1. Risk Management
University of Economics, Kraków, 2012
Tomasz Aleksandrowicz

2. risk at financial markets
current financial crisis
financial risk management

3. Biggest XX centaury financial crises
• 1929 - Wall Street Crash (Great Depression)
• 1973 – oil prices crisis (1973 – 1974 market crash)
• 1987 – Black Monday (19 October)
• 1989 – 1991 - savings and loan crisis (US)
• 1990 - Japanese asset price bubble
• 1992–93 – Black Wednesday (16 September)
• 1994 - economic crisis in Mexico
• 1997 - Asian financial crisis
• 1998 - Russian financial crisis
• 2001 - dot-com bubble

4. world financial crisis
financial crisis in 2007 – 2012 (?)
case story: dramatic turn of events of 2008

5. phases of the crisis
• US housing bubble burst causing sub-prime
mortgage crash (2006)
• banking and financial market crisis (2008 - 2009)
• global recession (started 2009)
• sovereign debt crisis (started 2010)

8. • 17 February – UK
government
nationalized struggling
Northern Rock bank

9. • March 14 – Bear Stearns
gets $30bn Fed funding as
shares plummet
• March 16 – Bear Stearns is
acquired for $240m a by
JPMorgan Chase in a fire
sale to avoid bankruptcy
(worth $18bn year earlier)

10. • March - July – more banks around the world starts to
announce huge losses many of them seek financing by issuing
stock or from governments

11. • September 7 - US government takeover of Fannie Mae and
Freddie Mac
• two companies at that time owned or guaranteed about half
of the US $12 trillion mortgage market
• this move causes panic on the markets

12. • September 14 –
Merrill Lynch, 158-year
old investment bank is
sold to Bank of America
for $50bn

13. • September 15 – Lehman
Brothers goes bankrupt
• Stock Exchange collapse:
DIJA down 500 points,
FTSE100 down 400
points

14. • September 16 – AIG credit
ratings downgraded
• September 16 – $140bn
withdrawn from money
market funds which causes
freeze of CP market
• September 17 – US FED lends
$85bn to AIG to prevent
bankruptcy

15. • September 18 –
HBOS plc the biggest
UK mortgage
provider took over by
Lloyds TSB for £12bn

16. US government response
• September 18 - Treasury Secretary Henry Paulson and Fed
Chairman Ben Bernanke meets with legislators with proposal
of $700 billion emergency bailout of toxic assets

17. • September 25 – due to
bank run and $16.4bn
deposit withdrawn in 10
days Washington Mutual is
closed down by regulator –
remaining assets sold to JP
Morgan Chase for $1.9bn
• at that time bank assets
were worth $307bn

18. • September 29 - Citigroup Inc.
announced that he would acquire
banking operations of Wachovia
• Later October 3: Wells Fargo
makes a higher offer for Wachovia
paying $15bn

19. • September 29 –
September 31: As
crisis hits Europe –
more banks
nationalized

20. • First days of October
– Iceland banking
sector nationalized
• stock exchange
operations
suspended
• rating agencies
downgrades
• economic downturn
• Iceland first country
to seek IMF help

21. US solution to liquidity crisis
• October 3 – President George W.
Bush signs act creating a $700 bn
Troubled Assets Relief Program
(TARP) to purchase failing bank
assets
• October 6 – Fed announces that it
will provide $900 billion in short-
term cash loans to banks
• October 7 – Fed makes emergency
move to lend $1.3 trillion directly
to companies outside the financial
sector (effect of freeze in CP)

22. October 6 2008
– October 10 2008
• Worst week for the stock market in 75 years
• The Dow Jones loses 22.1%, its worst week ever
on record, down 40.3 % since reaching a record
high of 14,164.53 October 9, 2007.
• The Standard & Poor's 500 index loses 18.2 %,
its worst week since 1933, down 42.5 % in since
its own high October 9, 2007

23. World Recession in 2009
(% GDP change)

24. Europe sovereign debt crisis

26. roots of world financial crisis
causes of crisis in risk perspective
main consequences

27. causes of financial crisis
• no simple answer
• many direct and indirect factors
• variety of narratives describing the crisis
• highlights from risk management perspective

28. • Regulatory and market-based controls did not effectively
protect this system or measure the buildup of risk

29. roots of financial crisis
• policy of deregulation of financial sector
• historically low interest rates
• derivatives market not regulated
• rise of financial engineering and complexity of the securities
• sub-prime loans and predatory loans
• rating agencies paid by security issuer model
• financial sector salaries and incentives connected with short
term performance (not regulated)
• commodities boom

30. sources of financial risk
xxx