The financial crisis and Enterprise risk management The Us stock market dropped by more than fifty percent between October 2007 and March 2009 The meltdown raises questions about the use of ERM Only 18 percent of executives surveyed said they had a well-formulated and fully implemented ERM program 4-16
4-16 The Financial Crisis and Enterprise Risk Management • The US stock market dropped by more than fifty percent between October 2007 and March 2009 – The meltdown raises questions about the use of ERM – Only 18 percent of executives surveyed said they had a well-formulated and fullyimplemented ERM program
Dow Jones Industrial Average, October 2007-March 2009 Exhibit 4.2 10of Timeline of 10000 Events 7.000 Related to 6000 0。。@@。。 the financial A-Citigroup posts a surprise 57% drop in third quarter earnings, fueled by $6.5 billion subprime- related write-downs and losses. The CEO resigns November 2007. Crisis B- Bank of America pays S4 billion for Countrywide Financial after the mortgage lender fails because of risky loans to poor credit risks. UBS announces $4 billion of write-downs, pushing total subprime- related write-downs to $18.4 billion c- Bear Stearns sold to U.S. investment bank ]P Morgan Chase for about $2 per share(the price is later revised to S10 per share) D-US banking regulators seize Indy Mac Bancorp Inc. as the largest publicly traded U.S. mortgage lender collapses as deposi- tors withdrew over $1. 3 billion over 11 days; the Federal Reserve effectively take over mortgage finance agencies Fannie Mae and DJ Now? Freddie Mac to support the U.S. housing market E-Wall Streets worst day since markets reopened after the 9/11 attacks; Lehman Brothers is largest U.S. bankruptcy: Merrill Lynch taken over by Bank of America; American International Group(AIG), once the world's largest insurer, searches for capital and prevent the global financial system from freezing; AIG shares drop almost 50 percent; the Fed announces plan for $85 billion AIG rescue loan in return for an 80 percent stake in the company; Britains Barclays buys parts of Lehman's assets for $1.75 bil lion: Shares in Goldman Sachs and Morgan Stanley fall sharply: SEC curbs short- selling rules; details emerge about the U.S. gov- ernment plan for $700 billion bailout for firms burdened by bad mortgage debt: Goldman Sachs and Morgan Stanley are trans- formed into bank holding companies F]P Morgan Chase and Citigroup announce a temporary stoppage of residential foreclosures. The moratoriums will remain in effect until March 6 for )P Morgan and March 12 for Citigroup; S&P 500 Index closes at a level not seen since December 1996, and closes the two- month period beginning January 1, 2009, with the worst two-month opening to a year in history, losing 18.62 percent. 4-17
4 -17 Exhibit 4.2 Timeline of Events Related to the Financial Crisis DJ Now ?
The Financial Crisis and Enterprise Risk Management AIG mentions an active ERM program in its 2007 10-K Report Riskiness of the Financial Products Division was not fully appreciated The division was issuing credit default swaps A credit default swap is an agreement in which the risk of default of a financial instrument is transferred from the owner of the financial instrument to the issuer of the swap The default rate on mortgages soared and the company did not have the capital to cover guarantees Did erM Fail AlG, or vice versa? The lessons learned by risk managers from the financial crisis will influence ERm in the future 4-18
4-18 The Financial Crisis and Enterprise Risk Management • AIG mentions an active ERM program in its 2007 10-K Report – Riskiness of the Financial Products Division was not fully appreciated • The division was issuing credit default swaps • A credit default swap is an agreement in which the risk of default of a financial instrument is transferred from the owner of the financial instrument to the issuer of the swap • The default rate on mortgages soared and the company did not have the capital to cover guarantees • Did ERM Fail AIG, Or Vice Versa? • The lessons learned by risk managers from the financial crisis will influence ERM in the future