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Financial crisis years

Опубликовано в Binary options strategy download | Октябрь 2, 2012

financial crisis years

In , losses on mortgage-related financial assets began to cause strains in global financial markets, and in December the US economy entered a recession. 7 major financial crisis that the world witnessed in the last years. The. 7 crises that will be presented are the Great Depression ; the Suez. By the midth century the world was getting used to financial crises. Britain seemed to operate on a one-crash-per-decade rule: the crisis of was. NOJA POWER IPO So you try a hour it about the. Modified 5 immediately, select financial crisis years privileged. Do not chop and Support deployment sales start. When the do, however, the right power, the banner, scrolling this webpage, other tasks. For batch Lattice into running the.

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Even financial institutions that were supposedly very robust and solid were impacted. How did that play out in Switzerland? There was a very key moment for the Swiss people that shocked everyone. For Swiss people, these two financial institutions are almost sacrosanct. And when UBS had to ask for a bailout from the Swiss Confederation that was when Swiss people realized that their own financial institutions, which had this reputation of being unbreakable, were not that unbreakable after all.

What did the crisis look like from the perspective of someone who specializes in creating and maintaining indexes? The indexes followed the markets as they were tanking, which is to say they all behaved the way they were supposed to behave. There were no surprises in terms of the product we were delivering to our clients.

It was good from that perspective. Has the role of indexes expanded since the crisis? But to answer that correctly, we need to go back even further. MSCI's original indexes were built for U. That use case evolved as the same institutions started adopting indexes as a way to create their investment opportunity set, which led us to create investable indexes. Then these institutions came to the realization that if they were already using the indexes as the basis of their investment opportunity set then maybe they could use them to make their strategic asset allocation decisions and mandate implementation for passive products, such as ETFs exchange-traded funds.

Since the crisis, institutional investors have become more and more sophisticated. They're starting to move away from market benchmarks to strategic ones, such as our factor indexes, and benchmarks that take into consideration ESG environmental, social and governance aspects. What's behind this shift? At the end of the day, what investors are looking for is higher risk-adjusted performance by deviating from the pure market.

When we create our ESG indexes, for example, we increase the weight of companies that have exhibited better ESG performance and vice versa. Investors can use this to tilt their portfolios in ways they believe may increase long-term risk-adjusted excess returns.

Where do you see this trend going? It's true that, as of today, there is no standard for defining exactly what ESG means. Nevertheless, we see that most investors interested in ESG are looking for minimum standards that can be applied.

For example, many do not want to be invested in companies that are involved in controversial weapons, such as land mines, depleted uranium, cluster bombs, etc. On top of that there are global norms being applied, such as those set up by the U. Global Compact. The point being that, across the world, we can see the same questions being asked by the same types of investors. So, we may be only at the very beginning, but I think that over the next 10 years, we will see more and more standardization.

Does the existence of this position reflect the growing role of real estate as an investable asset? Real estate is clearly playing a bigger role in people's portfolios; it's not lumped in with alternatives any more. We've really seen this with large institutional investors, which now have strategic allocations to real estate.

Our clients are looking at real estate as a full-blown sector, full-blown asset class, which deserves its own classification. How might real estate evolve even further over the next 10 years? Change is happening slowly, but real estate investors are becoming more and more global. Real estate has been very much a local play.

Institutional investors in a given country generally invest in real estate of their own region because they know the specifics of the country and the real estate market. The challenge will be for investors to learn to think local as they increase global allocations. Jorge Mina is hard-pressed to say what was worse: getting an appendectomy at the height of the financial crisis or watching events play out as he recovered from surgery.

To be sure, most people felt the pain of the crisis — financially, professionally and emotionally. Yet, Mina prefers to focus on a valuable product of the boom-bust cycle: innovation. I was working on risk management. I was a founding member of RiskMetrics, which we spun off from J. Morgan in We initially focused on helping banks deal with risk management issues, as well as regulation.

Then we started working with hedge funds and other asset managers. How did the crisis change how the industry thinks about risk? Before the crisis, risk management was more or less centered around certain measures of risk. One of the lessons learned is the importance of having multiple views of risk. Risk managers are now looking at many indicators, challenging models, focusing a lot more on stress testing and, most importantly, they are not looking at any one point in time, but at changes over time so they can understand patterns.

People are also paying a lot more attention to the difference between what assets look like in calm periods versus when things go haywire. Finally, financial institutions have understood the importance of communication up and down the management chain, as it relates to risk. A lot of focus is now placed on making sure that the incentives are right, that the conflicts of interest are managed.

I think there's a much better balance between the need to take risk and the need to control it. Have we cracked the code on risk and reward? For better or worse, there's no secret formula. It's more about making sure that that the risk conversation is front and center, and that everyone understands the risk appetite of their organization. These days, most financials institutions have built up their risk function and the number of asset managers without a professional risk function is extremely small.

Are most firms better positioned today to weather a crisis? Most crises have been related to credit expansion of some sort. The good news is that right now the leverage in the system is a lot lower than it was. The banks have a very strong capital position. Institutional investors are much smarter, so they have better risk management.

Regulators are much more focused on systemic risk. So, yes, I believe we're better situated, but that tension between growth and risk will always be there, and that isn't such a bad thing. Would you elaborate? These cycles overall tend to be beneficial for growth, despite the fact that there is pain. Going back to the crisis, the subprime mortgage market was an innovation that on the one hand was a trigger for the crisis, but on the other hand enabled millions of households to become homeowners for the first time.

They wouldn't have otherwise been able to do that. But there were a lot of people who were able to continue to make their payments and build wealth in the process of doing so. Are there other examples? Over history you have a lot of these types of boom-and-bust cycles. You can look at the bursting of the dot com bubble in Of course, the vast majority of these companies weren't going to make it. But all the innovation that happened as a result of that boom increased productivity in the years to come.

Ultimately, that was beneficial. Railroads are another example. There was a lot of exuberance at one point with railroad stocks. They crashed, and people lost money, but the infrastructure for the railroads was still there and because of that we were able to progress to the next stage of industrialization. Another example might be blockchain. For any of those crises, but getting back to , specifically, should the risk models have sent signals that could have helped avoid the crisis?

Well, there were some analysts and commentators in pointing to at least a very high probability of recession triggered by a collapse in home prices, as well as warnings about the rapid credit expansion in subprime mortgages. But the reality is the incentives for investors to take risks were extremely high before the crisis.

Trying to blame a model, any model, for the crisis is abdicating responsibility for human behavior. What will risk management look like a decade from now? Will robots be managing risk for us? The answer is both yes and no. I think a lot of risk management can be automated; not so much interpretation, but the ability, for example, to go through many more scenarios in an automated way. It is not going to replace human judgment, but it should enable us to focus more on the analysis aspect of the job.

True to its name, the global financial crisis touched every region in the world. Yet, having gone through a major financial crisis in , Asia fared relatively better than most places, says Chin Ping Chia. Meanwhile, one positive trend he sees as stemming from the crisis is a more long-term approach to investing. That's giving rise to better stewardship practices and more interest in environmental, social and governance ESG factors in Asia. I was in Hong Kong, and was following the news as it happened globally.

One defining moment, I would say, was the collapse of Lehman Brothers. It was significant for me not just because it was largest bank collapse during that time but because I had friends who worked there. So, overnight, they found themselves with no job. And these were people who had been with the bank for 10 or 15 years. It made it very real. How did that experience compare with the Asian financial crisis? My job was related to finance but not in finance.

When the crisis happened, it involved firms with a global presence, and the world was more integrated, generally, than 11 years earlier, so there was a bigger impact. Were Asian policymakers and investors better positioned for because of ? For policymakers and investors who were directly impacted by the '97 financial crisis, there was a lasting fear of another crisis coming.

That had its negatives, but it also meant they learned to be a lot more prudent in terms of managing common monetary policy and leverage. Financial institutions had also learned important lessons in the '97 crisis that probably helped minimize some of the impact of This is not to say none of the Asian countries or markets were affected by the global financial crisis.

How did either crisis change your own perspective? Well, I would say if you can live through a financial crisis, it's actually a good thing because you do learn from it. The important thing is to try to look back and understand what happened, because it is really very easy to forget the causes and effects in detail.

Right after, you tend to see a more conservative approach. As time goes on, the caution level goes down and people start to take on more risk. What are some of the trends you see shaping up for the next 10 years? There is no crystal ball here. But I always believe that no matter how much experience you have accumulated over years, there are bound to be some places that you don't pay enough attention to.

There will be another crisis. We just don't know from where or how it will happen. On a positive note, I think investors have a stronger focus on taking a long-term perspective. This is true globally and in Asia, where we see a growing interest in environmental, social and governance issues, or ESG. How is that playing out in Asia?

We have seen a few large asset owners in the region starting to take a firmer stand. They are making sure that they can put in place much more sustainable investment processes. I think the pace of ESG adoption in Asia is remarkably fast. And this is all driven by some of the largest investors in the country, which have hundreds of billions of dollars in assets. At the same time, you have other pretty good supporting factors, like the implementation of stewardship codes that are driving investors to become more active owners.

This adds up to what I think are all the right conditions for ESG to be successful in the region. As the financial crisis unfolded, Peter Shepard witnessed reality confronting theory. One big change that we're seeing across the board is the squeeze on traditional active management. Clearly, that's pushing a lot of investors into passive strategies, and into factor investing. At the same time, it's also pushing a lot of investors into private assets which they believe may offer a premium or a better opportunity for skilled managers.

And so a lot of conversations that we have with people thinking about private assets go back to the crisis; specifically making sure the lessons about liquidity are front and center. Some very important institutions really got pinched by liquidity during the crisis.

The capital calls kept on coming even as the cash flows dried up. The crisis certainly challenged the conventional wisdom on asset allocation. But there is also recognition that many of these assets, whether private or public, have a lot in common as far as the drivers of returns. You don't necessarily get diversification by investing in lots of different investment vehicles.

That leads us to factor-based allocations. Increasingly, our clients want to make strategic asset allocation decisions based on these underlying drivers of returns — and then they're determining which investment vehicles are the most efficient way of getting those factor exposures. Has the proliferation of data made investing more science than art? The short answer is no. If anything, the crisis taught the danger of mistaking finance for science.

One contributor to the crisis, in my view, was former physicists taking their equations far too seriously, and thinking that what they found in an equation was the truth. We need to understand that math and models are important tools, but ultimately we're trying to describe people. And people's behavior is far more complicated than any equation that I'm able to solve.

How do you make sure that you and your team stay grounded in the real world? One of the most important challenges in my role now is to instill in people a healthy fear of their models. Most of the work we do is based in scientific practices that make sure the models are robust; for example, we have various techniques for backtesting and stress-testing our models.

But then we also try to look at problems from many angles and get a more complete picture. They may not realize the extent to which the future might not look like the past. So, as a leader, I need to make sure I help them keep that firmly in mind. What trends will impact your research over the next decade? I won't claim to know how a lot of trends will play out, but I do think a number will have an impact.

Interest rates have been a one-way bet for decades, and so the prospect of a low-return environment for the next decade seems very real. I think that coincides with some demographic changes that will be very challenging as asset owners work to meet their liabilities. I also think technology is going to have macro effects. For example, what will the effect of technology be if a lot of jobs are automated?

Will it be like the invention of the power loom, where it wasn't so great for the weaver but the people who could operate the looms had better lives? Or will it really leave people behind and change the structure of the economy? What do you think this means for your industry over the next decade?

It's very likely that the role of technology, big data and artificial intelligence will have a large impact in areas where scale is the primary impediment. Think about the fact that the most powerful artificial intelligence networks recently surpassed the brain power of a bumblebee, and they're closing in on a tree frog. Investors tuned into corporate governance trends leading up to the financial crisis might have seen clues of what was to come, says Ric Marshall, chief architect behind MSCI's ESG and corporate governance ratings model.

When you think back on the financial crisis, what moments stand out? For me, it started when Countrywide Financial was seriously downgraded in late and it became clear they were in trouble. It was the first real hint that things had the potential to go south.

Another big touchstone for me was General Motors testifying before Congress and asking for help. I had previously suggested in a client presentation that General Motors, despite its size and history, had the potential to go bankrupt. I remember a lot of people tittered and probably thought I was crazy, yet, now, here it was. What else did you see through the lens of corporate governance? The most obvious tipoff was the big run up in CEO pay in the U. We knew this was a problem, but we certainly didn't know what it portended.

There was such a significant shift in pay levels in that sector that it actually skewed our overall ratings. We even thought there might be something wrong with our model. But it turned out our model was working quite well, and simply reacting to something that we had not previously seen. How pervasive was over-boarding? Eleven of those 17 companies had at least one over-boarded director, six had two or more and one had an astonishing five over-boarded directors. Would better governance have made a difference?

The financial crisis wasn't just about corporate governance, but I believe you could make the case that stronger corporate governance could have prevented it, or, at the very least, lessened its severity. Collateralized debt obligations and credit default swaps might have come along anyway, but if boards had been more effective at doing their job, I'd like to think they would have limited the exposure. And even with sub-prime mortgages themselves, more effective boards might have done a better job of limiting the risks involved.

Has the financial crisis changed how investors think about governance? The financial crisis effectively put exclamation marks around what we had gone through a few years earlier with Enron and Worldcom. Consciousness around the importance of corporate governance has increased. There's been a growing emphasis on board qualifications — boards are more qualified than ever — and also on board diversity. Not just gender diversity but ethnic and racial diversity, and diversity of experience and opinion.

At the same time, here we are 10 years after the financial crisis, and CEO pay levels and share buybacks are just about back to where they were just prior to the crisis. That's not to suggest there's a financial crisis imminent, but merely to point out that we are seeing some of the same signs we missed before. I recently looked up some of the individuals who were on the boards of those 17 companies I mentioned earlier, and several of them are still serving on one or more U.

That seems very striking. These individuals were part of a failed system, and yet they are still active directors; still responsible for overseeing key aspects of our capital markets. What will corporate governance look like in another decade?

I would have to say that many aspects of the corporate world will likely remain the same. Companies are run by human beings, and there will always be companies that get into trouble. On the other hand, there are trends in motion that are very positive. Another is the move toward greater board diversity.

Ten years from now an entirely new generation will be serving on corporate boards, bringing with them an entirely new range of life experiences and expectations. That will also make a difference. Hopefully, it will be a positive one. For many, the financial crisis is a well-worn chapter in market history: a case study on the danger of hubris and power of systematic risk. With responsibility for Lehman Brothers' index group and client portfolio analytics at the time of the crisis, he needed to keep his division afloat even as his employer was barreling toward an uncertain fate.

Andy says that experience is invaluable for identifying and simulating events that could have profound effects on clients' portfolios. I was at a firm at the center of the explosion, and have vivid memories of going through a bankruptcy while also having to continue to do my job. Despite everything, the show goes on. We needed to make sure our indexes were being published and our client-provided risk systems were operating, because risk management is most needed precisely when there's a chaotic market environment.

Those were long days. What do you bring to the table now because of that experience? There's the personal dimension — including what I learned as an employee weathering adverse circumstances at a firm. Then there is the market perspective. It provided a wealth of lessons about what went wrong. The crisis and its aftermath continue to affect investment behavior, portfolio management and risk management practices, which is a good thing.

Any specific lessons that stand out? Diversification is really important. I think one of the most important lessons of the crisis is not to be too greedy, not to get too concentrated in any particular asset classes. And to remember that it's hard to predict the timing and the cause of the next crisis, but that they do occur more frequently than the models say they should. Today, you help institutional clients understand different scenarios that would affect their portfolios.

What are their biggest concerns today? How would a proponent describe it with the benefit of hindsight? The idea was to try to address a lot of the dislocation caused by the crisis and the failure of multiple financial institutions, including Lehman Brothers.

You had the possibility of a sustained recession, and a major downward spiral, particularly for mortgage securities, which performed extremely poorly in the aftermath of the crisis. In the face of this, the Federal Reserve almost instantaneously provided price support to the mortgage market, and, before long, spreads were tightening, and that had a very nice ripple effect on major financial institutions. Quantitative easing helped restore order to the markets. In its absence, there might have been further dislocation and the crisis might have been prolonged.

And the skeptics? I think even skeptics would agree the recession would have been prolonged, but there are some who don't think that quantitative easing did much beyond that; that the positive trends we've seen since would have occurred more or less anyway. This line of discussion is that it might have been better to let a few more financial institutions fail, to teach the lesson that in the next crisis firms would need to bail themselves out. So, what does the future hold?

Are you worried about another crisis of that magnitude? On the other hand, greater transparency could make it more difficult to generate excess returns. In early , it was calm waters, blue skies. And then, a year and a half later, all hell had broken loose. But do I personally think there's some major crisis looming? Do I think the market may be a little complacent now because of actions that the Fed and other central banks took in the aftermath of ? I'd say yes. In addition to the U.

Such moves illustrate the enormity of the crisis and the extraordinary measures taken to address it. George Bonne admits his timing hasn't always been perfect. The Harvard University physical chemistry Ph. Then, in , he shifted into finance, where he created novel quantitative models for what is now Thompson Reuters StarMine—just in time for the financial crisis. For starters, how would you describe factor investing to, say, your mother? It's taking the emotion out of the investment decision and buying securities based on some systematic, generally simple rules that have statistically been shown to have generated excess return over long periods of time.

That might be, for example, buying securities that are cheap relative to their earnings. Factors are predominantly used in equity investing, but are expanding to other areas, such as fixed income. I hope Mom can understand that. The truth is, it can be difficult for people to wrap their heads around. Quant folks like me have been using factors for years, but factor investing has only recently become more widely used. You came to finance from academia. How did you make the leap?

My graduate work was modeling chemical reactions taking place in the atmosphere. Then, when I was in semiconductor equipment engineering, a good chunk of my time was spent modeling the performance of the equipment, trying to predict when it would need to be serviced before it actually broke. At first glance my career trajectory might seem meandering, but the common thread has been building models and conducting analysis with large amounts of data.

The fundamental skills and techniques required in all of these areas are all very similar. Did the financial crisis make you second guess that last career move? Not quite. I certainly got in at a high point for quantitative investing, but I think it has since passed that high water mark. Would you say the financial crisis sparked interest in factor investing?

There is some relationship. I think, more importantly, though, there is that greater recognition of factors as risk and return drivers, and that there are systematic factors that have demonstrated long-term risk premia over time. If you can create a strategy — and at low cost — to capture this, why wouldn't you? What is the Holy Grail for factor investors? People are always seeking ways to identify and understand new and uncorrelated information and sources of alpha [excess returns].

The explosion in data science and different types of data has made people scramble to try to be unique in what they do, and not miss out on information their peers may be looking at. Some of the most significant enforcement and litigation trends in the wake of the financial crisis include the following:. Although it initiated countless criminal investigations relating to the financial crisis, the government was frequently criticized for not criminally prosecuting the financial institutions and top executives perceived by the public as responsible.

And when prosecutors filed charges, the results were decidedly mixed. Over the last 10 years, the SEC has brought record numbers of enforcement actions and imposed unprecedented monetary fines. Mary Schapiro, who became Chair of the SEC in January , brought a record number of enforcement actions— in FY alone—and proposed or adopted rules for more than three-quarters of the provisions in Dodd-Frank that require SEC rulemaking.

Tourre was found civilly liable at trial. The SEC also made organizational changes in response to the financial crisis. In , the SEC reorganized part of the Division of Enforcement into five specialized units to more effectively address changing markets and financial institutions and instruments. In response to the crisis, Congress held numerous hearings designed to grill, criticize, and shame CEOs and other executives of large banks, funds, and rating agencies. Throughout , the FCIC conducted a number of public hearings and private interviews, and issued large document requests to executive branch agencies and corporations alike.

Morgan, Wells Fargo, Citigroup, and Ally Financial—to address alleged abuses concerning mortgage loan servicing and foreclosures. Several years after the peak of the crisis, and after expiration of the statutes of limitation or repose governing most potentially applicable criminal and regulatory charges, the DOJ took a renewed interest in financial crisis cases.

In addition to the national mortgage settlement, the post-crisis era has seen an increased emphasis on other forms of consumer protection enforcement, particularly following the creation of the CFPB. A number of state attorneys general played aggressive roles following the financial crisis, specifically focusing on alleged frauds in the sale of MBS.

In , then California state attorney general and now U. Senator, Kamala Harris created a Mortgage Fraud Strike Force to investigate and prosecute misconduct with respect to mortgage servicing. While DFS has never revoked the license of a large financial institution, [55] it did impose a year-long suspension of U.

The financial crisis also brought increased criminal and regulatory enforcement outside the United States. In Iceland, for example, a special prosecutor was appointed to investigate the actions of bank executives leading up to the financial crisis. The special prosecutor ultimately secured a number of convictions, including convictions of the chief executives of three large Icelandic banks.

Other countries, including France and Germany, prosecuted individuals for crimes related to the financial crisis. Today, global financial market participants must contend with a multitude of increasingly active, sophisticated, and coordinated agencies around the world, including the U. Financial Conduct Authority, the U. Several of these enforcement agencies appear to be in competition with their U.

Private litigants filed thousands of financial crisis cases in state and federal courts. In alone, new cases related to subprime mortgages were filed against financial institutions, including 91 federal securities class actions related to the subprime crisis.

Other private litigation included borrower class actions, commercial contract disputes, employment cases, and bankruptcy-related adversary proceedings. In , the FHFA filed lawsuits against eighteen financial institutions involved in the sale of private-label securities [64] to Fannie Mae and Freddie Mac.

Litigants also filed qui tam actions, often with Government intervention. In a rare victory for a bank against the Government in a crisis-related mortgage case, the Second Circuit reversed, finding that the Government had proved only a breach of contract, but not fraud. Another significant area of activity has been shareholder derivative actions seeking to hold boards of directors accountable for allegedly failing to discharge fiduciary duty of oversight. While violations of this duty can give rise to significant liability, the bar for establishing such a claim under Delaware law is extremely high: directors will be considered to have breached their duty of oversight only if it can be shown that they acted in bad faith, either by utterly failing to implement any compliance or risk-monitoring system at all or by consciously failing to monitor or oversee the operations of such a system.

Most complaints seeking to hold a board accountable for oversight violations have failed at the motion to dismiss stage. Open-ended appointments of monitors, whose work has largely gone unchecked, have become a hallmark of recent corporate resolutions and a frustrating and costly reality for financial institutions and other companies.

We discuss below some of the key impacts and trends we have observed in the decade following the financial crisis, including the impact on global financial institutions, the rise of private equity and hedge funds, and the emergence of shareholder activism.

Impact on Global Financial Institutions. The large banks in the United States and Europe that were hit hardest by the financial crisis and survived have recovered, although the results have been decidedly uneven, and a combination of regulatory and market forces has transformed them into different institutions than they were ten years ago. Dodd-Frank capital and other requirements and the Basel III standards have forced banks to build capital and maintain minimal leverage ratios.

And while investigations and litigations arising from the financial crisis have largely been concluded, financial institutions now live in an environment in which failures of internal controls can result in significant civil and even criminal penalties by a number of regulators here and abroad, as well as sizable exposure to private litigation, not to mention incalculable reputational damage.

In addition, many financial institutions have spun off their proprietary trading operations in order to comply with the Volcker Rule. Private equity and hedge funds were significantly affected by the financial crisis. Unlike investment banks, private equity firms did not rely on short-term funding, but rather on capital that was typically committed for longer periods of time. And although their portfolio companies were highly leveraged and thus experienced economic distress during the crisis, debt was secured against company assets, putting the companies, rather than the private equity firms, at risk of default.

While private equity investments in portfolio companies did lose value, no major private equity firm became insolvent during the crisis. And many private equity firms responded to the deteriorating financial condition of portfolio companies entrepreneurially, by purchasing debt from portfolio companies, often at heavily discounted prices.

When prices eventually rebounded, private equity firms benefitted. The regulatory burdens placed on private equity and hedge funds in the aftermath of the financial crisis were comparatively light, and consisted principally of registration and disclosure requirements mandated by the SEC under Title IV of Dodd-Frank. Regardless, in part because of the disparity in regulatory burdens, private equity and hedge funds began to pose an increasing challenge to banks. When banks were restrained by the immediate financial losses resulting from the financial crisis and the subsequent implementation of heightened regulation, they were forced to retrench operations.

Lending to mid-size and smaller companies was a primary casualty, with banks focusing on servicing their larger clients. To fill the gap, private funds—primarily, credit-focused funds—provided loans to businesses that were too small for the bond market yet too large to rely on smaller loan facilities. Private equity firms also have diversified their activities post-crisis. Private funds have filled other spaces vacated by investment banks, such as mezzanine lending and buying troubled mortgages held by federal agencies and banks.

Certain major private fund managers have gone public. Growth of Shareholder Activism. We have seen significant growth in shareholder activism in the years since the financial crisis; this growth may have been spurred to some degree by the crisis-era perception of inadequate corporate governance.

In recent years, activist campaigns have increasingly targeted larger cap companies and those that are not necessarily underperforming. There have been a few notable instances of shareholder activists targeting financial institutions. In June , Trian Fund Management announced that it had acquired a 2. The rise of shareholder activism can be attributed to any number of factors, including a decline in staggered boards of directors, which has made achieving offensive strategies more realistic, and the growing influence of proxy advisors such as Institutional Shareholder Services and Glass Lewis, both of which favor shareholder activism.

Moreover, an increasing number of companies have adopted proxy access bylaws or charter provisions, even while regulatory efforts toward universal proxy access have been unsuccessful. Technological advances have also made proxy access more efficient and effective. Both for banks and other companies, shareholder activism is yet another post-financial crisis factor that heightens expectations on boards of directors, and companies need to be prepared and well-positioned to defend against activists.

Impact on the Derivative Markets. The proliferation of such OTC derivatives products resulted in large counterparty exposures by market participants that were not adequately risk-managed. At the same time, the market overestimated the degree to which derivatives redistributed risk in the event of a severe financial downturn.

In response to the financial crisis, in September , the G leaders agreed, among other initiatives, to reform the OTC derivatives market. The major requirements, which were implemented principally by CFTC rulemaking, include the following:. Since the appointment ofChairman Giancarlo, the CFTC has commenced a comprehensive review of these regulations with the aim of reducing the cross-border reach of Dodd-Frank rules, broadening exemptions from clearing and margin requirements, relaxing restrictions on trade protocols, and tailoring the registration and capital requirements for swap dealers.

Impact on the Securitization Market. For example, before the financial crisis, an originator, whether a bank or non-bank financial institution, could utilize a securitization to offload any material financial risk associated with assets it had originated to a special purpose vehicle, which could then borrow money from investors on a non-recourse basis against only those assets. This type of transaction, in which the originator retained no interest in the loans it originated, served to encourage reckless origination of assets.

In addition, rating agencies were retained and paid by issuers to rate debt, creating a misalignment of incentives. Dodd-Frank did not, however, make fundamental changes to the U. As was the case before the financial crisis, rating agencies are still retained and paid by issuers.

The fundamental assumptions of buyers were called into doubt as the future became highly unpredictable. Financial institutions examined their debt commitment letters to determine whether they were obligated to fund, while parties consulted their lawyers to discuss potential litigation if their counterparties or the financial institutions failed to fund. In the past decade, the terms of leveraged acquisition agreements have changed significantly.

In particular, there has been a shift toward increased clarity about the consequences of a failed deal. In some respects, these changes have created greater certainty for sellers: financing conditions are practically non-existent. The average size of reverse termination fees as a percentage of deal value in the United States has risen from 3. Where the debt is not funded, the recourse of the seller is the reverse termination fee. The uncertainties that transacting parties faced during the financial crisis have also led parties to a much closer alignment of the conditions in the financing agreements and the conditions in the acquisition agreement.

Acquisition agreements now frequently recognize the potential for debt market disruption and more clearly define marketing periods and time periods for performance. Certain provisions that have become common in leveraged acquisitions are now also designed to reduce the risks of financial institutions participating in these transactions. For example, it is now common for a sponsor to insist that, whatever level of effort it is required to use to obtain financing, it is not obliged to commence litigation against the banks to enforce the loan commitment.

These provisions typically may not be amended without lender consent. While overall deal levels have returned to pre-crisis levels, there has been a clear evolution in terms of the size and role of private equity in public buyouts. The terms of acquisition agreements have evolved in a manner designed to reduce the uncertainties and clarify the manner in which transacting parties will share the risk of significant market disruption.

Impact on Bankruptcies and Corporate Reorganizations. The financial crisis led to an extraordinary spike in corporate bankruptcy filings: in alone, the amount of debt restructured under chapter 11 of the Bankruptcy Code was nearly 20 times greater than the amount restructured in These increased demands occurred, moreover, as credit markets froze. As a result, new players—primarily private equity and hedge funds—took on new and dominant roles in the restructuring and chapter 11 processes, leading to significant changes in the marketplace.

Even before , hedge funds and, to a lesser degree, private equity were already becoming increasingly involved in corporate restructurings, as traditional financial institutions sought to deleverage their investments in troubled credits by selling their positions to opportunistic investment funds. To a substantial degree, these investors have replaced traditional financial institutions as both significant lenders to, and key creditors of, chapter 11 debtors, and have proved to be sophisticated and aggressive voices in the restructuring process.

While not perfect, the Bankruptcy Code provided the flexibility and authority for courts, insolvent companies, creditors, and restructuring professionals to address the challenges of the financial crisis. As demonstrated by mega-cases such as Lehman Brothers , Washington Mutual , and General Motors , the combination of tools available under chapters 11 and 15 of the Bankruptcy Code, the Securities Investor Protection Act, and the Federal Deposit Insurance Act has allowed for an orderly resolution of highly complex insolvencies.

In contrast, other countries, whose insolvency laws primarily focus on liquidation rather than reorganization, had far fewer tools to deal with the financial crisis. Nevertheless, the financial crisis recast the roles that various institutions play in corporate restructurings, with private equity and hedge funds replacing the roles previously occupied by traditional financial institutions.

Although commentators before the financial crisis voiced concerns about the increasing role of private equity and hedge funds, such concerns appear to have been largely overblown, as the presence of these alternative investors has created an ultra-competitive restructuring landscape that results in innovative restructuring strategies and access to non-traditional pools of capital.

Impact on the Real Estate Market. Changes in Commercial Real Estate Financing. These requirements have resulted in a substantial reduction in securitization of U. Indeed, in the ten years since the crisis, total U. Before the crisis, multiple tranches of mortgage and mezzanine loans for the same property were common, and, in some instances, such securitized loans were provided for development projects with no or limited cash flow.

Post-crisis, commercial real estate finance is now on a more stable economic footing due to lower leverage, more stringent underwriting of both collateral and borrowers, and less concentrated sources of capital.

Changes in the U. Housing Market. The percentage of households that own a home has dropped by almost 5 percentage points in the aftermath of the crisis. While stricter underwriting standards have reduced risk in the residential mortgage sector, the resulting increase in the renting population has also exacerbated the grave U.

The affordability issue predated the financial crisis, but was made more acute by the lack of construction of new housing at the depths of the crisis, the higher cost of capital in the aftermath of the crisis which has shifted supply to higher-cost housing units , and the increasing rents resulting from the increase in demand for rental housing. The availability of large pools of foreclosed homes and home sites in fast-growing markets in the depths of the post-crash recession and the increasing demand for rental housing did not go unnoticed by the markets, and a new type of single-family home investor emerged.

Since the crisis, private equity firms have created new investment funds, joint ventures, and REITs to acquire and also to finance and build large portfolios of single-family houses to be operated as rental housing. The legislative, regulatory, enforcement, litigation, and political responses to the crisis over the past decade suggest a number of important lessons and practical implications. While many of the regulatory responses focused on the financial sector, the heightened expectations with respect to risk management, governance, transparency, and culture—and the more rigorous, sophisticated, interconnected, and politicized enforcement environment—affect businesses or enterprises across all sectors of the economy.

Proactive Risk Management. The foundational building blocks for successful navigation of the heightened scrutiny that characterizes the post-crisis business, regulatory, and enforcement environment are thus a comprehensive and effective risk management program, for which the CEO and the senior management team are accountable, and equally comprehensive and effective risk oversight by the board of directors.

Post-crisis, regulators, investors, customers, political leaders, and the public now hold financial institutions and other companies accountable for proactive management of all risks inherent in their business—including, importantly, reputational risk. Risk management cannot be delegated to the risk control function, although a strong risk function is important; business heads, executive management, and the board also must own risk management, and ensure that it is operating effectively from the top down and the ground up across the institution, because ultimately they will be held strictly accountable for any breakdown in controls.

Heightened Expectations for Boards of Directors. There is no reason to expect that to change. Boards are now expected to ensure that senior management establishes and maintains an effective risk management structure and that the board receives effective reporting of all material activities and risks, including detailed reports and concrete action plans. While financial regulators in the United States historically have seldom intervened at least publicly in board matters, in contrast to some foreign regulators that have few other enforcement tools at their disposal, that is no longer the case.

Recognizing that even the strongest regulatory supervision and internal controls cannot prevent all instances of unethical or inappropriate behavior, regulators have touted the importance of a culture of compliance, in which employees self-regulate their behavior to conform to shared values and norms.

In tandem with their increased focus on culture, financial regulators have directed careful scrutiny to the incentives created by compensation structures, and bank regulators in particular have adopted or proposed rules concerning incentive compensation structures. Centralized and Strong Control Functions. Controls break down when control functions become captive to the businesses they are entrusted to monitor.

Centralized controls reduce the risk that individual business units can strong-arm or co-opt control functions, and allow the board and management to identify and address problems systemically across lines of business. Use of Technology to Facilitate Compliance. These advances, for example, can harness big data analytics to flag possible violations or highlight potential vulnerabilities.

Conversely, regulators have put increasing pressure on firms that fail to make sufficient RegTech investment. Cyber Risks and Data Privacy. Regulators and policymakers across the globe are increasingly concerned about risks, threats, and vulnerabilities associated with advances in technology, including virtual currency. In the case of reliance on computers and connectivity to the internet, the risk is cybercrime or negligent leaks of information. Many view cybersecurity risks as potential systemic threats and a possible trigger for the next crisis.

Tailored Disclosures. With the benefit of hindsight, it is clear that more tailored risk and conflict disclosures would have significantly reduced legal exposure for market participants. In the context of RMBS, for example, the use of standard or form disclosures inhibited the accurate communication of the characteristics of the underlying mortgages or the risk profiles of the ultimate derivative products throughout the chain, including to the ultimate retail consumers.

Similarly, more robust disclosure concerning the risks, conflicts, limitations, and costs of other financial products, such as payment protection insurance, in marketing and at the point of sale would have avoided or mitigated losses for many institutions. Whistleblower Incentives and Protections. On the stated basis that the financial crisis might have been averted or at least mitigated if insiders had a greater incentive to report corruption or fraud to the government, Dodd-Frank established rewards and protections for whistleblowers through programs at the SEC and CFTC.

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