Newswise — When the financial crisis broke in September, Terry Baker, associate professor of accounting at Wake Forest, quickly altered his syllabus and asked graduate students in his class, "Accounting for Derivatives," to compare and contrast current events with the 1998 collapse of the hedge fund, Long-Term Capital Management (LTCM).
The fund, which made extensive use of quantitative risk models, credit default swaps and highly leveraged investments in derivatives, floundered suddenly after Russia defaulted on its bonds. To prevent the crisis from spreading throughout the financial system, the Federal Reserve engineered a bailout involving some of the same banks caught up in the current crisis.
The exercise proved valuable in helping Baker's students consider how lessons learned, and especially those not learned or since forgotten, can help them as they embark on careers in finance and accounting.
"Professional skepticism is now solidified as one of the things at the forefront of my mind when interacting with client personnel," wrote Daniel Lovrich, a fifth-year Master of Science in Accountancy graduate from Johnstown, Penn., in his paper. "The ill-advised decisions from 1998 and 2008 will prompt me to look at tasks and decisions that come across my desk to see if they make sense."
Renee Roedersheimer, a Cincinnati, Ohio, MSA candidate, gained a stronger appreciation for the interconnectedness of the financial world. "One event truly does have a ripple effect on the rest of the economy, especially in the financial services sector," she wrote. ""¦I will certainly focus more on the underlying assumptions of estimates used by the companies that I am auditing."
Baker, who joined the Wake Forest faculty in 1998, notes that none of his students, who were only 10 to 12 years old a decade ago, had heard of LTCM before the class.
"The fact that many of us have forgotten about Long-Term Capital Management says something about the current crisis, in my view," Baker says. "While the current financial crisis is disconcerting for students preparing to start their careers, the historical lessons it has prompted them to learn may prove invaluable in the long run."
Baker and his students are available to discuss the insights that emerged from their study of LTCM.
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