Research & Ideas: Publications
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Management and the Financial Crisis (We have Met the Enemy and He Is Us…)
November 2009 - HBS Working Papers
The financial crisis of 2008-2009 has revealed that our broad model of corporate governance is broken, independent of the shortcomings in the regulatory system. Managers and boards of directors in scores of systemically important firms failed to protect employees, customers, or shareholders and placed the global financial system at risk. This paper assert that the root cause of the crisis can be found in five related systems: incentives, risk management and control, accounting, human capital, and culture. The worst firms had lethal combinations of strong incentives, weak control and risk management, flawed internal and external accounting, low skill and/or low integrity people, and corrosive cultures. Piecemeal attempts to fix elements of corporate governance will fail. The problem, to illustrate, is not just the structure of compensation. Nor will increasing required capital prevent problems at companies with strong incentives and weak controls. We may need a new kind of external agency for systemically risky firms that would take a holistic look at the five systems to identify weaknesses, make recommendations to managers and boards, and set regulatory policies, including assessing charges for insuring against losses. Without such a comprehensive assessment and improvement plan, boards cannot do their jobs, and the system will remain as subject to calamitous events as it was before the crisis.
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The End of Chimerica
November 2009 - HBS Working Papers
Niall Ferguson, Moritz Schularick
For the better part of the past decade, the world economy has been dominated by a world economic order that combined Chinese export-led development with U.S. over-consumption. The financial crisis of 2007-2009 likely marks the beginning of the end of the Chimerican relationship. In this paper we look at this era as economic historians, trying to set events in a longer-term perspective. In some ways China's economic model in the decade 1998-2007 was similar to the one adopted by West Germany and Japan after World War II. Trade surpluses with the U.S. played a major role in propelling growth. But there were two key differences. First, the scale of Chinese currency intervention was without precedent, as were the resulting distortions of the world economy. Second, the Chinese have so far resisted the kind of currency appreciation to which West Germany and Japan consented. We conclude that Chimerica cannot persist for much longer in its present form. As in the 1970s, sizeable changes in exchange rates are needed to rebalance the world economy. A continuation of Chimerica at a time of dollar devaluation would give rise to new and dangerous distortions in the global economy.
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Gucci Group: Freedom within the Framework
Harvard Business School Case 9-109-079
F. Asis Martinez-Jerez, Elena Corsi, Vincent Dessain
In September 2008, during the global economic downturn that followed the credit crunch crisis, Robert Polet, the CEO of the Gucci Group, had learned that after four years of growth, the Group's largest business, the fashion brand Gucci, would report a slowdown for the first semester. Polet had joined Gucci in 2004 after 26 years at one of the largest consumer goods companies Since his arrival, the Gucci Group had grown both in revenues and profitability. Part of his secret was his decentralized management style. Polet was worried because the economic crisis was reaching out the luxury world. He knew that he should leave the primary decisions for the Gucci brand to Lee. Yet, given the urgency of the situation, Polet wondered if more involvement from him in the brand's decision making process would not be more effective. Purchase this case
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Citigroup-Wachovia-Wells Fargo
Harvard Business School Case 9-910-006
Guhan Subramanian, Nithyasri Sharma
In late September 2008, amidst the spiraling financial crisis, many firms on Wall Street were in a precarious position. One such institution was Wachovia, which entered acquisition talks with Citigroup and Wells Fargo. This case describes the development of these negotiations throughout the week of September 26-October 3, 2008 and explores the role of a company's Board of Directors and the role of government regulators, particularly the FDIC, during times of crisis. Purchase this case
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Banking Deregulations, Financing Constraints and Firm Entry Size
October 2009 - HBS Working Papers
This paper examines the effect of U.S. branch banking deregulations on the entry size of new firms using micro-data from the U.S. Census Bureau. It finds that the average entry size for startups did not change following the deregulations. However, among firms that survived at least four years, a greater proportion of firms entered either at their maximum size or closer to the maximum size in the first year. The magnitude of these effects was small compared to the much larger changes in entry rates of small firms following the reforms. The results highlight that this large-scale entry at the extensive margin can obscure the more subtle intensive margin effects of changes in financing constraints.
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Citigroup's Exchange Offer (A)
Harvard Business School Case 9-210-009
Robin Greenwood, James Quinn
Citigroup faced considerable distress in early 2009. In late 2008, the bank had accepted $45 billion in preferred equity from the United States government via the Troubled Assets Relief Program (TARP). Yet, the stock had continued to slide in early 2009. In late February, the company announced that it would convert as much as $50 billion of preferred stock into common stock, at $3.25 per share. The case asks students to evaluate the pricing of preferred stock relative to common stock at this time. As the case takes place during a period of considerable uncertainty in global capital markets, and conventional sources of arbitrage capital have been depleted, the apparent mispricing may not be as attractive as it initially seems. Purchase this case
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Transworld Auto Parts (A)
Harvard Business School Case 9-110-027
V.G. Narayanan, Lisa Brem
Transworld Auto Parts had to implement its new strategy flawlessly to survive the auto industry upheaval. The new CEO asked her leadership team to craft strategy maps and balanced scorecards to help each division implement its strategies. Purchase this case.
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The Termination of U.S. Auto Dealerships in 2009
Harvard Business School Case 9-210-017
Das Narayandas, Kerry Herman, Sarah Morton
The case chronicles the sudden termination of many U.S. autodealers in the wake of the economic crisis in the fall of 2008.
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Tenova: Mining for Growth in an Economic Crisis
Harvard Business School Case 9-610-021
Gary P. Pisano, Elisa Farri, Elena Corsi
In December 2008, Gianluigi Nova, CEO of Tenova SpA, a technology and equipment supplier to the metals and mining industry, had to choose between two options. The first was to continue growing in the company's core business: equipment for the steel production. The second option offered growth in a related, but nearly new business for Tenova: the equipment for mining, mineral processing, and extractive metallurgy. They only had a small presence in this market. Yet, Nova had to cope with the worldwide economic crisis whose destructive power hit every area of the metals and mining industry. Nova had to decide which option offered the best opportunity to grow in the worst economic crisis since 1929.
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Systemic Risk and the Refinancing Ratchet Effect
September 2009 - HBS Working Papers
Amir E.Khandani, Andrew W. Lo, Robert C. Merton
The confluence of three trends in the U.S. residential housing market-rising home prices, declining interest rates, and near-frictionless refinancing opportunities-led to vastly increased systemic risk in the financial system. Individually, each of these trends is benign, but when they occur simultaneously, as they did over the past decade, they impose an unintentional synchronization of homeowner leverage. This synchronization, coupled with the indivisibility of residential real estate that prevents homeowners from deleveraging when property values decline and homeowner equity deteriorates, conspire to create a "ratchet" effect in which homeowner leverage is maintained or increased during good times without the ability to decrease leverage during bad times. To measure the systemic impact of this ratchet effect, we simulate the U.S. housing market with and without equity extractions and estimate the losses absorbed by mortgage lenders by valuing the embedded put-option in non-recourse mortgages.
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Nomura's Global Growth: Picking Up Pieces of Lehman
Harvard Business School Case 9-210-017
C. Fritz Foley, Linnea Meyer
What issues commonly arise in international financial management? Kenichi Watanabe and Takumi Shibata, CEO and COO of Nomura Holdings Inc., one of the leading investment banks in Asia, have the opportunity to expand their firm internationally through the acquisition of various parts of Lehman Brothers, an insolvent global investment bank. In evaluating this opportunity, students must consider the complexities of such expansion, including the challenges posed by a multinational insolvency, the difficulties of post-merger integration in a cross-border acquisition, and more general issues related to currency hedging and international taxation.
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New Perspectives on Regulation
2009 - The Tobin Project
David Moss and John Cisternino (eds.)
This publication collects seven viewpoints on the role of government in regulation, in light of the recent economic crisis. David Moss authors a chapter, "Government as Risk Manager" which explains the four basic ways to manage risk: prevention, risk shifting, risk spreading, and loss control.
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Alacra, Inc.
Harvard Business School Case 9-810-012
Lynda Applegate, Aldo Sesia Jr.
In 2009, the CEO of Alacra, a venture-backed information services firm that provides customized data primarily to financial services firms, must decide how to respond to the global economic crisis.
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Anger and Regulation
August 2009 - NBER Working Paper Series
Rafael Di Tella, Juan Dubra
This paper proposes a model where voters experience an emotional cost when they observe a firm that has displayed insufficient concern for other people's welfare (altruism) in the process of making high profits. The main result is that, as competition decreases, the set of parameters for which such pooling equilibria exist beomes smaller and firms are more likely to anger consumers.
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A Note on Cost Reduction in Financially Troubled Organizations
Harvard Business School Note 9-809-161
This note discusses methods for reducing costs, particularly labor costs, in a financially distressed organization.
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Spain: Can the House Resist the Storm?
Harvard Business School Case 9-709-021
On September 16, 2008, President Rodriguez Zapatero recognized the severity of Spain's macroeconomic situation and clearly pointed to the culprit in front of the Spanish Congress: "Let nobody doubt it; there is already a wide consensus about the origin of the crisis: [It is] in the U.S. and its subprime mortgages." During the last eight years, Spain had gone through a phenomenal expansion that has had many important ingredients: immigration, housing boom, banking and financial market regulation, current account deficit and productivity growth. This case analyzes how they interacted during the period 2000-2007 and what drove the Spanish recession in 2008.
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Risk Management at Wellfleet Bank: Abridged
Harvard Business School Case 9-110-011
Inspired by one of the few banks that successfully weathered the 2007-2009 credit crisis, the case illustrates risk management in the world of corporate lending. Chief executive Alastair Dowes has to decide if the risk governance process is adequate to uncover mega-risks, based on reflections on the risk assessment and sanctioning of a $1 bn credit proposals. Students will be invited to assess and review the risks in the proposal, and to arrive at a decision (whether Wellfleet should accept it or not). At the same time, students will learn that gray-area risk decisions and, in particular, risk-adjusted performance measurement can rarely be automated. Risk governance requires executives to strike a balance between risk modeling and qualitative business judgment - a holistic (rather than silo-based) view of risks.
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What Happened at Citigroup?
Harvard Business School Case 9-310-004
Clayton Rose, Aldo Sesia Jr.
What went wrong at Citigroup? In 1998, the Travelers Group and Citicorp merged to create Citigroup Inc., considered the first true global "financial supermarket" and a business model to be envied, feared, and emulated. By year-end 2006 the firm had a market capitalization of $274 billion, with $1.9 trillion in assets and $24.6 billion in earnings. But, ten years after the merger, it ended in tears. In July 2009, the firm was effectively nationalized, with billions of dollars in bailout money converted into a 34% ownership stake for the U.S. government. Citigroup was worth less than $16 billion, having lost more than $250 billion in value from its peak. This case examines Citi's business model, the challenges it faced, its leadership, and key decisions to better understand what contributed to the failure of one of the most powerful financial firms in the world. Purchase this case
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Executive Pay and the Credit Crisis of 2008 (B)
Harvard Business School Case 9-110-005
V.G. Narayanan, Lisa Brem
As the recession lingered on into 2009, the U.S. government sought to limit executive pay and excessive risk. The debate raged over what constituted excessive risk and how best to mitigate it. This case describes the government restrictions on executive pay for TARP recipients and delves into the debate on executive compensation and incentives that encourage excessive risk. Purchase this case. Also see Executive Pay and the Credit Crisis of 2008 (A)
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Note on Capital in the U.S. Financial Industry
Harvard Business School Note 9-310-005
Clayton Rose and Scott Waggoner
This note was created to supplement classroom discussion in the EC course ""Managing the Financial Firm,"" and provides background for exploring issues general managers in financial firms face in considering appropriate capital levels.
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Arcor: Global Strategy and Local Turbulence (Abridged)
Harvard Business School Case 9-710-407
Pankaj Ghemawat, Michael G. Rukstad, Jennifer L. Illes
Argentine confectionery manufacturer, Arcor Group, seeks to implement an international strategy but in 2003, while recovering from the Argentine financial crisis, globalization plans are thwarted. Already Latin America's leading candy producer and an exporter to over 100 countries, Arcor analyzes how it can become truly global with production facilities and distribution networks in various regions. First, however, Arcor must stabilize its operations at home, where a devalued peso, economic uncertainty, and political instability still linger from the devastating financial crisis. Purchase this case
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Target Corporation: Ackman versus the Board
Harvard Business School Case 9-109-010
Suraj Srinivasan, Krishna G. Palepu, James Weber
After 15 years of great performance, Target's faltering performance during an economic downturn led an activist shareholder to initiate a proxy fight. Target Corporation, the second largest discount store retailer in the U.S., had competed successfully against industry leader Wal-Mart for years by promoting an upscale discount shopping experience in comparison to Wal-Mart's focus on low prices. This strategy worked well for Target in good economic times. The economic crisis of 2008-2009, however, caused shoppers to abandon Target in favor of Wal-Mart. In the spring of 2009, one of Target's largest shareholders initiated a proxy fight to place his five director nominees on the board. Target won the proxy fight, but still faced questions about whether it had a strategy that could work in both good times and bad. Purchase this case
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Understanding Inflation-Indexed Bond Markets
June 2009 - NBER Working Paper Series
John Y. Campbell, Robert J. Shiller, Luis M. Viceira
This paper explores the history of inflation-indexed bond markets in the U.S. and the U.K. It documents a massive decline in long-term real interest rates from the 1990s until 2008, followed by a sudden spike in these rates during the financial crisis of 2008. Breakeven inflation rates, calculated from inflation-indexed and nominal government bond yields, stabilized until the fall of 2008, when they showed dramatic declines. The paper asks to what extent short-term real interest rates, bond risks, and liquidity explain the trends before 2008 and the unusual developments in the fall of 2008. Low inflation-indexed yields and high short-term volatility of inflation-indexed bond returns do not invalidate the basic case for these bonds, that they provide a safe asset for long-term investors. Governments should expect inflation-indexed bonds to be a relatively cheap form of debt financing going forward, even though they have offered high returns over the past decade.
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Informed and Interconnected: A Manifesto for Smarter Cities
June 2009 - HBS Working Papers
Rosabeth Moss Kanter, Stanley S. Litow
The need for a fresh approach to U.S. communities is more urgent than ever because of the biggest global economic crisis since the Great Depression. Through examination of the barriers to solving urban problems (and the ways they reinforce each other), this paper offers a new approach to community transformation which calls for leaders to use technology to inform and connect people. But technology alone is not the answer. Realization of the vision requires leaders to invest in the tools, guide their use, and pave the way for transformation. Perhaps the urgency of the current economic crisis can provide the impetus to overcome resistance to change and turn problems into an opportunity to reduce costs, improve services to communities, and make our cities smarter.
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Going to the Oracle: Goldman Sachs, September 2008
Harvard Business School Case 9-309-069
Clayton Rose, David Lane
On September 23, 2008, in the midst of a historic crisis in the U.S. financial markets, Warren Buffet's Berkshire Hathaway invested $5 billion in Goldman Sachs. This case provides an opportunity to evaluate Goldman's decision to raise capital, the cost of the firm of Buffett's investment and the decision by Warren Buffett to make the investment, all in the context of a profound market crisis that may have altered the usual metrics for such decisions. Purchase this case
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The First Global Financial Crisis of the 21st Century
Harvard Business School Case 9-709-057
Laura Alfaro, Renee Kim
The global economy was expected to suffer from negative growth for the full year in 2009, a phenomenon not seen since World War II. While the U.S. subprime mortgage disaster was blamed as the original instigator, it was noted that the "global imbalances" of the U.S. current account deficit funded for many years by other nations such as China was also a chief culprit of the crisis as well. Policymakers around the world recognized that the scope and scale of the financial crisis required a coordinated global response. Yet there were conflicting views on what kind of action was needed to address the first global financial crisis of the 21st century. Purchase this case
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Don't Just Survive-Thrive: Leading Innovation in Good Times and Bad.
April 2009 - HBS Working Papers
Lynda Applegate, J. Bruce Harreld
Battered by contracting markets and frozen credit, many businesses today are fighting for survival. Indeed, the current global financial crisis provides a mandate for restructuring. But survival is not the end goal. In fact, cost cutting and restructuring are simply the first steps in repositioning and leading a company and industry through the crisis and in defining how business will be conducted in the future. This paper describes how IBM managed to, not just survive the crisis it faced in the early 1990s, but to reposition the company to lead the industry. The powerful lesson from the IBM story is that innovation is not a side business to running the real business.
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U.S. Subprime Mortgage Crisis: Policy Reactions (B)
Harvard Business School Case 9-709-045
Laura Alfaro, Renee Kim
In March 2009, the U.S. economy was in a severe recession not seen since the Great Depression after the subprime mortgage crisis had spiraled out of control. The situation had dramatically changed in one year since the Federal Reserve Board had helped to bailout investment bank Bear Stearns. Deflation, not inflation, had become a top concern. Interest rates were near zero percent. Five million jobs had been lost. The new Barack Obama administration had push forward with a $787 billion stimulus package, coupled with various programs to address the frozen credit markets and depressed investors' confidence. Yet the burning question in every policymakers' mind was--how effective would the various plans work to revive the U.S. economy? Purchase this case
Related: U.S. Subprime Mortgage Crisis: Policy Reactions (A) -
Before the Fall: Lehman Brothers 2008
Harvard Business School Case 9-309-093
Clayton Rose, Anand Ahuja
This case examines Lehman Brothers in the months preceding its collapse. Following the announcement of a huge and unexpected second quarter loss, the CFO was removed from her post after only seven months in the job. This case explores the challenges faced by a firm leader as she attempts to manage a situation that threatens the firm's survival. In particular, the case allows for an examination of how changes in a firm's performance and position are communicated to key external stakeholders in an effort to retain their confidence, while market conditions worsen, the balance sheet deteriorates, and the firm's credibility is challenged by a short-selling hedge fund. Purchase this case
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Kinyuseisaku: Monetary Policy in Japan (B)
Harvard Business School Supplement 709-056
Laura Alfaro, Renee Kim
Toshihiko Fukui, Government of the Bank of Japan, faced a complex situation in the fall of 2007. An economic recovery had allowed the central bank to abandon its zero interest rate policy, which had been in place for years, and raise rates to 0.5%. The Bank of Japan was eager to increase them to more 'normal' levels to exert effective monetary policy. Yet the appropriate timing and approach was a controversial issue, especially as the government did not want a rate hike that could potentially hinder economic growth and increase its already large fiscal debt burden. Purchase this supplement
Related: Kinyuseisaku: Monetary Policy in Japan (A) -
Note: The Rejuvenated International Monetary Fund
Harvard Business School Note 709-050
Rawi Abdelal and Jonathan Schlefer
The International Monetary Fund was dismissed as almost irrelevant to the global economy, but during the 2008 financial crisis, it returned to center stage, providing financial rescues for developing countries. Purchase this note
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Note: The Newspaper Industry in Crisis
Harvard Business School Note 709-463
David Collis, Peter Olson and Mary Furey
This note is a primer on the newspaper industry, which has been in decline in the U.S. and Western Europe. The 19th century business model whereby news and editorial content was packaged and delivered to homes daily and paid for by national advertisers has been overturned by the internet and the corresponding immediate access to global information. The note covers the history of newspapers, industry economics, current news consumption trends, the response of the newspapers to the threat of the internet, and vignettes highlighting newspaper business models throughout the world. Purchase this note
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UBS and Auction Rate Securities (A), (B) and (C)
Harvard Business School Case 9-209-119
Daniel B. Bergstresser, Shawn Cole and Siddharth Shenai
UBS, a global financial services company, must decide whether to continue to support the market for Auction Rate Securities in the face of a growing financial crisis. These instruments, underwritten by UBS, were marketed to clients as highly liquid and safe alternatives to cash. UBS' decision becomes urgent when Citigroup, another leading underwriter of ARS, decides to let their auctions fail, leaving clients with illiquid assets of uncertain value. The case explores theoretical and practical aspects of liquidity risk, and challenges students to evaluate the benefits of honoring implicit commitments to customers against the costs of acquiring billions of dollars in illiquid assets. The (B) and (C) cases consider the implications of UBS decision. Purchase this case
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Washington Mutual's Covered Bonds
Harvard Business School Case 9-209-093
Daniel B. Bergstresser, Robin Greenwood, James Quinn
Washington Mutual issued 6 billion Euro of covered bonds in 2006. The objective of the case is to ask whether these bonds are mispriced in late 2008. The case is set in September 2008, and Washington Mutual is facing considerable distress due to mounting losses on its mortgage portfolio. Following investment bank Lehman Brother's Chapter 11 bankruptcy protection filing in mid September, the price of Washington Mutual's covered bonds has fallen to 75 per 100 of face value. As these bonds are overcollateralized, the case asks students to evaluate the underlying collateral portfolio in the event of liquidation, as well as assessing the likelihood of different outcomes. Purchase this case
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Chronology of the Asian Financial Crisis (revision)
Harvard Business School Case 9-708-001
Laura Alfaro, Rafael Di Tella, Renee Kim
In July 1997, Thailand became the first Asian ""tiger"" economy to abandon its fixed exchange rate system in response to speculative attacks on its currency. Investors started to flee Asia, and the crisis rapidly spread to other countries. Central banks spent billions of dollars to try and defend their currencies, only to seek emergency bailouts from the International Monetary Fund. This case presents a chronology of events that unraveled during the Asian financial crisis from 1997 to the end of 1998.
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State Street Corporation
Harvard Business School Case 9-209-112
State Street Corporation reports a 13% gain in EPS in 2008 amidst a global financial crisis. The stock price declines 59% on the day of the earnings report. This one-day decline was exceeded in the prior 12-month period by only one non-bankrupt S&P 500 company. That company was AIG, Inc., which declined 61% on the day Lehman Brothers declared bankruptcy. While State Street reported $5 billion in profits over the 4-year period 2005-2008, the company also sustained $10 billion in after tax mark-to-market losses on its "available for sale" investment portfolio and the investment portfolios of its conduits. The question is, how has the firm performed over the past four years? Has it earned $5 billion or lost $5 billion? Fair value accounting plays a key role in the dilemma. How should a financial services firm measure and report income in the face of disorderly and illiquid markets for its principal assets? The case also examines how management at State Street responded to the deterioration in its capital ratios generated by "fair value" accounting. Purchase this case
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Barbara Norris: Leading Change in the General Surgery Unit
Harvard Business School Case 9-409-090
Boris Groysberg, Nitin Nohria, Deborah Bell
Barbara Norris struggles to address the many problems facing her as a recently promoted nurse manager in the General Surgery Unit (GSU) at Eastern Massachusetts University Hospital (EMU). She has inherited a unit with the lowest employee satisfaction scores and highest employee turnover rate among all of the departments at EMU. Furthermore, her new unit was infamous for its culture of confrontation, blaming and favoritism. The staff that has remained is dissatisfied, unmotivated and not functioning as a team to deliver patient care. In fact, GSU's patient satisfaction scores, although average, had been declining steadily over the past few years. Barbara has been asked by EMU'S Director of Nursing to turn the unit around in the midst of an economic crisis and deep cost-cutting measures throughout the hospital. Where and how should she begin? Purchase this case
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Securing Jobs or the New Protectionism?: Taxing the Overseas Activities of Multinational Firms.
March 2009 - HBS Working Papers
Tax policy toward American multinational firms would appear to be approaching a crossroads. The presumed linkages between domestic employment conditions and the growth of foreign operations by American firms have led to calls for increased taxation on foreign operations-the so-called "end to tax breaks for companies that ship our jobs overseas." At the same time, the current tax regime employed by the U.S. is being abandoned by the two remaining large capital exporters-the U.K. and Japan-that had maintained similar regimes. The conundrum facing policymakers is how to reconcile mounting pressures for increased tax burdens on foreign activity with the increasing exceptionalism of American policy.
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Debt Literacy, Financial Experiences, and Overindebtedness.
March 2009 - NBER Working Paper (purchase or subscription required)
Peter Tufano, Annamaria Lusardi
This paper analyzes a national sample of Americans with respect to their debt literacy, financial experiences, and their judgments about the extent of their indebtedness.
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Necessity and Invention: Monetary Policy Innovation and the Subprime Crisis
Harvard Business School Case 9-709-041
This case describes the efforts of Ben Bernanke, Chairman of the Federal Reserve, to improve liquidity in money markets during the subprime crisis. The case explains the four main new tools for monetary policy (or quantitative easing) the Federal Reserve has used between 2007 and 2009: the Term Auction Facility (TAF), the Primary Dealer Credit Facility (PDCF), the Term Securities Lending Facility (TSLF), and the Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF). Purchase this case
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When Does Domestic Saving Matter for Economic Growth?
January 2009 - HBS Working Papers
Philippe Aghion, Diego Comin, Peter Howitt, and Isabel Tecu
The researchers begin with a simply stated question: Can a country grow faster by saving more? Long-run growth theories imply that a country can grow faster by investing more in human or physical capital or in R&D, but that a country with access to international capital markets cannot grow faster by saving more. Domestic saving is therefore not considered an important ingredient in the growth process because investment can be financed by foreign saving. From the point of view of standard growth theory, the positive cross-country correlation between saving and growth that many commentators have noted appears puzzling. This publication has also been recently profiled in Harvard Business School Working Knowledge. Click here to read.
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Barack Obama and the Bush Tax Cuts
Harvard Business School Case 9-709-037
Matthew Weinzierl, Eric Werker
As his inauguration approached, President-Elect Obama faced a financial sector meltdown, a costly bailout, and massive government deficits. With the economy in recession, interest rates near zero, and joblessness on the rise, Obama needed to decide whether, and how much, to use fiscal stimulus to resuscitate the economy. To help students understand Obama's options, the case reviews both the recent tax cuts under President George W. Bush, including the supply-side and demand-management justification given for them, and the broad history of fiscal policy in the United States. Purchase this case
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The Tip of the Iceberg: JP Morgan Chase and Bear Stearns
Harvard Business School Supplement 309-091
Clayton Rose, Daniel B. Bergstresser, David Lane
This case examines a seminal event in the financial and economic crisis that began in the summer of 2007, and provides background for better understanding the full scope of the crisis as it was revealed during the summer and fall of 2008. It was written to address two sets of issues. First, it provides the opportunity to understand the corporate finance issues of capital and liquidity, and of firm valuation. Second, the case allows for the exploration of aspects of a firm's internal and external governance, as well as the challenges of navigating through a crisis when faced with compelling pressures from competing stakeholders. Purchase this case
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An Ounce of Prevention: The Power of Public Risk Management in Stabilizing the Financial System
January 2009 - HBS Working Papers
The magnitude of the current financial crisis reflects the failure of an economic and regulatory philosophy that had proved increasingly influential in policy circles over the past three decades. This paper suggests (1) that contrary to the prevailing wisdom, New Deal policies (including federal deposit insurance and bank supervision) worked to stabilize the financial system; (2) that the financial catastrophe of 2007-2009 was not an accident, but rather a mistake, driven by a deregulatory mindset that took 50 years of post-New Deal financial stability for granted; and (3) that the dramatic federal response to the current financial crisis has created a new reality, in which virtually all systemically significant financial institutions now enjoy an implicit guarantee from the federal government that will continue to exist (and continue to generate moral hazard) long after the immediate crisis passes. Click here to read.
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The Financial Crisis of 2008
Harvard Business School Case 9-709-036
This case presents excerpts from the speeches of observers to the 2008 financial crisis, including former and current central bankers, a private banker, and a Nobel-prize winning economist. They present different interpretations of the causes of the financial crisis and make proposals about how a similar crisis might be stopped in the future. The goal of the case is to provide students with alternative perspectives and broad historical data so that they can evaluate both causes of and responses to the crisis. Purchase this case
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Rosetree Mortgage Opportunity Fund
Harvard Business School Case 9-209-088
Andre F. Perold, Victoria Ivashina
In December 2008, in the midst of the worst financial crisis since the Great Depression, Rosetree Capital Management was evaluating the purchase of a pool of U.S. residential mortgages. The firm had formed an investment vehicle to acquire troubled residential mortgages from banks and other motivated sellers. The idea was to purchase mortgage loans at a discount and to work with individual borrowers to restructure their debts. Performing mortgages could then potentially be resold in the secondary market. The case provides cash flow projections in various economic scenarios that are revealing of the economics of troubled mortgages and home foreclosure. Rosetree needed to decide whether and how much to bid for the loans. Purchase this case
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Financial Crisis in Asia: 1997-1998 (Abridged)
Harvard Business School Case 9-709-004
Huw Pill, Rafael Di Tella, and Jonathan Schlefer
What caused the 1997-98 Asia Crisis: Asian nations' poor economic management, international financial contagion, close "crony" relations between local politicians and capitalists? This case examines how the crisis erupted in Thailand and spread in a chain of events that no one-neither Asian financial authorities nor Western economists-had foreseen. Purchase this case
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Sub-Prime Crisis and Fair Value Accounting
Harvard Business School Case 9-109-031
Paul Healy, Krishna G. Palepu, George Serafeim
This case examines the challenges in implementing fair value accounting for mortgage instruments, the role of accounting in the sub-prime crisis, and proposals for revising accounting standards given the crisis Purchase this case
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Executive Pay and the Credit Crisis of 2008
Harvard Business School Case 9-109-036
V.G. Narayanan, Fabrizio Ferri, Lisa Brem
The credit crisis of 2008 placed compensation practices at publicly traded firms in the United States under scrutiny. This case examines perceived excessive pay and severance packages at several firms implicated in the credit crisis of 2008, the executive compensation provisions in the Emergency Economic Stabilization Act, and discusses the implications for compensation committees at public companies. Purchase this case
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Fear of Rejection? Tiered Certification and Transparency
October 2008 - HBS Working Papers
Emmanuel Farhi, Josh Lerner, and Jean Tirole
The sub-prime crisis has thrown a harsh spotlight on the practices of securities underwriters, which provided too many complex securities that proved to ultimately have little value. Certifiers such as rating agencies, journals, standard setting bodies, and providers of standardized tests play an increasingly important role in the market economies. Yet as scrutiny of rating agencies in the aftermath of the sub-prime crisis has shown, these organizations have complex incentive structures and may adopt problematic approaches. On an explicit level, all major rating agencies follow a well-defined process, whose end product is the publication of a rating based on an objective analysis. But firms have been historically able to get rating agencies not to disclose ratings that displease them. This publication has also been recently profiled in Harvard Business School Working Knowledge. Click here to read.
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The Economics of Structured Finance
October 2008 - HBS Working Papers
Joshua Coval, Jakub W. Jurek and Erik Stafford
The authors examine how the process of securitization allowed trillions of dollars of risky assets to be transformed into securities that were widely considered to be safe, and argue that two key features of the structured finance machinery fueled its spectacular growth. This publication has also been recently profiled in Harvard Business School Working Knowledge. Click here to read.
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Reputation and Competition: Evidence From the Credit Rating Industry
October 2008 - HBS Working Papers
Bo Becker and Todd Milbourn
Fair and accurate credit ratings arguably play an important role in the financial system. In an environment absent free entry of rating agencies, the provision of quality ratings is at least partially sustained by the reputational concerns of the rating agencies. The economically significant entry of a third agency into a market that was previously best described as a duopoly provides a unique experiment to examine the effect of increased competition on the disciplining effects of reputation. Using a variety of data sources, the authors find that competition leads to more issuer-friendly and less informative ratings.
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Iceland (A) and (B)
Harvard Business School Case 9-709-011
In May of 2008, a team of sovereign debt analysts at Moody's had to decide whether to downgrade the country's sovereign long-term debt from Aaa to Aa1 or lower. Investor sentiment toward Iceland had changed radically in March, and the Moody's team was fearful that the situation could spiral out of control. The Moody's team knew that carry traders increased Iceland's vulnerability to a confidence crisis because they were quick to liquidate their holdings at the first sign of distress. The plunge in the Icelandic Krona since the beginning of 2008 also forced the Icelandic people to confront a decision: would joining the European Union (EU) protect Iceland from capricious swings in investor sentiment? What, if anything, should Iceland do to avoid a future crisis? Purchase case A and Purchase supplement B
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New Century Financial Corporation
Harvard Business School Case 9-109-034
Krishna G. Palepu, Suraj Srinivasan, Aldo Sesia Jr.
New Century Financial Corporation, one of the largest subprime loan originators in the U.S., reported accounting problems in early 2007. The resulting liquidity crisis forced the company to file for Chapter 11 bankruptcy protection. The case study examines New Century's business model and accounting practices and focuses on the role of management, audit committee, and external auditors in the problems at New Century based on the findings of the Bankruptcy Examiner.Purchase this case
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Note: Credit Rating Agencies
Harvard Business School Technical Note 9-209-056
The note examines the role of credit rating agencies in capital markets, with emphasis on the role of these agencies in the recent credit crisis and recommendations for change. Purchase this note
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A Sense of Urgency
2008 - Harvard Business Publishing
Urgency can be a positive force in companies, says leadership expert and HBS professor emeritus John P. Kotter. His book, A Sense of Urgency , makes that conviction clear. Kotter shines the spotlight on creating a sense of urgency by getting people to actually see and feel the need for change. Why focus on urgency? Without it, any change effort is doomed.
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Moral Gray Zones: Side Productions, Identity, and Regulation in an Aeronautic Plant
2008 - Princeton University Press
Anyone who has been employed by an organization knows not every official workplace regulation must be followed. When management consistently overlooks such breaches, spaces emerge in which both workers and supervisors engage in officially prohibited, yet tolerated practices--gray zones. When discovered, these transgressions often provoke disapproval; when company materials are diverted in the process, these breaches are quickly labeled theft. Yet, why do gray zones persist and why are they unlikely to disappear? In Moral Gray Zones, Michel Anteby shows how these spaces function as regulating mechanisms within workplaces, fashioning workers' identity and self-esteem while allowing management to maintain control.
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Leveraged Loans 2007
Harvard Business School Case 9-208-145
Andre F. Perold, Erik Stafford
The leveraged loan market was in a crisis during the summer of 2007. A sudden drop in capital market prices for an asset class can be caused by news affecting fundamental values; or by a widespread liquidity shock. The implication of a shock to fundamental value is that the price drop is permanent, whereas if the underlying cause of the price drop is caused by a liquidity event, the situation may represent a profitable investment opportunity. Investors must assess the likely cause of the recent price drops in the leveraged loan market and determine an appropriate investment strategy. Purchase this case
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Economic Catastrophe Bonds
April 2008 - Harvard Business School Working Papers
Joshua D. Coval and Erik Stafford
The central insight of asset pricing is that a security's value depends on both its distribution of payoffs across economic states and state prices. In fixed income markets, many investors focus exclusively on estimates of expected payoffs, such as credit ratings, without considering the state of the economy in which default is likely to occur. Such investors are likely to be attracted to securities whose payoffs resemble those of economic catastrophe bonds - bonds that default only under severe economic conditions. This paper shows that many structured finance instruments can be characterized as economic catastrophe bonds, but offer far less compensation than alternatives with comparable payoff profiles. It also argues that this difference arises from the willingness of rating agencies to certify structured products with a low default likelihood as safe and from a large supply of investors who view them as such.
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Note: The Hedge Fund Industry
Harvard Business School Technical Note 208-126
This note describes the state of the hedge fund industry as of the end of the year 2007. Purchase this note
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Subprime Meltdown: American Housing and Global Financial Turmoil
Harvard Business School Case 708-042
This case focuses on the financial difficulties faced in the U.S. from August to December 2006 as well as their roots in subprime lending. After briefly discussing how mortgages were structured and traded in the pre-1990 period, it describes subprime mortgage lending, as well as other innovative mortgages issued in the 1990s. It also discusses how these mortgages were packaged into securities, and who ultimately came to own these claims and their attendant risk. The case then describes the pain inflicted by raising foreclosures, as well as the financial market ramifications of the rise in mortgage delinquencies. It also chronicles the response of the U.S. and European central banks to the unfolding financial difficulties. Lastly, the case lays policies that have been proposed to deal with either the consequences or the causes of the crisis. These include policies for reforming the supervision of the financial system, changing bankruptcy rules and regulating mortgage finance. Some attention is paid to the role of credit rating agencies in the crisis, and in the financial system as a whole. Purchase this case
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U.S. Subprime Mortgage Crisis: Policy Reactions
Harvard Business School Case 708-036
Laura Alfaro, Renee Kim
By March 2008, the U.S. Government and the U.S. Federal Reserve Board had taken various policy measures over the last few months to tackle the subprime mortgage crisis that threatened to drag the economy into a recession. The Bush administration approved a fiscal stimulus package exceeding $150 billion. Interest rates had been repeatedly cut at the fastest pace in decades, to 2.25% as of March 2008. The Fed, in an unprecedented move, helped JPMorgan Chase to take over Bear Stearns, which was on the brink of collapse. Yet as the global economy faced slower growth stemming from the U.S. mortgage crisis, policy makers were caught in an intense debate over what the 'right' solution would be, and the implication of these policies on global imbalances. Purchase this case
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Kinyuseisaku: Monetary Policy in Japan (A)
Harvard Business School Case 9-708-017
Laura Alfaro, Akiko Kanno
Toshihiko Fukui, Governor of the Bank of Japan, faced a complex situation in the fall of 2007. An economic recovery had allowed the central bank to abandon its zero interest rate policy, which had been in place for years, and raise rates to 0.5%. The Bank of Japan was eager to increase them to more 'normal' levels to exert effective monetary policy. Yet the appropriate timing and approach was a controversial issue, especially as the government did not want a rate hike that could potentially hinder economic growth and increase its already large fiscal debt burden. Purchase this case
Related: Kinyuseisaku: Monetary Policy in Japan (B) -
Revisiting Rental Housing
2008 - Brookings Institution Press
Nicolas Retsinas, Eric S. Belsky
Rental housing is increasingly recognized as a vital housing option in the United States. Yet government policies and programs continue to grapple with widespread problems, including affordability, distressed urban neighborhoods, poor-quality housing stock, concentrated poverty, and exposure to health hazards in the home. These challenges can be costly and difficult to address. The time is ripe for fresh, authoritative analysis of this important yet often overlooked sector.
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Korea: After the 1997 Financial Crisis
Harvard Business School Case 9-707-042
Laura Alfaro, Rafael Di Tella , Renee Kim
Examines what happened to Korea after the 1997 financial crisis and the implementation of the IMF-mandated reforms imposed on Korea as conditionalities to the country's emergency loan package. Purchase this case
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Finansbank 2006
Harvard Business School Case 9-208-108
C. Fritz Foley, Linnea Meyer
How do financial policy requirements and benefits of ownership concentration affect the need for and process of corporate restructuring? This case provides students with an opportunity to analyze the restructuring of a Turkish multinational business group by way of a merger. Finansbank A is a bank headquartered in Turkey with additional operations in Holland, Switzerland, Russia, Romania, and Ukraine. It was founded by H³sn³ Ízye in in 1987, and in April 2006, the National Bank of Greece (NBG) offered to buy part of the bank. Students can consider which factors contributed to Finansbank's growth and success. In order to then assess the terms of NBG's offer, they can evaluate given valuations of the bank and analyze why the proposed deal is structured so that Ízye in retains a stake and buys back the non-Turkish operations. Students can also consider the offer from the perspective of minority shareholders. Purchase this case
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The U.S. Current Account Deficit
Harvard Business School Case 706-002
Laura Alfaro, Rafael Di Tella, Ingrid Vogel
Investors and policymakers throughout the world were confronted with the risk of painful economic consequences arising from the large and growing U.S. current account deficit. In 2005, the U.S. current account deficit was almost $800 billion, equivalent to 6.3% of GDP, and showed no signs of abating. The implications of the widening deficit were debated with intensity. Purchase this case
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When All Else Fails: Government as the Ultimate Risk Manager
2002 - Harvard University Press
One of the most important functions of government—risk management--is one of the least well understood. Moving beyond the most familiar public functions—spending, taxation, and regulation—When All Else Fails spotlights the government's pivotal role as a risk manager. It reveals, as never before, the nature and extent of this governmental function, which touches almost every aspect of economic life.
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