Finance, by Bill Janeway

Last week we had the pleasure of hearing Bill Janeway speak to our MBA class. Bill was formerly vice-chairman of Warburg Pincus (the Private Equity fund) and is still a Senior Advisor to the company. He sits on a number of boards, and is incredibly active at Cambridge. In fact, you may recognize him from my post on Tim O’Reilly; he hosted Tim in Cambridge that day. Of course, Bill also sits on the Board of O’Reilly Media! (I put a more complete bio at the bottom of the post.)

But Bill came and spoke to our class on Finance. Specifically he reviewed the recent failings of the financial markets and traced it back to modern finance principles trying to treat economics too much like physics. (Where models can be relied upon.)

This was quite an intensive talk; over 50 slides crammed with quotes, references, citations, and more. (In his defense, he told us that it was going to go pretty quickly and that slides would be available afterward.) I tried to take notes and largely failed; this was information by immersion. In the course of an hour he managed to touch on virtually all key aspects of what caused the credit crunch, and the principles of finance that led to the crisis.

While I have the slides, I don’t have specific permission to share them. He recently did an interview which covered a lot of the same material as this talk, which can be found here.

He ended the talk with a few notes that I did manage to catch. First, the bad news is that we’re essentially in the “1931” scenario right now. But he believes that the good news is that “1933” will not follow “1931.” (He is very encouraged by Obama’s election.) Perhaps more importantly for some people in our class, banking will not be like it was ($-wise) for at least a generation or two. For regulators and finance thinkers, Bill said that we to establish Financial Economics as a social science in order to frame future regulation of the industry.

Overall, it was a fantastic talk. Since I don’t have a deep finance background, there was quite a bit I didn’t managed to catch as it flew by. But it’s clear Bill Janeway is clearly a very deep thinker and actor in the modern financial marketplace, and it great to get his perspectives on how we got to where we are, and what we as a society need to do going forward.

If there is one single takeaway from his talk, it’s this: Finance is NOT a branch of Physics!

[Addendum:] If you want to read another really interesting perspective of the credit crisis (from the perspective of sub-prime loans, CDO’s, etc) that is actually readable and entertaining for a wider audience, check out “The End” by Michael Lewis in Portfolio. Very interesting, as well…

As promised, Bill Janeway’s full bio:

Bill’s experience encompasses over thirty years of practical finance in investment banking and venture capital in the US and Europe. On joining Warburg Pincus in 1988, he initiated and managed implementation of the investment strategy for Information Technology that established the firm as a global leader in the domain, including funding from start-up such prominent providers of infrastructure software as BEA Systems and VERITAS Software. Bill is a member of the Board of Directors of Fortent, O’Reilly Media Inc., Nuance, Inc., NYFIX, Inc., and Wall Street Systems, Inc.
Bill was a Marshall Scholar in 1965 through 1968, and in 1965 was valedictorian of Princeton University. He holds a BA from Princeton’s Woodrow Wilson School and a PhD in Economics from Cambridge University.
He is chairman of the board of trustees of Cambridge in America, University of Cambridge; founding manager of the Cambridge Endowment for Research in Finance, University of Cambridge; Honorary Fellow, Pembroke College, University of Cambridge; and director of the Social Science Research Council. Bill is co-Chair of the 800th Anniversary Campaign for Cambridge University and a Visitor at the University’s Centre for Financial Analysis and Policy.

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