events in crisis

[ajsa]

Hi David,

I am sure this year FRM will contain some recent events in this financial crisis. for example:

Lehman
AIG
Madoff
WaMu
freddie mac & fannie mae
credit market freeze

Could you give us some brief summaries about the reasons behind these events? you can decide which events are important for the exam...

Thanks.

 

[David Harper CFA FRM]

Hi asja,

In addition to not having the time to write case study summaries (yikes! I am running on fumes and caffiene, myself, sorry b/c I would *enjoy it!), the more relevant point is: GARP should not test you on cases that aren't assigned ... I would not be surprised if (e.g.) several of your examples appeared in 2010, but the 2009 already has assigned cases (as reviewed in my tutorials), in particular, as I'm sure you know, there are two "concrete" company cases in current issues: UBS & Northern Rock (although there are some decided AIG "themes" in part b/c Gary Gorton worked for them).

I do think you've picked a good list and some of these situations share themes that do appear in 2009 FRM and, therefore, we shouldn't be surprised to see them tested. For example:

AIG: they made CDS famous. So, expect CDS, synthetic CDO, super-senior SCDO tranche; the problem of unfunded, insufficiently collateralized derivatives.
Madoff: principal-agent problem (e.g., subprime case)
WaMu; e.g., predatory lending

More generally, due to the crisis, I think the the following are sort of hot topics:
* counterparty risk
* liquidity risk & LVaR
* weaknesses of VaR
* model risk (although FRM is still young on this topic)
* basis risk
* funding risk
* Gorton's reading on the repo market (huge!); related to Northern Rock's dependence on overnight/ST wholesale funding
* rating agency and rating problems (huge!)
* ERM (but really still not much in FRM on this)

...that's just quickly off the top of my head...back to work for me...David