The consequences of the financial crisis on theory and practical aspects of asset management

2007 is going down in history with the subprime phenomenon which came as a surprise to all market observers. According to P. Artus, Director of the Economic Research at Natixis , the word subprime was mentioned in 6,000 articles in the international press in 2006, 32,000 during the first 6 months of 2007 and 130,000 during the second semester of 2007. In the French press, the word subprime only appeared in six articles in 2006, 700 during the first semester of 2007 and 8,400 during the second semester of 2007.If, just before the summer, many anticipated an increase in defaults on subprime loans, no one imagined that it would provoke a financial crisis that some do not hesitate to compare to that of 1929. In a report dated from April 2007, the experts of the IMF noticed that: "Despite recent volatility in financial markets and concerns about the housing market in the United States, we predict that strong global growth will continue, albeit less fast. Although risks to the outlook are judged to have declined since the last 6 months, five main factors create uncertainty. First, there could be a sharper slowdown in the United States if the housing market continues to deteriorate. Second, oil prices could spike given limited spare production capacity and continuing geopolitical uncertainties. Third,inflationary pressures could be rekindled as output gaps continue to close, particularly if there were another spike in oil prices. Fourth, continued volatility in financial markets could lead investors to move further away from risky assets. Finally, global imbalances could unwind in a disorderly fashion. Although the probability of this occurring is low, the costs would be high".So, at worst, there were fears of a slowdown in the US economy, but not one that would spread to the rest of the world: the "decoupling theory". Fate, however, was to decide otherwise, with the downturn proving more widespread and more brutal than expected. The financial crisis, which started in August 2007, is first a subprime mortgage credit crisis. Even if this market had recorded a high growth rate in the United States, it is not so large: it represents $1,000 billions whereas the total market capitalization of the US stock market amounts to $20,000 and the patrimony of American households is nearly $60,000 billion. This financial crisis is far from the end. From now on, it affects not only subprime mortgage credit but the whole financial, banking and economic system. It raises a lot of questions about the advantages and the drawbacks of securitization, the role of financial innovations in the risk transfer, the internal risk management, the plan of a global banking and financial regulation, etc.

[...] The make-up of the accounts of Barings (Leeson, 1996), the losses of trading of Calyon at the time of the summer 2007 relieves thus of this logic The bonus and the transformation of representation accountant The direct effect of the bonus on the risk taken sometimes by speculator financial operators must not mask the most important element: the bonus contributes to transforming the object of the accountant representation of the business. The weight of the budgets of bonus, superior in the market bank at the end of the 90s to the reserved volumes to the salary payment set up, contributes to transform substantially the activity of management of the bank of market. [...]

[...] In this report, we will take particular care of the consequences of this crisis on both theory and practical aspects of the asset management industry. So, we will discuss the impacts of the subprime crisis and the change it has generated or would generate on our field of study. Talking about the consequences comes down to: The lessons that we can draw from this crisis (analysis in The potential measures that we must take in order to improve the financial system (analysis in t+1). [...]

[...] PART The consequences of the financial crisis on theory 1. From a financial viewpoint The crisis revealed the need of better functioning of rating agencies and transparency of information The main rating agencies (Moody’s, Standard & Poors, Fitch) did not anticipate any of the three financial crises of the last 15 years, i.e., the Asian crisis in 1997, the financial scandals of Enron, Worldcom at the beginning of 2000s, and the subprime crisis. Rating agencies have been at the heart of the sub-prime crisis because they had a solid reputation and many investors relied on their ratings for many diverse products: mortgage bonds, asset back commercial paper (ABCP) issued by the structured investment vehicles (SIVs), Derivative Product Companies (DPCs) and monolines which insure municipal bonds and structured credit products such as tranches of CDOs. [...]