MELISSA BLOCK, host:
In recent weeks, we've heard more than we ever thought possible about the commercial paper market, about short sales and credit default swaps. Well, imagine being a teacher explaining the headlines to your class. In these next two reports, we're going to visit a couple of classrooms to hear how instructors are turning the financial news into a teachable moment. We'll start in graduate school. Reporter Rene Gutel from member station KJZZ visited an MBA class at the Thunderbird School of Global Management in Glendale, Arizona.
Mr. YERALD COLEBERG(ph) (Professor, Thunderbird School of Management, Glendale, Arizona): All right, do you want to get started? Gentlemen? Ladies?
RENE GUTEL: The class is called Financial Engineering and Derivative Products. Professor Yerald Coleberg teaches options, futures, forwards and swaps, including credit default swaps, also known as CDS. Just the kind of maneuvering that helped get us into this mess.
Mr. COLEBERG: This reminds me of Terminator 3; Rise of the Machines where we build machines we can't really control. And that's a CDS market. It starts in a very benign manner. It's a trillion dollars, suddenly goes to $60 trillion in the span of a few years and creates this enormous exposure over the world.
Mr. COLEBERG: Anyone care to posit some solutions?
GUTEL: Sophia Bennett, who is sitting in the front row, raises her hand.
Ms. SOPHIA BENNETT (Student): I think there has to be a greater standard or accountability for people gambling on those derivatives, because originally it was designed as a hedge instrument and since people started gambling, they just made money and they just started selling and buying without thinking what could bleed at the end.
GUTEL: Students bounce ideas back and forth while Coleberg pushes them to consider the possibilities on the table.
Mr. COLEBERG: So there's two solutions being put out. One is direct, the English style which is direct investment on the banks and then there's the U.S. style which is buying troubled assets. Which do you think will work?
GUTEL: In the second row, Evan Thomas says the real question isn't whether or not to embrace stricter regulation but just how much of it.
Mr. EVAN THOMAS (Student): You know, nationalization is an option, not one that we should take the table.
GUTEL: Did you catch that? He suggested nationalizing the US banking system. But Thomas's classmate, a man named Matt Smith, says that wouldn't work.
Mr. MATT SMITH (Student): For a country like the U.S., our banking sector is so large, so globally connected, that the government stepping in and taking on that role, I don't think is really a feasible solution.
GUTEL: After the discussion, Coleberg goes over last week's homework. The class was assigned to develop a strategy for managing call options on Google stock.
Mr. COLEBERG: You all lost money and your losses range from - over this period, 20 percent to 50 percent.
GUTEL: They're losing money, just like the rest of us. For NPR News, I'm Rene Gutel.
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