Description
Investment Risk Management
Overview
Risk management negligence within the financial services industry contributed to one of the most significant economic crisis in the recent history of the United States. During this time, Lehman Brothers, a global financial services company, filed for bankruptcy protection. This created the largest bankruptcy ever within the financial services industry. To complete this assignment, you will need to search the Internet and Strayer databases for information related to Lehman Brothers’ bankruptcy, the financial risk factors that contributed to the failure, and management’s responsibility for the failure.
Write a 5–6 page paper in which you:
- Based on the information you research related to Lehman Brothers, assess the factors that contributed to the financial failure of the firm, indicating how management failed to manage the risk related to each factor. Make a recommendation for how firms should manage these types of risks in the future. Provide support for your recommendation.
- High-risk investments such as mortgage-backed securities had a significant impact on the valuation of investments held with Lehman Brothers, yet many financial institutions continue to use these investments today. Assess the sufficiency of risk management techniques used by financial institutions today, indicating whether you believe the risk is appropriately managed to avoid a subsequent financial crisis. Provide support for your position.
- Evaluate management’s role within a financial investment firm for establishing proper risk management procedures for high-risk investments and the appropriate level of accountability for portfolio performance. Determine the consequences that should be enacted when Financial Firm Management fails to perform their fiduciary obligation to investors, indicating how these consequences should be implemented. Provide support for your response.
- Given the recent debt crisis within the eurozone of Europe, analyze the impact on the performance of foreign markets, and recommend a strategy for financial firms to minimize investment risk in these markets. Provide support for your recommendation.
- Evaluate the role of the Federal government, if any, related to the regulation of investments by financial institutions including the scope of the role, the authority and enforcement capability within the regulatory agency, the benefits, and consequences of regulation. Predict how the regulatory environment may change over the next five years. Provide support for your prediction.
- Use at least five quality academic resources in this assignment. Note: Wikipedia and other websites do not qualify as academic resources.
This course requires the use of Strayer Writing Standards. For assistance and information, please refer to the Strayer Writing Standards link in the left-hand menu of your course. Check with your professor for any additional instructions.
The specific course learning outcomes associated with this assignment are:
- Develop risk management strategies for a financial firm, including the role of management, the federal government, and strategies for foreign markets.
Explanation & Answer
Attached. Please let me know if you have any questions or need revisions.
Running Head: FINANCIAL RISK MANAGEMENT
Financial Risk Management
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FINANCIAL RISK MANAGEMENT
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How Firms Should Manage the Risks that Faced Lehman Brothers in the Future
While some factors can contribute to a firm's failure, Lehman Brothers firm financial
failure can be tied to various factors. In this regard, one of the factors that are closely tied to
financial problems was the weakness in risk management that characterized mega global
financial institutions. The weakness resulted in the creation and continued existence of complex
credit facilities (de la Iglesia Viguiristi, 2019). Additionally, the corporate structure of the firm
was ineffective. Further, staff had insufficient knowledge and experience of the various tasks that
they were supposed to undertake (de la Iglesia Viguiristi, 2019). The board of directors of the
firm did not comply with the requirements of COSO. Most importantly, the organization lacked a
common language of identifying risk, and this brought to its knees the company’s operational
metric for risk management.
Recommendations
First, the firm should understand and conduct an assessment of the market, counterparty
as well as credit risks, to address operational, contractual, and technical issues that characterize
counterparty risks. This should focus on derivative trades as well as repurchase agreements that
are bilateral (de la Iglesia Viguiristi, 2019). Acquisition of accurate and holistic perception of
risk across various business units happens to be one of the key challenges facing businesses due
to legacy frameworks and broken methods for risk governance.
Secondly, the firm should come with better mechanisms for measuring, monitoring, and
managing liquidity, as this will ensure the firm maintains financial credibility, solvency as well
as market viability. Third, the firm should enhance the effectiveness of operations when it comes
to collateral management (de la Iglesia Viguiristi, 2019). Accurate capturing of contractual
agreements will enable the company to optimize its funding and minimize excess exposure of
FINANCIAL RISK MANAGEMENT
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credits to banks and dealers. Again, the firm should always try to understand their investments as
this will help better understand the risks that accompany those investments.
Besides, hedge funds, as well as other brokerage users, are employing the use of
alternative custody approaches, and this is an effective strategy when it comes to distinguishing
the custodian as well as the functions of trade finance (de la Iglesia Viguiristi, 2019). Finally, the
organization should implement transparent internal controls as this will help in safely keeping
assets by brokerage companies as well as other custodians.
Sufficiency of Risk Management Techniques used by Financial Institutions Today
Following the failure by Lehman Brothers, all financial institutions were unsafe, lending
reduced, and the global economy significantly went down. As a result, the Fed was compelled to
open the discount window again since the Great Recession. Central banks around the world were
forced to reduce their interest rates (Lioudis, 2019). With the increase in the role of risk
management, large firms have embarked on the implementation of large-scale and companywide programs referred to as enterprise risk management. The techniques include risk avoidance,
loss control, risk retention, as well as risk transfer (Lioudis, 2019). These techniques are effective
for pure risks, but not for speculative risks. Insurance limits the uncertainty that characterizes
speculative financial loss. Again, while companies see this as one of the best techniques,
insurable risks are characterized by various requirements.
The CAMELS ratings can be described as a supervisory system of rating that was
brought forth by the US to classify the overall condition of banks (Lioudis, 2019). The ratings
are based on financial statements ratio analysis, complemented with actual examination carried
out by the assigned regulatory supervisor. In the United States, t...
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