Thursday, September 25, 2008

Gamble on Gambling? Or Stay Safe in Cash?

September 25, 2008


WMS Industries Inc. is one of the largest slot machine makers in America. This week, the students in Prof. Richard M. Levich’s “Managing Investment Funds” course at New York University’s Stern School of Business were mulling over whether WMS was itself worth gambling on.

“If they can sustain success in the international markets, then they may be worth a bet,” said Manuel Navas, who is 27 and previously worked at MetLife and Wachovia, noting the strength of WMS in Hong Kong, Macao and Argentina. “If not, then the U.S. slowdown could really hurt them.”

Professor Levich, deputy chairman of the department of finance, said that gambling tends to be a countercyclical industry, often booming when the economy is bad. That prompted another student to question the morality of investing in a company that profits from people betting when they can least afford to.

“It’s a gambling company,” Mr. Navas said bluntly. “That’s what they do.”

The debate was not just academic. Professor Levich’s students, divided into groups, are charged with investing nearly $2 million of N.Y.U.’s $2.2 billion endowment over the course of the semester, injecting real-world experience — and consequences — into the classroom. With crisis gripping Wall Street, one of the groups — which looks to invest in small companies — is keeping most of its $500,000 in what is essentially a savings account — not the expected course for usually risk-taking business-school students, but indicative of the turbulent times.

“If you feel you have to be in cash, then be in cash,” Professor Levich advised when student after student expressed concerns.

As American financial markets undergo a wholesale restructuring this month, many business-school students here and in other top Master of Business Administration programs across the country have been left to wonder if the jobs — at investment bank and hedge funds — that they were aiming for will be there at graduation.

The students went from Mr. Levich’s hands-on practicum to “International Macroeconomic Policy: Theory and Evidence From Recent Financial Crisis” with Prof. Nouriel Roubini, who warned on Monday afternoon, “Wall Street as we have known it for 100 years is not going to exist.”

Nicknamed “Dr. Doomsday,” Professor Roubini has long warned of the danger facing the financial markets. Now he looks prescient, and his classroom was packed beyond capacity as he sought both to explain the events of the past week and to give students guidance on what might happen next.

“Things are moving so fast it is quite amazing,” he said. “What we are observing right now is the demise of the shadow banking system.”

As he defines it, the shadow banking system consists of many of the institutions that had inspired the students to seek M.B.A. degrees rather than, say, law degrees. He included not just the investment banks that all but disappeared from Wall Street in the stunningly short time span of a week, but also what he said are the next institutions to be radically altered by events: hedge funds and private equity funds.

Heather Zakian, 30, a former advertising sales executive who is in her second year at Stern, said that she worked over the summer at Merrill Lynch, which offered her a job upon graduation — and which was sold to Bank of America this month.

“They sent us an e-mail last week, saying everything would be fine,” Ms. Zakian said after class, although her tone was anything but confident.

As Mr. Roubini spoke, invoking the word “mess” more than a dozen times to describe the markets, Ms. Zakian listened raptly.

“I just came from a lecture where we were told that in maybe five or eight years there would be a return of investment banks,” Ms. Zakian said hopefully. “What do you think?”

Mr. Roubini said that there would probably be boutique investment banks but nothing so big that it could cause a systemic problem if it failed. In other words, the days of the big investment banks like Merrill Lynch were done.

The conversation turned to the federal government’s proposed $700 billion bailout plan, which Professor Roubini called “not just a bazooka but a nuclear weapon to deal with this crisis.”

“Where is the money going to come from?” asked a student, Michelle Yan Leung.

“Which country are you from?” Mr. Roubini said.

“China,” she replied.

“O.K., it is going to come from China,” he said.

Nervous chuckles from the class.

Mr. Roubini, his reputation for doom notwithstanding, laid out a set of circumstances in which, if all the right actions were taken and had the desired effect, the housing and financial markets could begin to recover in a year or 18 months.

That was little comfort to students who will be graduating in eight months.

“My best guess is there will be fewer jobs, that don’t pay as well,” Ms. Zakian said.

But Mr. Navas was more optimistic.

He worked for a hedge fund over the summer — he declined to say which one — and, despite Mr. Roubini’s warnings, he said he thought it would be fine.

“I got into this because I think financial markets are exciting,” he said, though he acknowledged that dreadful headlines about Wall Street in the newspaper each morning were “a little nerve-racking.” “I am just trying to understand everything that is happening,” he added.

Uncertainty, Professor Levich said, is definitely coloring the conversation of students. He added that in 33 years of teaching at the business school, he had never seen a moment quite like this.

“The questions students ask have changed,” he said.

A year ago, Mr. Levich said, students were focused on where they could find the most lucrative jobs. “They will now ask if the institutions they were planning to work for will even exist,” he said.

The new caution can be seen in the students’ management of what N.Y.U. calls the growth fund.

The debate in class on Monday ended with a discussion about whether the students should keep the bulk of their money liquid or start investing it.

In order to succeed in the class, students in Mr. Navas’s group are expected to outperform the Russell 2000 index, which tracks the stock performance of thousands of small companies.

Since the N.Y.U. fund was established in 1999, students have consistently beaten the indexes they are competing against, and made a profit. Last year, for the first time, the fund lost money, about 1 percent; but the indexes lost more.

Some students argued on Monday that the moment presented an opportunity to seize on undervalued stocks.

They also noted that if the government indeed pumped $700 billion into the system, the market could spike — so perhaps the best bet was buying a fund that mirrors the index.

But they ended class on Monday agreeing to stay in cash for the moment, drawing up proposals for next week’s meeting. Even Mr. Navas, the WMS advocate who said he loves the excitement and risk of the stock market, was backing off.

“I don’t want to be in there right now,” he said. “I want to stay in cash.”

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