Category Archives: Financial Crisis

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The Global Financial Crisis: A Historical Outlier

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Earlier this month, Swiss Re hosted its 2009 economic forum and, as always, had an amazing wealth of data and insight to share. I was just going through the presentation from the event again today while researching a story and was once again taken aback by how well one of the slides illustrated just how unique the 2008 financial meltdown was.

The dates are tough to make out at this resolution, but the point here is the colors. Look at how even other recession years fall into the normal distribution bell curve while 2008, the lone red rectangle, sits nearly by itself alllllllllllll the way off to the left.

Scary stuff.

swiss re recession stock graph

The data credit got clipped off, but the chart should read “Source: Axa”

The Return of the Hedge Fund?

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It appears the hedge fund industry is making a strong comeback — and much sooner than most thought it would.

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For the first time since the beginning of the financial crisis, new hedge-fund start-ups exceeded the number of hedge fund liquidations.

According to Hedge Fund Research, a total of 224 new hedge funds were started in the third quarter of 2009, compared with 190 funds that liquidated or closed. The total number of hedge funds now stands at 6,775, the highest number since the end of 2008 when there were 6,845 funds.

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Even Zoe Cruz, one of Wall Street’s most powerful women during her time as Morgan Stanley co-president, has started her own fund — Voras Capital Management — for which she has recently started recruiting talent to manage the starting capital of $200 million.

This is a good sign. Or is it? Investments in hedge funds can aide in the economic recovery of Wall Street, but will most of these hedge fund managers, who have seemingly dusted themselves off and started anew, resort back to their old, misleading ways?

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top 10 hedge fund closures 2008

The top 10 hedge fund closures of 2008, ranked by Absolute Return magazine.

Regulation of the Insurance Industry

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I was lucky enough to attend a conference on the regulation of the insurance industry, held yesterday at NYU’s Stern School of Business.

What was most interesting during this meet-up of industry minds, was the discussion between Roger Ferguson and Eric Dinallo. For a quick background, Ferguson is president and CEO of TIAA-CREF and a member of Obama’s Economic Recovery Advisory Board. Ferguson also has experience working with SwissRe and the U.S. Federal Reserve System.

Dinallo recently served as the superintendent of the New York state insurance department. He has also worked with U.S. Treasury, the Federal Reserve Bank of New York and has testified to in front of Congress 11 times — calling for the regulation of the credit default swaps (CDS) that were integral to the creation of the financial crisis.

The two met for an early morning, head-to-head discussion of the federal regulator option with their moderator, John H. Biggs. Ferguson began the discussion, stating his views on the oft-discussed Optional Federal Charter (OFC) proposal that would allow insurance companies to choose a single, federal regulator instead of what some see as an onerous, 50-state regulatory scheme.

“I think the reality is that insurance and reinsurance are the key shock absorbers in this country,” said Ferguson. “We at TIAA-CREF should have the creation of an Optional Federal Charter. We think it should be optional for many reasons, one being that international insurers would have the benefit of a regulator  — it’s the argument for consistency of treatment — there needs to be consistency across the various segments of financial services. Also, dual regulation, as we have in financial services, could be applied to insurance.”

In response to that, Dinallo fired back with his own thoughts on the OFC. “Insurance performed extremely well under the crisis — I think the industry should be proud,” he said. “There might be areas where OFC may be a good idea, such as reinsurance and monolines. However, I think the optional part of the federal charter is a disaster. It’s like AIG having the Office of Thrift Supervision supervise them even though 99% of their business wasn’t in thrift. I don’t agree that the federal charter should be optional, unless Tim Geithner wants a stack of auto insurance complaints on his desk.”

Also on hand were Viral V. Acharya, professor of finance at the Stern School of Business, Matthew Richardson, professor of applied economics at Stern, and Stephen Ryan, professor of accounting at Stern. These three, along with John H. Biggs, former chairman, president and CEO of TIAA-CREF and current professor of finance at Stern, published a white paper entitled On the Financial Regulation of Insurance Companies. Within it, the four academics discuss numerous proposals for regulation of the industry, including the OFC.

So, what do you think — the optional federal charter … needed or not?

Economic Crisis Advances Risk Management in India

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According to the Times of India, risk management has come into much greater in focus in India ever since the financial collapse rocked the global economy twelve months ago.

The global shockwaves following Lehman Brothers’ collapse have woken India Inc to the importance of sound risk management system to tide over future crises.

Despite the fact the India was less affected by the meltdown, companies here are pulling up their socks as the slump has demonstrated that risks are entwined and cut across boundaries.

It’s a brief article without many specific examples, but it touches on the fact that risk management in something that many companies now expect from all their units — and they expect them to report their findings to the CFO. All this looks like many businesses in the country are beginning to see that there are real benefits to holistic risk management.

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Much like their U.S. and European counterparts, Indian companies will undoubtedly struggle to turn this good idea into good practice, but the underlying concepts have to come first, and this looks like a positive sign in that a key driver of the developing world economy is moving towards incorporating better forethought throughout its private sector.

Most big players have sought international risk advisory firms like Marsh, to step up the internal control process of their portfolio companies.

“The global credit crisis has driven home the point that although US was the epicentre, its effect has been felt elsewhere too, in today’s inter-connected world. Risk management must factor inter-linkages and remote possibilities,” said Marsh India head Sanjay Kedia.
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“Low-probability and high-severity catastrophes like the recent financial turmoil or the Mumbai terror attacks do happen,” he said.

And when they do, hopefully many companies in India will be able deflect the blow.

bangalore risk management

Bangalore, or The Silicon Valley of India, has seen large-scale economic expansion in recent years. Now, a focus in risk management is expanding there as well.