This document discusses the major financial crises of the 20th and early 21st centuries, including the Great Depression, various stock market crashes, the Asian Financial Crisis, and the Global Financial Crisis of 2007-2009. It outlines the phases of the recent crisis, from the bursting of the US housing bubble to the recession and sovereign debt crisis. Key events of 2008 that exacerbated the crisis are described, such as the collapse of Lehman Brothers and bailouts of major financial institutions. The roots of the crisis are analyzed from a risk management perspective, including deregulation, low interest rates, unregulated derivatives, and incentives for short-term gains.

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