Lessons From The 2008 Global Financial Crisis: Imprudent Risk Management And Miss Calculated Regulation
Of the major shortcomings exposed during the 2008 global financial crisis, there are two aspects that have attracted much interest among academics: the under-appreciation of the complexity of new operations at large financial institutions and the inadequate oversight of basic prudential supervision by regulatory agencies. To provide a brief focus on elements of these aspects, this paper presents corresponding case studies involve the fall of two of the largest finance companies ever existed: American International Group and Lehman Brothers Holdings. A survey of related historical arguments shows that while AIG fails due largely to its extended involvement in the new Credit Default Swap contracts that enable gambling on defaults, the collapse of Lehman Brothers’ may be attributable to the misguiding capital adequacy regulations implied by the Basel II Accord. Though perhaps overly simplified, the conclusions from these two cases offer insights into the fundamental weaknesses of some primary contemporary risk management practices and regulations.