Subprime risk management lessons

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Responsive VaR estimators provided ample time tohedge…'2006-1 AAA'Absolute Spread Levels450400350300250200150100500Feb 23 '07, first majoroutlier, 350% vol increasein 1 day, 12sd moveThe first tremor(vol up 300% Dec 12-21)June 07, ML triesto liquidate BearSubprime CDO's1/19/20063/19/20065/19/20067/19/20069/19/200611/19/20061/19/20073/19/20075/19/20077/19/20079/19/200711/19/20071/19/20083/19/20085/19/2008www.riskmetrics.com 8
No Shortage Of Hypothetical Stress Tests To ConsiderGaveKal European Divergence ScenarioItaly’s continues to have budget deficits, ballooning debt, and eventually exits EURReal estate & construction slowdown in Spain, Portugal, GreeceRoubini U.S. Credit Contagion & RecessionSubprime to Prime Contageon (2/3 of all ’06-’07 mortgages had risky features)Muni selloffs & defaults (lower fees from developers and house taxes, fixed expenses)U.S. consumer slowdownCorporate Bond Defaults increase. Current avg: .6%’; LT avg: 3.8%; Recession: 10-15%Recovery rates: from 70% in benign environment to 30% during recessionShallow U.S. recessionary to longer / deeper recession (12-18 months), impact on global growthOil Spike (Iranian blockade; Saudi coup; natural disasters; war…)Market / FX shocks (Asian currency revaluation, $ bust/boom, EUR bust/boom...)Themes (BRIC growth, changing consumption patterns, baby boomer retirement...)Economic scenarios (inflationary bust, deflationary bust, inflationary boom, deflationary boom…)Avian Flu & other diseasesEnvironmental risks (Tokyo earthquake, Storms, Tsunami, Oil spills, Chemical leaks...)Regulatory, Accounting, Fraud, Reputation, Liquidity...www.riskmetrics.com 9
Page 1 and 2: Subprime Risk Management LessonsAn
Page 3 and 4: Importance of Enterprise Risk Manag
Page 5 and 6: Lessons for Investors in Bear’s F
Page 7: Did VaR forecast the U.S. Subprime
Page 11 and 12: Levels: 3 Stages of Risk Management
Page 13 and 14: Questions?www.riskmetrics.comasia@r
Page 15: Addressing a Broad Spectrum of Risk

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