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The Financial Crisis


When I attended graduate business school in the late 1970’s, the big “change” in finance was examining cash flow instead of earnings.  After all, the logic went, how can you make fair assessments on leverage and other ratios if you do not have a basic understanding of the underlying cash flow?  A few of us jokingly proposed that the solution to every case study should be the mantra, “cash is king.”

Within a couple of decades, the financial industry seemed to lose focus on examining cash flows and instead focused on earnings, which, in many cases, were generated by exotic financial instruments, some supported by outlandish leverage ratios of 100:1.  Others were backed by merely a guarantee (the credit default swap market and mortgage insurance market).  Evidently, institutions such as AIG and MBIA believed that receiving a one or two percent transaction fee for a guaranty was “easy money.”  It’s too bad that the accountants and the MBA’s weren’t communicating since “risk” has always been a formulation in valuation analysis and the higher the leverage, the higher the risk.

The collapse of the sub-prime lending market earlier this year was just the tip of the iceberg.  The tightening of credit by lenders and the mark-to-market of marketable securities were natural reactions (that should have occurred earlier) and unfortunately, have exacerbated the liquidity crunch.  Even some of the most secure commercial paper has been impacted with the flight to security by individual and corporate investors in a liquidity-strapped market where there are fewer buyers of bonds.

It would be interesting to research which investor gurus called for a refocusing on the basic fundamentals.  Clearly, some took action and are above the current liquidity crunch (note Warren Buffet’s recent investments in Goldman Sachs and General Electric).  It’s a shame that the common-sense approach wasn’t shared by everyone.  Even scale factored into the equation when you consider that Bank of America did not originate sub-prime loans but its investment division owned some of the sub-prime mortgage paper.

I am not a public policy wonk, so I do not have a particular solution from a regulatory perspective that I believe should be implemented.  I think tighter regulations will evolve from this fiasco and we may never know whether or not the new regulations would have kept us from this crisis.  It is interesting that when the regulators called for tighter scrutiny of Fannie Mae and Freddie Mac, Congress looked the other way under the guise that loosened credit risk would increase home ownership.  Sarbanes-Oxley, which was passed and implemented after the Enron incident, did not keep the current crisis from occurring either.  Many people have been affected, whether as a sub-prime mortgage borrower, as an investor in a financial institution or fund that was impacted from the investment downturn, or as a taxpayer who will contribute to the billions and maybe trillions that ultimately will result from the government’s intervention.  I hope that future boards of directors of companies issuing or buying complicated financial instruments ask tough questions and make sure that the underlying risk of the instrument is understood.  After all, there is no such thing as “easy money.”

Wally Boston Dr. Wallace E. Boston was appointed President and Chief Executive Officer of American Public University System (APUS) and its parent company, American Public Education, Inc. (APEI) in July 2004. He joined APUS as its Executive Vice President in 2002. In September 2019, Dr. Boston retired as CEO of APEI and retired as APUS President in August 2020. Dr. Boston guided APUS through its successful initial accreditation with the Higher Learning Commission of the North Central Association in 2006 and ten-year reaccreditation in 2011. In November 2007, he led APEI to an initial public offering on the NASDAQ Exchange. For four years from 2009 through 2012, APEI was ranked in Forbes' Top 10 list of America's Best Small Public Companies. During his tenure as president, APUS grew to over 85,000 students, 200 degree and certificate programs, and approximately 100,000 alumni. While serving as APEI CEO and APUS President, Dr. Boston was a board member of APEI, APUS, Hondros College of Nursing, and Fidelis, Inc. Dr. Boston was appointed to the National Advisory Committee on Institutional Quality and Integrity by the U.S. Secretary of Education in 2019. He also serves as a member of the Board of Advisors of the National Institute for Learning Outcomes Assessment (NILOA), as a Trustee of The American College of Financial Services, as a member of the board of Our Community Salutes - USA, and as a member and chair of the board of New Horizons Worldwide. He has authored and co-authored papers on the topic of online post-secondary student retention, and is a frequent speaker on the impact of technology on higher education. Dr. Boston is a past Treasurer of the Board of Trustees of the McDonogh School, a private K-12 school in Baltimore. In his career prior to APEI and APUS, Dr. Boston served as either CFO, COO, or CEO of Meridian Healthcare, Manor Healthcare, Neighborcare Pharmacies, and Sun Healthcare Group. Dr. Boston is a Certified Public Accountant, Certified Management Accountant, and Chartered Global Management Accountant. He earned an A.B. degree in History from Duke University, an MBA in Marketing and Accounting from Tulane University’s Freeman School of Business Administration, and a Doctorate in Higher Education Management from the University of Pennsylvania’s Graduate School of Education. In 2008, the Board of Trustees of APUS awarded him a Doctorate in Business Administration, honoris causa, and, in April 2017, also bestowed him with the title President Emeritus. In August 2020, the Board of Trustees of APUS appointed him Trustee Emeritus. In November 2020, the Board of Trustees announced that the APUS School of Business would be renamed the Dr. Wallace E Boston School of Business in recognition of Dr. Boston's service to the university. Dr. Boston lives with his family in Austin, Texas.


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