Writing in the eye of the storm

2/23/2010 - David Stowell had no idea what he was in for when he signed up to write an investment banking textbook a few years ago.

But he certainly had the expertise. Stowell, a clinical professor of finance, had recently joined the Kellogg faculty after 20 years in investment banking and four more at a hedge fund. His publisher, the Academic Press imprint of Elsevier, had identified a need for a good textbook that merged academic theory with real-world experience. The book seemed like a win-win for both parties.

Then the worldwide credit crisis hit; two of the world’s largest investment banks disappeared; and other large institutions suffered huge losses and struggled to survive. In the midst of this, Stowell realized he would need to rewrite the book, which was about one-third finished.

“It was exciting, but distracting,” Stowell says. “I had a unique opportunity to write this book during the biggest financial crisis we’d seen in 75 years. It caused me to work more hours than otherwise would have been the case, but the timing really helped keep the book up to date and fresh.”

Writing in real time allowed Stowell not only to explore the industry-related causes and effects of the financial crisis, but to re-conceive the book around the emerging overlap between three different investment industry subsectors. The book, An Introduction to Investment Banks, Hedge Funds, and Private Equity: The New Paradigm, was released on Feb. 13.

“As an investment banker, I used a communication process that tried to make complicated concepts clearer,” Stowell says. “Teaching here at Kellogg has helped me learn how to better convey complex ideas in straightforward ways, and that’s helped me as a writer.”

The book outlines Stowell’s view of the emerging, post-crisis new paradigm of investment banking, hedge funds, and private equity. It is a world in which leverage has dropped substantially, risk tolerance is lower, and extremely complex financial instruments have fallen out of favor.

“This means a potentially lower earnings profile, but also less risk, so this is probably a good thing,” Stowell says.

But this new paradigm also entails legislative and regulatory proposals on compensation controls, levels of leverage, and trading rules that could affect areas far outside these industry sectors, hindering liquidity in equity markets or eroding shareholder value in buyouts. “This book gives students a foundation for understanding the impact of additional changes as the industry continues to evolve,” he says.

The book includes 10 case studies, some of which Stowell has taught in his classes for more than a year. Most cases recount familiar corporations and events — the collapse of Bear Stearns, Procter & Gamble’s takeover of Gillette, or hedge funds’ role in shaping corporate policy at McDonald’s — but from an insider’s perspective. “These cases were all written based on real-world experiences in the industry, and real transactions that allow the text to come to life,” Stowell says.

Stowell cites the Gillette acquisition case as one that illustrates political as well as financial realities. “The deal almost got derailed because one politician in Boston (U.S. Rep. Barney Frank) with a big bully pulpit created scathing commentary that the newspapers picked up,” Stowell says. “That kind of conflict gets students to see different points of view, and encourages them to debate within the framework of the case paradigm. When I saw students connect and debate and have differences of opinion, that’s when I knew I had more here than just a dry textbook.”