Friends, Romans, greedy MBAs...

Elite business schools in the US are facing a backlash. What did you teach those stuffed shirts, anyway... Russian roulette??

Bloomberg's Oliver Staley reports: Harvard Business School, stung by criticism that it hasn’t prepared alumni to cope with the economic meltdown, will dissect its performance using a practice it employs to examine corporations in crisis.

A task force, created in November at the direction of the dean, is writing a case study to scrutinize whether the school is failing to teach students to understand and manage risk in the current environment, according to Paul Healy, co-chair of the panel. The case study method is the technique Harvard uses to analyze decision making by executives during times of duress.

The idea is to put professors in the students' seats and ultimately use the discussion to promote curriculum changes.

Harvard's less than illustrious alumni at the moment include the likes of Stanley O’Neal and John Thain (ex Merrill Lynch), Rick Wagoner, (ex General Motors Corp) and Christopher Cox, former chairman of the U.S. Securities and Exchange Commission.

The article goes on to add that "many of the graduates involved in failures attended the school 20 or 30 years ago, before classes on risk management, macroeconomics and leadership were required". But another Bloomberg columnist, Kevin Hassett, points out it's not so much what they studied but their attitude which resulted in the downfall.

And he makes such a good case that this is one of those rare instances where I am compelled to reproduce a large chunk of the article.

For two centuries, Wall Street survived wars, depressions, bank panics and terrorist attacks. Now Wall Street as we know it is dead. Gone.

When a healthy and thriving person dies suddenly, a medical examiner may talk to family and friends to see if the deceased had recently changed behavior in some way.

Wall Street did change radically in recent years in one notable way. Twenty or 30 years ago, it was common for the best and the brightest to be doctors or engineers. By the 2000s, they wanted to be investment bankers.

When Wall Street was run by people randomly selected from the population, it was able to survive everything. After the best and brightest took over, it died the first time real-estate prices dropped 20 percent.

Are the two facts related? In other words, did Harvard kill Wall Street?

Hassett goes on to argue that Wall Street is gone because its firms did a terrible job assessing the risks of the positions they took.

The models these firms used to evaluate risks failed. But having a failed model brings a firm down only if the firm collectively buys into the model. To do that, the firm must be run by people who have a great deal of faith in their models, and a great deal of faith in themselves.

So basically, MBAs believe they know everything, that they can do no wrong. This narcissism has a real career impact...

The consequences of Wall Street’s reckless brilliance in many ways parallel modern-day engineering disasters. If you travel through Italy, you can’t help but notice the many Roman bridges that still stretch across that nation’s waterways. How is it that the Romans could build bridges that would last thousands of years, while the ones we build today collapse after a few decades?

The answer is simple. Back then, they did not have the fancy computers required to calculate exactly how strong a bridge must be. So an architect made a bridge very, very strong. Today, engineers can calculate exactly how much steel they need to incorporate into a bridge to bear the expected load. The result is, they are free to make them weaker...

The same is true of the financial sector. Back when Wall Street was run by individuals without fancy degrees, they had a proper skepticism toward fancy models and managed their risks with a great deal more humility and caution. Only when failed models became canon did catastrophe strike.

He concludes: Wall Street didn’t die in spite of being run by our best and brightest. It died because of that fact.

Ahem. I don't agree with this entirely - the regulators who turned a blind eye and allowed the is good' brigade to take over are also to blame. But yes, there is much in what he says that rings true.

Every catastrophe has its lessons (one hopes!). Here is some more food for thought for bschools and their students from columnist Matthew Lynn (also from Bloomberg!)

A sum up: Business schools legitimized a pseudo-scientific approach, promoted a mechanistic management style and formed a managerial elite more interested in rewards than producing lasting wealth for the economies they operate in.

(An attitude which manifests right from the time of placement, I would add!)

But the details are more interesting, so here goes:

If a flight-training school produced this number of crashes, we would be asking some questions. There is no reason that business studies should be exempt from the same kind of scrutiny.The schools should be called to account for several things.

First, they encouraged a quasi-scientific approach to business, sermonizing that everything could be nailed down in a textbook. By preaching a set series of formulas they encouraged students to believe that running a company could be mastered by anyone. The entire private-equity industry is founded on that principle. So are mergers and acquisitions.

In reality, management is a skill that is acquired through experience, judgment and flair. Billions are about to be wasted relearning a simple fact that should never have been forgotten.

Second, the intellectual tools that led us into the financial meltdown were largely invented within academia. Complex models for pricing risk created the market for the options and derivatives contracts that have caused so much trouble in the past year.

The business schools took something that was mysterious and unknowable -- risk -- and tried to make it as easy to count as peas in a pod. By doing so, they encouraged a whole generation of young men and women to go into investment banking armed with the belief that they had mastered risk, that it had been tamed and brought under control.

The truth, of course, turned out to be different. Bankers can no more tame risk than sailors can tame the oceans. All they can hope to do is steer a safe course through it.

Third, the schools created a managerial elite that acted like a caste apart. One reason the bonus culture ran out of control was that many of the people involved were trapped in a bubble. They thought “guaranteed” bonuses, private jets and multimillion-dollar payoffs were normal. That process started in business schools.

Citing examples from history such as Henry VIII and Fidel Castro, Lynn makes a rather drastic proposal: Shut down business schools. They are beyond redemption.

Not that yeh honewala hai. Just arbit emotional CP. But for a moment, if we were to say that an ordinance was passed to shut down bschools across the world. What would happen?

Nothing. They would just spring up in another form. They might teach anything, anywhere, but ultimately we would find a new way to create elites, who believe they are the brighest and best, and can do no wrong.

We will bring down other walls on other streets. But keep building more... to separate Purebloods and Mudbloods, Brahmins and non-Brahmins, Thinkers and Followers, ... 'Us' and 'Them'.