...University College of Management Safi S. Alsanoosy FIN- 6063 April-16-2012 Instructor: Dr. David Alldice Contents A- Introduction 3 B- Causes of financial Crisis 2007-2008 3 i- Role of mortgage lenders 4 ii- Role of mortgage Borrowers 5 iii- Role of investment bankers 5 iv- Role of Credit rating agencies 7 v- Role of CDO Investors and hedge funds 8 C- Impact of crisis on financial institutions and Lehman Brothers 8 D- Measures to mitigate financial crisis 11 E- Conclusion 15 F- References 17 A- Introduction The subprime mortgage crisis happened in the U.S. financial system into the most horrible recession from the time when the Great Depression. This report tracks how the subprime mortgage crisis outspread, disturbing first the housing sector and then the economy on the whole. When banks started lending to subprime borrowers, it looked immense. Unexpectedly, anyone could get a house through a mortgage loan, even with modest or no money down payment. Nevertheless not the entire of those mortgage borrowers were high-quality nominees for the mortgage loan. The defaults of these subprime mortgage borrowers helped lash out the subprime crisis. (Rudd, 2009). The circumstances of the mortgage markets became more deteriorated due to the involvement of Investment Banks in underwriting the mortgage loans. The amplified exploitation of the secondary mortgage markets by lenders further to the numeral of subprime mortgages lenders could create. As...
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...The Role of Financial Institutions & Risk Management in Subprime Crisis Vikrant Joshi The Role of Financial Institutions & Risk Management in The Subprime Crisis This paper discusses the role of financial institutions & their risk management strategies in the subprime mortgage crisis. The downturn in the housing and mortgage markets precipitated the first phase of the financial crisis in August 2007 when the solvency of a number of large financial firms was threatened by huge losses in complex structured financial securities. Why did these firms have such high concentrations in mortgage-related securities? Given the information available to firms at the time, these high concentrations in mortgage-related securities violated basic principles of modern risk management. Introduction: This paper analyzes the role of financial institutions in the light of risk management and corporate governance in the events leading to the subprime crisis. This paper explores the following question: Given the tremendous advances in financial risk measurement and management, why was the solvency of large and complex financial firms threatened by large losses in the mortgage market? First, the subprime mortgage market was about $1.3 trillion. Even a very high percentage loss in this market seemed manageable, given the overall size of U.S. and world debt markets. Commonly cited reasons such as high mortgage defaults in 2006 and 2007 do not provide a sufficient...
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...Positive and Negative Effects of the Global Financial Crisis Harlita H. Tomlinson Capella University BMGT8114: Accounting in the Global Era Dr. Wendy Achilles June 8,2014 Table of Contents Abstract 3 Positive and Negative Effects of the Global Financial Crisis 4 Background on the Global Financial Crisis 5 Global Financial Crisis and Its Negative Effects 9 Lack of Financial Sector Regulation and Oversights 9 Increase in the Number of Bankruptcies 11 Global Financial Crisis and Its Positive Effects 12 Designing Regulations to Monitor the Financial Sector 12 Global Governance as a Side Effect of the Global Financial Crisis 13 Lessons Learned 16 Domestic Lessons Learned 16 Global Lessons Learned 17 Lessons from Romania. 18 The Role of Financial Executives in GFC 19 Conclusions 21 References 24 Abstract The first financial crisis of the twenty-first century has not yet ended, according to Gorton and Metrick (2012), the wave of research on the crisis has already exceeded any single reader’s capacity, with the pace of new work only making this task harder. The Global Financial Crisis is considered by many economists to be the worst financial crisis since the Great Depression. Global Financial Crisis resulted in the threat of the total collapse of large financial institutions, the bailout of banks by national governments, and market downturns around the world. In the aftermath of this crisis, the housing market declined significantly and has not...
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...FINANIAL CRISIS 2008 AND CORPORATE GOVERNANCE The business world is questioning whether Corporate Governance has become a mere catchphrase, divorced from the contentious problems it is supposed to solve… MEMBERS: AYUSH KUMAR-030 NIPEKSH I MAHAJAN-082 PRABHAV MISHRA-0 PRATEEK KUMAR-096 VAIBHAV JAIN-164 “Why should a financial engineer be paid four, four times... to a hundred times more than the real engineer? A real engineer build bridges, a financial engineer build, build dreams. And when those dream turn out to be nightmares, other people pay for it.” - Andrew Sheng “Contrary to the vulgar belief that men are motivated primarily by materialistic considerations, we now see the capitalist system being discredited and destroyed all over the world, even though the system has given men the greatest material comforts” - Ayn Rand “In fact, there is ultimately a limit to how much regulation can do. In the final analysis, you could write all the rules you want, but there has to be a philosophy of ethical behaviour that comes from human beings operating in a professional way” – William H. Donaldson, CFA “The global crisis was caused by “the over-50s not knowing what the under-30’s were doing” – Johann Rupert, Remgro Chairman “The first casualty of a downturn is truth” - Financial Times Columnist 30 Sept 2008 Introduction- The banking crisis was triggered by largely unregulated trading of complex financial instruments, including mortgaged-backed...
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...1 Introduction Banking is an important institution in the economy and plays a very important role in the economic life and economic growth of any society. While it is of common understanding that banking is not “The Economy”, it is agreed that the health of the country’s economy is closely related to the soundness of its banking system which can be sustained through strict regulations and supervision in order to monitor and control business risks such as Capital Risks, Liquidity Risks, Credit Risks, Exchange Risks, Operational Risks, Market Risks and Legal Risks. Bank regulations and bank supervision are required to facilitate a ‘Systematic Risk Reduction’ approach thus reducing the risk of adverse trading conditions and to ensure that Financial Institutions satisfy at least the minimum ‘Prudential’ requirements in order to reduce the risk factor that creditors are exposed to. Lack in regulations and slack in supervision may lead to Financial Institutions risking bankruptcy thus exposing their clients of potentially losing their investments and financial assets while distressing the country’s economy. 2 What is the actual function of a bank within an economy? Banks' traditional role is primarily that of an intermediary for money, i.e. granting loans, processing payments, accepting deposits, carrying out investments, etc... Although banks do not create new wealth, through borrowing, lending and related activities they facilitate...
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...M Finance Vrije Universiteit Amsterdam - Fac. der Economische Wet. en Bedrijfsk. - M Finance - 2012-2013 Vrije Universiteit Amsterdam - Fac. der Economische Wet. en Bedrijfsk. - M Finance - 2012-2013 I Inhoudsopgave Vak: Institutional Investments and ALM Vak: Valuation and Corporate Governance Vak: Thesis Vak: Asset Pricing Vak: Derivatives and Asset Management Vak: Empirical Finance Vak: Research Project Finance Vak: Financial Markets and Institutions Vak: Private Equity and Behavioral Corporate Finance for Finance Vak: Financial Risk Management (Quantitative Finance) Vak: Real Estate Management Vak: Adv Corporate Finance 4.1 Vak: Valuation and Corporate Governance for Finance Vak: Institutional Investments and ALM for Finance 1 2 3 3 4 6 7 9 10 11 12 13 14 14 Vrije Universiteit Amsterdam - Fac. der Economische Wet. en Bedrijfsk. - M Finance - 2012-2013 II Institutional Investments and ALM Course code Credits Language of tuition Faculty Coordinator Teaching staff Teaching method(s) E_FIN_IIALM () 6.0 English Fac. der Economische Wet. en Bedrijfsk. prof. dr. C.G.E. Boender prof. dr. C.G.E. Boender, prof. dr. T.B.M. Steenkamp Lecture Course objective Achieve advanced knowledge of the investment process of institutional investors, like pension funds and insurers. The main objective is to fully understand the most important theoretical concepts in the institutional investment process and the way these concepts are used in practice. After following the...
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...The Global Roots of the Current Financial Crisis and its Implications for Regulation Anil Kashyap (University of Chicago) Raghuram Rajan (University of Chicago) Jeremy Stein (Harvard University) Where did the current financial crisis come from? Who or what is to blame? How will it be resolved? How do we undertake reforms for the future? These are the questions this paper will seek to answer. The analysis will have three parts. The first is a rough and ready sketch of the global roots of this crisis. Second, we will focus in a more detailed way on why it hit the financial sector, especially banks. Finally, we will end with some suggestions for future regulation, especially capital regulation. I. A Rough Sketch. It is always useful to start with the macroeconomic environment. In a sense, this is a crisis borne out of previous crises. An important difference between the recent period of sustained growth and previous periods is the low level of long term real interest rates over the last 5 years, certainly relative to the last two decades. Long rates fell following the collapse in investment in both emerging markets and developed countries after the crises in 1998 and the ICT bubble in 2001. Emerging market governments became more circumspect and increased budgetary surpluses, even while cutting back on public investment. For instance, in Philippines, investment fell from 24% of GDP in 1996 to 17% in 2006, while its savings rose from 14% to 20%. From borrowing 10% of its...
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...Wall Street Financial Crisis Student’s Name Institution Date Paper Draft Introduction Background of the crisis. The effects and impact of the financial crisis. Results of preliminary reports. Sociological perspective of financial crisis The aspect of sociology in financial crises Senate’s investigative report The key players and their roles Why the workers remained unknowing The sociological explanation of the unpredictability of the crisis Conclusion Introduction The Financial Crisis of 2008 was described by economists, analysts and even sociologist as the worst and most devastating economic crisis since the 1930s Great Depression. It threatened a total collapse of huge financial institutions, banks bailout by governments, and major downturns in security's exchange around the world characterized this dark economic year. The housing sector in many areas in the world t also suffered, with the result being forced and unnoticed evictions (Coxe, 2005). Many people lost their jobs and there was a prolonged unemployment leading to family crisis and debts. Key businesses including banks failed and there was a huge decline in the consumer profits. The small unsecured financial institutions suffered the worst ever insolvency resulting from bank runs that characterized this period. The declines in consumer wealth were estimated in trillions of U.S. dollars. All these activities took a very short active phase, manifested as a liquidity crisis, and dated from August 9...
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...1561/0500000025 Manufacturing Tail Risk: A Perspective on the Financial Crisis of 2007–2009 By Viral V. Acharya, Thomas Cooley, Matthew Richardson and Ingo Walter Contents 1 Introduction 2 How Did We Get There? 2.1 2.2 2.3 The Panic of 1907 and Its Aftermath Bank Competition, Financial Innovation and Risk-Taking in the Last Decades of the 20th Century Risk-Taking Incentives of Financial Institutions 249 253 253 258 264 3 The New Banking Model of Manufacturing Tail Risk 4 Alternative Explanations of the Financial Crisis 5 Conclusion A Appendix: Tail Risk in the Rest of the World References 273 292 311 314 320 Foundations and Trends R in Finance Vol. 4, No. 4 (2009) 247–325 c 2010 V. V. Acharya, T. Cooley, M. Richardson and I. Walter DOI: 10.1561/0500000025 Manufacturing Tail Risk: A Perspective on the Financial Crisis of 2007–2009 Viral V. Acharya1 , Thomas Cooley2 , Matthew Richardson3 and Ingo Walter4 1 2 3 4 Stern USA, Stern USA Stern USA Stern USA School of Business, New York University, New York, NY 10012, vacharya@stern.nyu.edu School of Business, New York University, New York, NY 10012, School of Business, New York University, New York, NY 10012, School of Business, New York University, New York, NY 10012, Abstract We argue that the fundamental cause of the financial crisis of 2007–2009 was that large, complex financial institutions (“LCFIs”) took excessive leverage in the form of manufacturing tail risks that were systemic in nature and inadequately...
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...There has been no shortage of news regarding banking scandals and crises over the past three decades both globally and in the United States. This increased awareness has led to the focus upon legislation to stem this trend in addition to creating guidelines for how financial reporting should regulated in order to stabilize the banking industry. Part of this effort has been led by the Basel Committee in its creation of its Core Principles for Effective Banking Supervision consultative document that was released in December 2011. The committee consisting bankers and regulators from its 27 member countries provides a framework for establishing bank governance. The United States, even though a member of the Basel Committee, had previously resisted implementing this framework, instead favoring its own legislation. However, the Federal Reserve agreed to adopt the Basel rules as means of governing the nation's banks against the objections of large financial institutions who argued that these guidelines are too strict. As of May 2012, the proposal of this agreement has not yet been released by the Federal Reserve. It is hoped that the endorsement from the United States of the new requirements under Basel III will work to encourage the European Union to follow suit. Banking Supervision Unlike many of the other countries that follow the Basel framework and have only one bank regulator, the United States banking system is governed by the Federal Reserve. The Federal Reserve consists of...
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...Name of the University Master Thesis Banking system reforms after the subprime crises Study case: Spain Author: | Supervisor: | | | Department of …………………………… January 2014 Abstract How did the Subprime Crisis, a small problem of U.S. financial markets, affect the entire global banking system? The aim of this paper is to analyze the effect of the subprime crisis on the banking sector in Europe, with a close attention on the case of Spain. Spain is currently facing the worst crisis ever experienced in its financial history, so it would be interesting to analyze what is the real situation of the banking sector and what will be the reforms that could lead to a consolidation of the financial systems. The strengths and weaknesses of the financial sector will be analyzed in order to see the changes needed to maintain its competitive position. The first part of the paper will briefly explain the subprime crisis, origins and impact on the financial world as new form of contagion. In the second chapter the consequences of the subprime crisis in the Spanish banking sector will be described. The last chapter of the thesis will present an analysis of the reforms made, using legal intervention. It will be concluded with a general point of view regarding the present situation of the Spanish banking system, the potential results of the current measures and the perspectives of new reforms. Contents 1 | Introduction | | 2 | Introducing the Subprime Crisis...
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...09-093 July 22, 2009 The Global Financial Crisis of 2008 – 2009: The Role of Greed, Fear and Oligarchs Cate Reavis Free enterprise is always the right answer. The problem with it is that it ignores the human element. It does not take into account the complexities of human behavior. 1 —Andrew Lo, Professor of Finance, MIT Sloan School of Management The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy. 2 —Simon Johnson, Professor of Entrepreneurship, MIT Sloan School of Management, Former Chief Economist, IMF On October 9, 2007 the Dow Jones Industrial Average set a record by closing at 14,047. One year later, the Dow was just above 8,000, after dropping 21% in the first nine days of October 2008. Major stock markets in other countries had plunged alongside the Dow. Credit markets were nearing paralysis. Companies began to lay off workers in droves and were forced to put off capital investments. Individual consumers were being denied loans for mortgages and college tuitions. After the nine day U.S. stock market plunge, the head of the International Monetary Fund had some sobering words: “Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown.” 3 1 2 3 Interview with the case writer...
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...Tarunkumar Patel MGMT 407-10 Executive Leadership Course Paper Topic: Crisis Management Instructor: Mr. Cleamon Moorer Introduction: I decide to work on a topic of Crisis Management. It is the process of preparing for and responding to an unpredictable negative event to prevent it from escalating into an even bigger problem, or worse, exploding into a full-blown, widespread, life-threatening disaster. Crisis management involves the execution of well-coordinated actions to control the damage and preserve or restore public confidence in the system under crisis. Crises are no longer an aberrant, rare, random or peripheral feature of today’s society. They are built into very fabric and fiber of modern societies. While not all crises can be foreseen, let alone prevented, all of them can be managed far more effectively if we understand and practice the best of what is humanly possible. Crisis management is no longer only for those assigned to the task; it is for each and every person. Every experience of a disaster has shown how ordinary people have to rise to the challenges of a crisis. Crisis management efforts should be directed towards helping the organization recover and rise from the embers of the crisis and ensure continuity. The field of crisis management deals with human-caused crisis and natural disasters. It’s hard for human to stop natural disasters to happen but definitely with the advancement of technology we can now take some pre steps to cause a big loss...
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...CHAPTER ONE INTRODUCTION 1.1 BACKGROUND OF STUDY Nigeria banking sector has experienced a boom-and-burst cycle in the past 20-25 years. After the implementation of the structural adjustment programme (SAP) in 1986 and de-regulation of the financial sector, new banks proliferated mainly driven by attractive arbitrage opportunities in the foreign exchange market (Heiko 2007), but prior to the de-regulation period, financial intermediation never took off and even declined in the1980’s and 1990’s (Capirio and Kligbiel). The sector was highly oligopolistic with remarkable features of market concentration and leadership. Lemo noted that there are ten banks that control more than 50% of the aggregate assets of the banking sector, more than 51% of the aggregate deposits liabilities and more than 45%of the aggregate credits. The sector was characterized by small scale banks with high overheads; low capital base averaging less than $10 million; heavy reliance on the government patronage and loss making. Nigeria‘s banking sector was still characterized by a high degree of fragmentation and low level of financial intermediation up to 2004. This research work is motivated by the need to look into the Central bank (CBN)’s recent reform (consolidation) that employed certain measures to strengthen the Nigeria banking system by drastically increasing the minimum capital requirement from N2 million to N25 billion ($190 million-US). Through review of relevant literatures, analysis...
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...Summary: International Financial Markets (master blok 1) Book: Financial Markets and Institutions (a European perspective) – Haan et al. Author: Kim Cornelissen Chapter 1: Functions of the Financial System 1.1. Functions of a financial system The financial system Figure 1.1; page 5 – Working of the financial system Financial system: includes all financial intermediaries and financial markets, and their relations with respect to the flow of funds to and from households, governments, business firms, and foreigners, as well as the financial infrastructure. Main task is to channel funds from sectors that have a surplus to sectors that have a shortage of funds. Financial infrastructure: the set of institutions that enables effective operation of financial intermediaries and financial markets, including such elements as payment systems, credit information bureaus and collateral registries. * Direct finance: occurs if a sector in need of funds borrows from another sector via a financial market. Financial market: is a market where participants issue and trade securities. * Indirect finance: a financial intermediary obtains funds from savers and uses these savings to make loans to a sector in need of finance. financial intermediaries: coalitions of agents that combine to provide financial services, such as banks, insurance companies, finance companies, mutual funds, pension funds etc. Bank-based system: indirect finance is then the main route for moving funds...
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