, however, was that “people forgot about gravity…. It all would have worked if housing prices kept going up forever,” she says. “People just didn’t think the music would stop—or that it would stop on their watch.”
Seth Levine ’94
Cofounder and Managing Partner, Foundry Group
Seth Levine originally intended to become a psychologist, majoring in psychology and economics at Macalester. But when he left school, he got a job as an investment banker for Morgan Stanley. Then he moved to Colorado for “lifestyle reasons,” working for a communications company and then in the venture capital world.
Foundry Group, which Levine cofounded in 2006, is a venture capital firm that specializes in funding new companies in the information-technology industry. Although he’s a bit embarrassed to admit it, from his point of view the 2008 market meltdown actually had a positive impact on his business.
“We raised our fund [from institutional investors] in fall 2007. So we had fresh capital to invest throughout the downturn” of the next two years, he says. Downturns are good times to invest in young businesses. In a recession, when investors are extremely cautious, “there are fewer dollars chasing those opportunities. So there was less competition for us,” Levine says.
In fact, he says, a recession can be an excellent time to start a business. A startup has easier access to talent, office space, and even basic equipment like desks and computers. He points out that Microsoft and Cisco Systems both were launched during downturns.
“I think the world will look back on 2008 and 2009 and realize that a number of meaningful businesses were founded in that period,” he says. “We were fortunate in our timing. We’ve been able to put together an exciting portfolio of companies.” As an example, he cites Zynga Games Network Inc., founded in 2007, which makes social games for online players.
Levine recognizes that the recession has meant “a lot of hardship for a lot of people,” including many of his own friends, “who have suffered dearly in this market.” But the plain truth is that for him at least, the meltdown of 2008 was no disaster.
Now he’s in a more mainstream position, hoping that the current recovery continues and strengthens. “We need to exit companies, too, and the landscape needs to adjust for us to see realizations from our portfolio,” Levine explains. Then again, he’s in no hurry for a strong sellers’ market to develop. The oldest companies in Foundry’s portfolio were bought in 2008, and he expects to hold onto firms for at least five years. “So we have lots of time,” he says.
The main lesson he’d draw from the subprime crash? The same one that should have been learned from the Internet bubble of the ’90s: that “economies are cyclical,” Levine says. A mortgage market that made sense only if housing prices kept rising forever was doomed because “markets behave as markets. The rules don’t fundamentally change.”
Jack Gordon is a Twin Cities writer who specializes in business topics, writing frequently for Twin Cities Business and similar publications.
Business leaders continue to come up through the ranks at Macalester, among them three rising senior women who are interning this summer at New York City investment banks. They are Eshita Sethi (Gurgaon, India), Bank of America Merrill Lynch; Diarra Gueye (Dakar, Senegal), Credit Suisse; and Varini Sharma (New Delhi), UBS . All three took “Introduction to Investment Banking,” taught by Joyce Minor ’88, the Karl Egge Professor of Economics. photo: courtesy seth levine « Shown here near their Wall Street offices are summer interns (from left) Varini Sharma, Diarra Gueye, and Eshita Sethi, all rising seniors.