Darrell Duffie


On his book How Big Banks Fail and What to Do about It

Cover Interview of July 27, 2011

The wide angle

As a financial economist at Stanford University, I was naturally led to this project. Among other topics, I study capital markets, risk management, derivatives, credit risk, bond markets, and over the counter markets.  These topics turned out to be central to the story of the financial crisis and to the subject matter of this book.

Also, over many years, I have been discussing the behavior of financial markets with market participants and regulators. As the financial crisis of 2007-2009 unfolded, I began spending a much bigger fraction of my time in meetings or on phone calls on issues that had not been widely understood.

Some institutional features of our financial system that had seemed obscure before the crisis suddenly became central, and alarming. The topics of these discussions included the potential for new regulations and for improvements in the design of market infrastructure.  I found myself on a steep learning curve. I became even more curious about the inner workings of various murkier parts of the financial system.

After the fall of Lehman Brothers, I joined the board of directors of Moody’s Corporation, a major credit rating agency. This was also an opportunity for me to learn more about financial markets, corporate governance, and regulation.  For many years, I had acted as a consultant to financial institutions, hedge funds, and other pertinent players. As the crisis deepened, I was taking part in more and more conversations with market participants, regulators, legislators, and journalists, both formally and “on background.” Given my primary role as a researcher and teacher, it became obvious to me that I should summarize what I was learning in an accessible form.

Leading up to 2007, academics had contributed surprisingly little to an understanding of some of the weaknesses in our financial system that should have been addressed earlier. (Exceptions include some of my colleagues, such as Bob Shiller at Yale and Raghu Rajan at the University of Chicago.)

Today, financial economists are much more actively involved in communicating concerns about our financial system. For example, I am a member of the Squam Lake Group, consisting of roughly a dozen economists that have taken precisely this role.  We recently published The Squam Lake Report, also by Princeton, which provides a broad set of analyses and policy recommendations.  And we remain active on this front.