By Mike Ransdell

When his plane landed, Yaniv Grinstein looked at his watch. It was 10 p.m., an hour late. "Certainly too late to meet now," thought the 26-year-old Israeli. "Oh well. It was nice of him just to offer." He found a pay phone in the terminal.

Grinstein was a PhD candidate for Carnegie Mellon's finance program. He had just arrived in Pittsburgh after spending two and a half days visiting with faculty and students at Northwestern University, where he was also accepted. His visit to Carnegie Mellon would help him decide between the two programs.

A few days before leaving Israel, he had received an email from Carnegie Mellon economics professor
Chester Spatt. Spatt explained that he would be out of town the day Grinstein visited campus, but he would be happy to meet with him the night before.

Grinstein was grateful. He was just a PhD candidate, after all. He hadn't yet published any papers of note. So for a professor to offer to meet with him and answer all of his questions "beyond normal workday hours" was inspiring.

"I'm sorry I'm just calling now," Grinstein said to Spatt, on the other end of the phone. "My flight was delayed, and I just arrived at the airport. I'm sure it's too late for you to meet with me now, but I appreciate your offer."

"Not a problem," replied Spatt. "We can still meet. Call me when you get checked in to your hotel." Stunned, Grinstein hung up the phone, gathered his bags, and hopped into a taxi heading for the Holiday Inn Select in Oakland. An accident in the Fort Pitt Tunnel brought the cab to a crawl through the tunnel, delaying him even further. When he finally arrived at the hotel, it was about 11 p.m.

After quickly checking in, Grinstein called Spatt and again told him that he would understand if it was too late to meet. Spatt replied he would be right over. Elated, Grinstein grabbed his notepad, filled with questions he had jotted down, and dashed to the lobby. Within minutes, Spatt strolled through the entrance and shook Grinstein's hand. For the next two hours, until past 1 a.m., he patiently answered all of Grinstein's questions while the two sat in the lobby.

"I was so impressed. He gave me the whole overview [of the program], and he knew the names of all the students for the past 15 years and where they ended up," says Grinstein, laughing in amazement as he remembers that night in late April 1995. "That by itself made me realize, "OK, this guy knows a lot. That actually was one of the reasons that I decided to come to Carnegie Mellon."

Grinstein is now assistant professor of finance at Cornell University, and his research has been cited by major publications, including The Economist, Forbes, Newsweek, and The New York Times. Coincidentally, he had little interaction with Spatt while at Carnegie Mellon because of their divergent research focuses. The two finally worked together after Spatt, who accepted an appointment at the Securities and Exchange Commission (SEC), recruited Grinstein to work as a visiting scholar in the SEC's Office of Economic Analysis (OEA). During that time, Grinstein was reminded of the lesson he learned when he first met him--he knows a lot, about a lot.

The SEC is the federal government's watchdog over the securities markets. It regulates and enforces securities rules to protect investors from fraud and maintains a level playing field so that markets can thrive. It was created in 1934 to restore investor confidence, which had been all but obliterated by the stock market crash of 1929. It is estimated that half of the $50 billion in new securities offered during the 1920s became worthless.

The OEA is the economic advisory arm of the SEC--almost like its independent consultant on potential regulations and long-term policy strategies. A big part of its job is to conduct and analyze research to develop reports that explain, "if you adopt this rule, these will be the likely results," to help guide the commission's decisions.

Effective July 2004, then SEC Chair William H. Donaldson selected Spatt to serve as the SEC's chief economist and OEA's director. For the next three years, Spatt led a staff of about 30 economists through some of the most hotly debated, highly publicized economic issues on Capitol Hill.

He arrived in Washington on the tail end of an ongoing, contentious argument over expensing stock options. "I got a heads-up from a very prominent economist working in the administration," recalls Spatt, "who told me before my arrival [to the SEC] that while options expensing was not at all controversial among economists, I would quickly see that it was incredibly controversial in Washington."

Stock options are the right to buy or sell shares at a given price at a given time. Public companies award them to executives (and sometimes all employees) in place of cash compensation. Here's how they typically work: A company issues its new CEO the right to purchase X shares of company stock at a fixed per-share rate after a vesting period, often a few years. At the conclusion of the vesting period, the CEO can buy the shares at the agreed-upon price rather than the current price. If the stock price has gone up, it can lead to significant compensation. The company benefits by not having an upfront payout.

The controversy regarding stock options centered on how companies expensed them--or rather, didn't expense them. When Spatt arrived in Washington, companies that issued stock options were required only to summarize them in footnotes in their financial statements. But the Financial Accounting Standards Board, the independent organization designated by the SEC to establish the rules governing how companies must prepare their financial reports, had proposed changing the rules. The change would require companies to expense stock options on their income statements--in other words, attach a real number value to them, which would then get subtracted from its profit, giving investors a more accurate financial picture.

Issuers of stock options cried foul, arguing that the change would scare off investors who would see smaller net earnings on their books. Besides, they countered, estimating the true value of stock options--whose real value won't be determined until the future date when the options can be cashed in--is difficult at best.

To help address the complaint that options were difficult to expense, Spatt led a team of SEC economists to study various approaches to expensing. They ultimately concluded that market-based instruments (i.e., instruments that could be bought and sold on the open market that mirrored the actual options) could, indeed, determine the true value of options under certain conditions.

Throughout the process, economists, lawyers, and lobbyists expressed their concerns with Spatt and his staff. "We went round and round on this stuff [with various individuals]," says George Oldfield, former economic research fellow at the SEC from October 2004 to May 2006, who worked with Spatt on the pricing model. He says it was like religious scholars studying the Old Testament, "arguing over what each Hebrew symbol meant, where there would be a thousand pages of commentary on the first symbol." He says Spatt wasn't intimidated by the passionate opinions. "Chester was very patient in this whole process. And this was only one of a number of things he had going on."

"The purpose of expensing is just to provide some transparency to investors about what is one's cost structure relative to other firms who are using other types of compensation tools," says Spatt. "It is just a way to try to get a more level playing field between different compensation tools."

Spatt demonstrated transparency in some of his personal views on economics through the 24 speeches he gave across the country during his three-year tenure at the SEC. Prior to each presentation, Grinstein says that Spatt would give OEA staff members copies of his speeches to review and offer feedback.

"In the beginning, I didn't really understand exactly why he was [giving so many presentations]," says Grinstein. "But I actually started to notice some very interesting things. First of all, he was talking about a lot of different things; things that I didn't know he knew a lot about. It showed me how deep and wide his knowledge is in different aspects of economics. The second thing I thought was really interesting was that I think it was a way for him to bring the academic knowledge and thinking to the people. One of the problems we have as academics is that sometimes we become detached from real life. We are in our ivory tower thinking about issues. But here he was basically bridging knowledge based in academia to the people. I don't think I saw that with other chief economists before him."

The breadth of Spatt's knowledge amazes Kathleen Weiss Hanley, financial economist at the OEA. On one particular occasion, she remembers listening to a visiting scholar present his research to the OEA staff, when the speaker referenced "an obscure paper that no one has probably heard of." Spatt had read the study, she says, and provided a detailed analysis.

His ability to recite research might have something to do with the fact that he has served in editorial roles for six scholarly journals, including the prestigious Review of Financial Studies, which he helped found. He also has refereed for many others (which means that he has dissected countless academic papers on a wide range of topics to determine whether they were up to publishing standards). For his own research efforts, he has received four awards for papers he's written with various colleagues.

Now back at Carnegie Mellon, he has taught master's courses on taxation and asset allocation and fixed-income investments in the past year. Next year he will introduce a course on the economics of securities regulation. Although he says he enjoyed being in the heart of federal policy-making, he's glad to be teaching and researching once again.

"Originally, I had agreed to serve for two years [at the SEC]; then I agreed to serve for another year," explains Spatt, "but it was time for me to return to being an academic. I felt that it would be valuable to have more time to reflect. I wasn't able to engage much in traditional research there. I had opportunities to give speeches on a lot of interesting issues, and some of that may seed my research program over time. But there were so many stimuli that I thought that I had sort of reached the point that it was important to go back to my professorial roots."

When Grinstein got back to Israel in 1995 after visiting Carnegie Mellon, he told his undergraduate professor, Dan Peled, about all of the people he had met at the campus. Peled, a former Carnegie Mellon professor who had encouraged Grinstein to apply to the school, knew all of the names and had a comment about each one. For Spatt, Peled used an old Hebrew phrase:

Translation: A well that doesn't lose a drop, says Grinstein. Now more than a decade since his hotel lobby talk with Spatt, having had the chance to work with him closely at the SEC, Grinstein says he understands exactly what Peled meant.

Mike Ransdell has been an award-winning freelance writer for more than 12 years. His features have appeared in several collegiate publications, including this magazine.