Vanguard’s case study in judgment calls

Mabel Yu was a fairly low-level em­­ployee at Vanguard.

She’d been working ridiculous hours from 2005 to 2008 reviewing mortgage-backed securities, asset-backed securities and commercial paper. She couldn’t figure out if they were too risky—and she was fighting for information against a tide of exuberance.

As a fixed income credit analyst, Yu had to recommend to Vanguard’s portfolio managers whether they should buy these new investments. All the bonds Yu evaluated had been rated AAA.

Yu distrusted the complexity of these instruments and was concerned about the deteriorating quality of the mortgages behind them. She suspected that even AAA bonds had worsening subprime exposure. She called bankers and rating agents, who treated her with condescension.

Ultimately, Yu believed in the culture of Vanguard and its founder, John Bogle, who advocated due diligence.

She recommended against the in­vestments, and Vanguard backed her up.

Bottom line: Vanguard named Yu its analyst of the year in 2009.

— Adapted from Judgment Calls, Thomas Davenport and Brook Manville, Harvard Business Review Press.