How Finance Shapes Your World with Song Ma

Hosted by Blake Eskin

A few weeks ago, I got a message from my bank.‌

Hello, this is Fraud Prevention Services.

You know the kind. More than $1,000 charged in three different states in less than an hour. And I am not a sneakerhead.‌

It is important that you call us back at your earliest convenience. Thank you and goodbye.

I canceled my debit card, and the bank promised to send out a replacement. It should arrive in two weeks, they said. At that point I freaked out. I was about to leave on a business trip without my card. What am I supposed to do? Talk to a bank teller when I’m in another state? Luckily, my daughter had some cash from babysitting, so she gave me the twenties and I Zelled her back. Bills, I could pay as usual by ACH. And to buy things I could use a credit card, even tap my phone. So yes, I was preyed upon by thieves, but in the end I didn’t lose much.‌

Not so long ago, I wouldn’t have thought about this experience with the global financial system as an example of society looking after me, but I’d already started talking to Song Ma.‌

Hello, my name is Song Ma. I’m a professor of finance and entrepreneurship at the Yale School of Management.

And since then, my encounters with finance, things that would usually make me wince, making monthly payments for my mortgage or car insurance, have looked different. When he talks about finance, he says things like this.‌

Finance allows us to ultimately take care of each other.

Today’s lesson is about why finance can and should be a benevolent force in society. Song Ma has thought a lot about the role of finance in society, including the positive role it can play. Why does this sound like a controversial position coming from someone who teaches at a school of management? Because finance doesn’t have a very good reputation.‌

If you think about a lot of images people have, the stereotypes about a banker or an investor, they often come from a negative image of chasing profit at the cost of some societal benefits.

Now, this is more than anecdotal. The latest Gallup poll on the honesty and ethics of professions shows that public perceptions of bankers are more negative than positive and getting worse over time. And you can understand why. Fine-print agreements that are constantly being updated with hidden fees and higher rates; pay-later schemes and payday loans that make it easier for people to spend money they don’t have and to go into debt that’s nearly impossible to escape. And all of this is often harshest on those who can least afford it.‌

Finance in the form of private equity has also done a number on all sorts of local businesses. Instead of looking at what they do for their communities, finance is often treating these companies as assets that can be stripped, expenses that can be trimmed, salaries that can be shed. We know all this, but Ma wants his students, and really all of us, to think about finance differently. To see how finance can help people.‌

I thought, maybe we should offer a platform for us to learn about what finance is about, and why human society, independently across different continents, different countries, different cultures, all discovered this tool.

Song Ma came to SOM in 2016, and he’s known for teaching a pair of electives. One is called Entrepreneurial Finance, and the other, Venture Capital and Private Equity.‌

Those are two of what I call sister courses. That is, they tackle the same problem but from two opposite perspectives. And then the students interact with each other because they share the same teacher, which is me. Sometimes I actually let the two classes to negotiate with each other as two different opposite parties, and have them pitch one from the other. So it’s actually an interesting dynamic.

Venture capital, private equity—that’s where the sexy, big financial deals happen now. Just like the 1980s had its famous investment bankers like the ones Tom Wolf called “Masters of the Universe.” Today it’s the titans of VC, betting on startups and breeding unicorns. And Song Ma’s students are interested in all this on a level beyond what they might feel about, say, bonds or cash flow.‌

They sometimes make the comment, “Oh, professor, this is very different from the finance that we learn from other classes.” And I say, “No. Finance is finance. This is exactly what we learned in other classes.”

That’s why he added a new course, Finance and Society. If his other courses were about how finance works, Finance and Society starts off asking, why? Why do we have finance? What does finance do for society? What would society look like without finance?‌

There are three roles that are played by finance, broadly speaking. The first one is that they allow you to allocate resources.

This could be about entrepreneurs and investors finding each other. But allocating resources also lets people invest in themselves.‌

In a world without finance, we would have no way to save. We would have no way to get a loan for our education. People who don’t inherit a lot of money would potentially not be able to buy a house. We would save a long time to buy a car.

One of the most important ways people allocate their own resources is when they save for retirement.‌

People in the workforce make a lot of profit early on in their life, from their mid-20s to perhaps early 60s. But you do not necessarily have similar income later. You want to have a mechanism that allows you to save some of those resources, to let those resources grow with the economy. And then later when you decide to take a different path in your life—for example, retire and then go to do something that is more fun, or even change a career to a lighter workload—you have enough resources to support that.

At its best, allocating resources is part of a virtuous cycle. You borrow money for an education and what you do with that education gives back to society, which is better off than it was before. These cycles apply to organizations too. One of the guest speakers in Finance and Society was the managing director of the Yale Investments Office, Amy Chivetta. The Yale endowment, she explained, invests in venture capital funds and those VC funds invest in new innovations. They bring in good returns.‌

But this is not ultimately how the financial system ends, making money. The Yale endowment’s next step is to use those obtained returns to fund university activities, including faculty research and teaching, but very, very importantly, scholarships. That allows Yale, as the original fund owner, to allocate resources to people who have ideas. The ideas generate profits and the benefits, and then those come back to the fund owner and then we can use it for something else.

That cycle isn’t always virtuous. Scholarships and financial aid have not kept up with costs. And many students, whether at community college or professional school, have to shoulder the burden of those loans for decades. So we have a situation that Song Ma described where people who aren’t lucky enough to inherit money may not be able to buy a house or fulfill their potential through education.‌

The second role finance can play in society, Ma explains, is that it allows people to share risks. One of the first examples that came up in class was about one of his students whose wife got into a car accident.‌

She was fine, but the car was totaled.

Paying for car insurance can feel like throwing money away. But without it, the student and his wife might have been in big financial trouble.‌

We have a system that allows us to take other people’s potential bad outcomes into account in our decisions. Even though we don’t feel that way, because we are only thinking about hedging our own risks. That is totally fine. But it is very important to realize by doing that, we are already implicitly taking other people’s benefit into consideration. Other people’s payment into their car insurance enabled that family to not bear that specific cost alone.

The third role finance can play is what we were talking about at the beginning: facilitating transactions. These transactions might involve cash, whether it’s taking money out of an ATM, or getting it from my daughter.‌

Let’s not forget: having paper money was already a very significant financial innovation.

And transactions can open up the world.‌

If you decide to go to another country—if you decide to take a ski trip to Japan, if you decide to go on a hiking trip in South America—now we have the easy transactions that are enabled by the developed financial system that you can just bring your phone and pay almost instantaneously.

Transactions, in fact, open up the world for everyone.‌

A fluent and connected financial system enables a connected world.

They certainly opened the world up for Song Ma. Ma was born in 1987 during what the Chinese call the period of reform and opening up. That’s like China’s version of perestroika and glasnost, moving away from a command economy.‌

The banking system is highly state operated. These are state-owned banks. And also there are not a lot of credit system in it. There are not a lot of household finance. The mortgage was not introduced until pretty late in the 1990s.

The privately owned banks and insurance companies you’d find in New York and London and Hong Kong, those were only beginning to emerge. The Shanghai Stock Exchange, which the communists closed in 1949 when they took over, that didn’t reopen until 1990. And hardly anyone was carrying plastic.‌

Back then, a credit card was not really a thing.

Ma grew up in Shandong Province in the northeast.‌

This is a province where a lot of Asian Chinese philosophers were born like Confucius and all those good philosophers. It is not what I call a business-friendly province.

But his father was a businessman.‌

Therefore, I got a lot of opportunities to read his books. I read asset pricing and corporate finance, basic accounting, and so on, when I was a middle school student. Because I was very into numbers.

Ma also tried his hand at business.‌

I sold old books and I sold small luggage and so on. And then I started using some of those of accounting methods as well as thinking about free cash flows.

He was developing some of the skills of a businessman.‌

But I didn’t develop a very good sense of finance myself until I went into college.

College was at Zhejiang University in a more business-friendly province than Shandong. In China Merchants Bank, which was the first privately owned bank in China, they were introducing something new on campus. A credit card just for college students. Ma signed up for one. ‌

Eskin: Do you remember what the first thing you bought or what you used it for most was?Ma: I perhaps went out with my friends for a really good dinner. It wasn’t because I got the card that I went out for dinner, but that’s the first time I swiped that card.

Hotpot in Hangzhou. That’s where Song Ma made his way into this new world.‌

I think I started to realize the power of finance when I got my first credit card. We really need to have a system to build trust with each other and aso have the discipline to govern ourselves. I think that’s a very interesting symbol for us to think about about how individuals need to handle themselves in the society. To be given that small piece of plastic.

That small piece of plastic was like his passport to the financial system. And joining that system was about a lot more than just money.‌

Because once you have the credit card system, you are part of the financial system and then people will start to track you and so on. You want to care about it.

Over time, his behavior evolved.‌

Eskin: How would you have paid for that dinner? You had the money to pay for dinner. So the week before, if you’d gone on that dinner, tell me how would the dinner have worked.

Ma: When I started getting the credit card, I certainly didn’t know much or didn’t feel that I can borrow money to smooth my consumption. I had enough money— what my parents gave me for as a monthly support and so on. But after swiping that card, you realize that I am really connected to the system. And then later you started to be able to see, “Oh, I can lightly borrow a little bit. I want to register for this class. I don’t necessarily have the money, but I can swipe the card now and then later I can pay it back.” So that’s the transformation that slowly happened.

If you think about people’s engagement in the financial system, it takes time. For example, I think the individual credit card that was introduced in China was in mid-2000s. But not until many years later were people are actively borrowing against their credit card. A lot of people were using it mainly as a payment system. People didn’t use it for borrowing that much. Similar things happened in the U.S. as well.

Eskin: Oh, yeah. I remember when I started with a card, I never spent money I didn’t know I had. I wish I could say I have the same discipline now.

I’m not the only one who wishes they had more discipline. According to the Federal Reserve Bank of New York, in the fourth quarter of 2024, Americans carried more than $1.2 trillion in credit card debt. ‌

Ma left Zhejiang University with a BA in economics, and his student credit card from China Merchants Bank. But he wanted to go deeper into the financial system. So he came to the United States to enroll in a PhD program.‌

I think the first thing I wanted to get is a credit card, but you need to have a Social Security number. But as most of the foreign students who started working here, you get an assistant job as a teaching assistant or research assistant that will get you on the social security system, and then you start to apply to the most simple credit card. And then, with very, explicit intention, to build my credit.

Ma thought he was going to be building mathematical models for pricing assets.‌

And I decided to switch gears, partially because I felt like I was not smart enough to do all those mathematical models, but partially because I got fascinated by venture capital and private equity and entrepreneurial finance. These are the things that I didn’t see much when I was a student in the late 2000s in China. That was a major difference that I observed here, and that major difference really pushed me to do research and devote a lot of my teaching and research on that specific area.

Ma’s perspective, having grown up with very few of the financial innovations that we take for granted here in the West, may help him to see things differently, to reach conclusions that may be counterintuitive. For a paper titled “Private Equity and Financial Stability,” he teamed up with scholars at Duke and the FDIC to take a look at the financial crisis of 2008.‌

My angle was to look at how finance actually helped the banking sector by buying out some problematic banks.

Now, the conventional wisdom about that crisis is that complex and risky private investments helped destabilize the economy. But Ma and its team found something else.‌

The private capital, through their long-term view, through their more stable funding, actually helped the financial system to avoid a more catastrophic scenario.

Without private equity investors who had a history with distressed companies and a stomach for risk, a lot of those banks would have gone under. Ma and his colleagues calculated that if that had happened, the FDIC, the agency that guarantees bank deposits, would have had to pay out more than $3.6 billion to people who kept money in those banks. ‌

Sung Ma tries to get his students beyond conclusions like “private equity is good,” or “private equity is bad.” In the Finance and Society course, Sung Ma and his students spend several weeks exploring the pros and cons of sovereign wealth funds. ‌

Eskin: What is a sovereign wealth fund? Is that kind of like the endowment of Yale, but it’s the country?

Ma: You can roughly think about it that way. If you take Norway as an example, they have a lot of net surplus from their natural resources. They organize their investment company that represents the country to make investments globally, and then the benefit of those investments later could be used for infrastructure, for citizen benefit, for welfare programs, and so on and so forth.

For the midterm, students had to write an essay about whether the U.S. should have one.‌

They need to analyze the existing sovereign wealth fund globallys and then pick a couple of them to think about the pros and cons and how they operate.

Both Democrats and Republicans have flirted with the concept of a sovereign wealth fund. But not everyone thinks it’s a good idea.‌

The reason being, well, the U.S. is very, very different. We actually do not have a lot of savings as a country. We are on a huge deficit at this moment. Where can we get extra funding? And there are some other considerations about why this might not be a good idea, which is, who should run this? How can we guarantee that those people have the right incentives? How are we going to compensate them?

The Yale endowment, for example, hires people with an investment, and I don’t mean a financial investment, in strengthening Yale as an institution.‌

How can we make sure we get these kinds of people in the government as well, who invests on behalf of the American people?

Finance and Society is a seminar limited to 40 people. A third are SOM students getting their MBAs. The rest come from all over Yale.‌

We have law students, we have public health students, we have environmental school students, we have the policy school students. I think we represent more than 18 countries.

And all of these perspectives help everyone in the room look at complex questions from many angles.‌

In this course, one of the exciting things about it is that I think it’s an opportunity for students to learn from each other. To learn from external sources. And also for me, importantly, to learn from them.

At SOM in the fall of 2024, Ma found himself seated at a dinner next to the former CEO of China Merchants Bank—the same bank that issued that credit card that Song Ma used to pay for his hot pot meal. The banker’s name is Weihua Ma—no relation. Almost 20 years on, the former student got to ask the former banker why he took this risky step of offering credit cards to students who didn’t have any income. They fleshed out the conversation later, back at SOM.‌

Translator for Weihua Ma: At that time, especially in schools, we introduced many initiatives like encouraging students not to buy computers outright, but to use installment plans instead. I think the results were quite good. The facts prove that our students and young people are trustworthy and diligent in maintaining credit scores.

China Merchants Bank did well too. That student credit card initiative became profitable faster than they expected. The student credit card was a crucial first step in his journey from China to New Haven and from undergraduate to professor having dinner with the banker who put the wind in his sails. And the way he sees it, finance, when it’s done right, comes with a lot of benefits. So then what is society without finance?‌

We are so used to a society with finance. If we try to imagine society without finance, it’s going to be really hard. A lot of those kind of roles played by finance, they just work into our life in a more subtle way, and we don’t realize that a life without finance and a society without finance is going to be very different in a very bad way.