Michael Milken, Chairman, Milken Institute; Chairman, CaP CURE; Co-founder, Milken Family Foundation

Lewis Ranieri, Chairman, Hyperion Capital Management; Chairman, Ranieri & Company, Inc.

Richard Sandor, Chairman and CEO, Chicago Climate Exchange, Inc.

Myron Scholes, Nobel Laureate, Economic Sciences, 1997; Managing Partner, Oak Hill Capital Management

Moderator:

Glenn Yago, Director, Capital Studies, Milken Institute

Summary:

The vision of financial innovation lies in the understanding that there are financial solutions to social problems. Financial innovation addresses asymmetric information problems between investors and borrowers. The past 30 years have seen tremendous growth in financial innovations and their benefit to society.

In this session, four distinguished financial innovators gave their in-depth insight into the difficulties of financial innovation and their common experiences as they described a vision of innovation for the 21st century.

Lewis Ranieri said that the motivation for financial innovation is not all about capital returns. He listed housing affordability, risk exposure mitigation, job creation and educational advancement among the motivators.

The panelists all agreed that for financial innovation to develop, a society must have rule of law and property rights. Difficulties in creating financial innovation arise in connection with changing regulations and taxation. Regulators tend to put blanket restrictions on new products such as futures, options and high-yield securities when firms incorrectly use financial products to manage risk. The restrictions imposed on these securities make it more difficult for companies and financial intermediaries to manage risk. Regulation, lack of education about financial products, lack of pricing mechanisms and transparency were some of the main issues faced by these innovators.

To create a market, one must have the ability not just look at the historical performance, but forward as well. Thus, advancement in financial theory, and better and more data collection are needed to sustain innovation into the 21st century.

Many financial innovations could change of the world, panelists believe. For example, were the citizens of Mexico able to securitize mortgage obligations and open its housing market to foreign investors thereby creating an affordable housing market, there would likely be much less illegal immigration to the United States.

Beyond housing, the innovations of the 21st century include financial solutions to solve environmental problems, and resolve hunger and human capital issues, which will have a multiplier effect on prosperity.

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