1/25/2011

Hedge Funds
and
2007-2008 Financial Crisis

Overview

• Time Line of 2007-2008 Financial Crisis

• Historical Perspective
– Is This Time Really Different?
• Who are Responsible?
• What are the Roots of the Problem?
• What are the Roles of Hedge Funds?
• What Are the Lessons Learned?

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The Time Line of 2007-2008

Financial Crisis
Brunnermeier, Markus, 2009. “Deciphering
the Liquidity and Credit Crunch 2007-2008,”
Journal of Economic Perspectives, Vol 23 (1)

S&P500: 2007-2008
10 1700
Fed opened Fed cut rate
Fed cut Rate Discount window To almost zero
Fed cut Rate By another25 bps To I-Banks 1600

5 By 50 bps Fed cut Rate $700 billion

By another125 bps Bailout plan 1500

0 1400
Index Return (%)

10/1/2007
11/1/2007
12/1/2007

10/1/2008
11/1/2008
12/1/2008
1/1/2007
2/1/2007
3/1/2007
4/1/2007
5/1/2007
6/1/2007
7/1/2007
8/1/2007
9/1/2007

1/1/2008
2/1/2008
3/1/2008
4/1/2008
5/1/2008
6/1/2008
7/1/2008
8/1/2008
9/1/2008

Index Value

1300

-5

Subprime 1200
Bear Stearns
defaults Sold to
Shot up Major banks
-10 JP Morgan 1100
Wrote down
MBS IndyMac
MBS Rating failed
Downgrades Fitch downgraded
1000
Insurer AMBAC
-15
TED Spread up
Lehman Bankcrupt
900
Merril sold to BA
Fannie Mae,
-20
Freddie Mac and AIG 800
Rescued by Gov

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Time Line of 2007-2008 Financial Crisis

• The Subprime Mortgage Crisis

– Feb 2007: increase in subprime mortgage defaults noted
– May 4, 2007: UBS shut down its internal hedge fund, Dillon
Read, after $125m of subprime-related losses.
– Later May 2007: Moody’s put 62 tranches across 21 U.S.
subprime deals on “downgrade review”.
– June and July 2007: Rating downgrades by Moody’s, Standard &
Poor’s, and Fitch unnerved the credit markets.
• Bear Stearns injected $3.2 billion into two hedge funds in mid June.
• Countrywide Financial Corp announced an earnings drop on July 24.
• The National Association of Home Builders revealed that new home sales
had declined 6.6% year-on-year on July 26.
• House prices and sales continued to drop from then through late in 2008.

Time Line of 2007-2008 Financial Crisis

• Asset-Backed Commercial Paper

– July 2007: the market for short-term ABCP began to dry up
• Amid widespread concern on the valuation of ABS and the reliability of credit
ratings
– IKB (a small German bank) became the first European victim of
the subprime crisis
• Failure to roll over ABCP and to provide the promised credit line
• €3.5 billion rescue package involving public and private banks announced.
– August 9, 2007: the French bank BNP Paribas froze redemptions
for three investment funds, citing inability to value structured
products.
– Money market participants became reluctant to lend to each other.
• August 8 to 10: quoted interest rate on ABCP jumped from 5.39% to 6.14%.
– Rating agencies continued to downgrade structured investment
vehicles.

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Time Line of 2007-2008 Financial Crisis

• The LIBOR, Repo, and Federal Funds Markets

– Alternative short-term financing channels
– Credit spreads: over risk-free U.S. T-bill rate
• TED spread = LIBOR – T-bill rate
– During the “liquidity bubble” these credit spreads had shrunk to
historically low levels.
– But they began to surge upwards in the summer of 2007.
• Higher interest rate for unsecured loans during crises
• Lower T-bill rate due to “flight to safety”
– TED spread jumped from 50 bps to 250 bps.

Time Line of 2007-2008 Financial Crisis

• Central Banks Step Forward

– Aug 1-9, 2007: Many quant hedge funds suffered large losses –
triggering margin calls and fire sales.
– Aug 9, 2007: The first “illiquidity wave” on the interbank market
started – LIBOR shot up.
• European Central Bank injected €95 billion in overnight credit.
• U.S. Federal Reserve followed suit, injecting $24 billion.
– Aug 17, 2007: The U.S. Federal Reserve reduced the discount
rate by 50 bps and lengthened the lending horizon to 30 days.
– Sep 18, 2007: Fed lowered the federal fund rate by 50 bps.
– First bank run in the United Kingdom for more than a century:
• Northern Rock was unable to finance its operations through the interbank
market and received a temporary liquidity support from the Bank of
England.

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Time Line of 2007-2008 Financial Crisis

• Continuing Write-downs of Mortgage-related Securities:

– Oct 2007 was characterized by a series of write-downs:
• Major international banks seemed to have cleaned their books.
• The Fed’s liquidity injections appeared effective.
• Various sovereign wealth funds invested $38 billion in major U.S. banks.
– Nov 2007 matters worsened again.
• Total loss in the mortgage markets became larger than original estimates
($200 billion).
• Many banks were forced to take additional, larger write-downs.
• TED spread widened again in mid Dec 2007.
– Dec 11, 2007: Fed cut the federal funds rate by 25 bps.
– Dec 12, 2007: Fed announced the creation of the Term Auction
Facility (TAF).
• Commercial banks could bid anonymously for 28-day loans .

Time Line of 2007-2008 Financial Crisis

• The Monoline Insurers

– Insurance companies in asset management community:
• Traditionally focused exclusively on insuring municipal bonds.
• Extended guarantees to mortgage-backed securities.
– As mortgage related loss mounted, these insurers were on the
verge of being downgraded by major rating agencies.
• Could lead to a loss of AAA-insurance for $2.4 trillion face value of muni-
bond, corporate bonds, and structured products
• Could result in a sweeping rating downgrade across financial instruments
and trigger a huge sell off by money market funds.
– Jan 19, 2008: Fitch downgraded insurer Ambac
• Stock markets around the world down by 5% to 15%.
– Jan 22, 2008: Fed cut the Federal Funds rate by 75 bps.
• First “emergency cut” since 1982.
– Jan 30, 2008: Fed cut the Federal Funds rate by another 50 bps.

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Time Line of 2007-2008 Financial Crisis

• Bear Stearns
– Early March 2008: Credit spreads between agency bonds (issued
by Freddie Mac and Fannie Mae) started to widen again.
• Large exposure to agency bonds on its own.
• One of the creditors of a failed hedge fund (Carlyle Capital) that heavily
invested in agency bonds.
– March 11, 2008: Fed announced $200 billion Term Securities
Lending Facility.
• Allowing investment banks to swap agency and mortgage-related bonds for
treasury bonds for 28 days.
• Market interpreted this as a sign that Fed knew that some investment banks
were in trouble.
• Naturally, they pointed to the smallest, most leveraged investment bank
with large mortgage exposure: Bear Stearns.

Time Line of 2007-2008 Financial Crisis

• Bear Stearns (cont.)

– March 12, 2008: The media falsely released that Goldman Sachs
refused to enter a contractual relationship with Bear Stearns.
• Contributed to the run on Bear by its hedge fund clients and other
counterparties.
• Bear’s liquidity situation worsened dramatically on the next day and was
suddenly unable to borrow from the repo market.
– Over the weekend, New York Fed helped broker a deal.
• JP Morgan would acquire Bear for $2 per share – later increased to $10.
– On Sunday night, Fed cut the discount rate from 3.5% to 3.25%
and (for the first time) opened the discount window to
investment banks.

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Time Line of 2007-2008 Financial Crisis

• Government-Sponsored Enterprises: Fannie Mae and

Freddie Mac
– Two publicly traded institutions with implicit government
guarantee: securitized a large fraction of mortgages and had $1.5
trillion bonds outstanding.
– July 11, 2008: IndyMac (a large private mortgage broker) was put
in conservatorship by FDIC.
• Triggering panic on Fannie Mae and Freddie Mac
– July 13, 2008: Henry Paulson announced explicit government
guarantee.
• However, share prices continued to drop.
– Sep 7, 2008: U.S. government put Fannie Mae and Freddie Mac
into Federal conservatorship.

Time Line of 2007-2008 Financial Crisis

• Lehman Brothers, Merrill Lynch, and AIG

– Sep 12-14, 2008: New York Feb brokered a weekend meeting
• Barclays and Bank of America refused to rescue Lehman without
government guarantee.
• Treasury and Fed decided against using taxpayer money to rescue Lehman.
• Lehman declared bankruptcy on Monday morning.
– Smelling “death”, Merrill Lynch sold itself to Bank of America
for $50 billion on Sunday (Sep 15, 2008).
– Bailout of AIG – a major seller of credit default swaps
• Sep 16, 2008: AIG stock plunged more than 90%.
• Feb quickly organized a $85 billion bailout in exchange for 80% equity stake.
• Oct and Nov 2008: Feb extended additional $77 billion bailout.

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Time Line of 2007-2008 Financial Crisis

• Coordinated Bailout, Stock Market Decline, Washington

Mutual, Wachovia, and Citibank
– Credit markets deteriorated significantly in subsequent weeks.
• Washington Mutual suffered a “silent” bank run and then sold to JP Morgan
Chase.
• Wachovia sold its banking operation to Wells Fargo on Sep 29.
– Meanwhile, Wall Street’s problems spilled over to main street.
• It became more and more clear that a proactive, coordinated action across all
solvent banks had to replace the reactive piecemeal approach.
– Sep 19, 2008: news on Treasury’s $700 billion bailout plan broke.
• foreclosure-mitigation elements for homeowners, provisions to purchase
troubled mortgage assets, and a coordinated forced recapitalization of
banks.
– Nov 2008: Citibank needed additional Federal support.
– December 16, 2008, the Fed set its target interest rate between
zero and a quarter percent.

Deep Impact! -- Two Close Examples

• Jay
– My 401K almost became “201K” at one point 
– Furlough…
• University Foundations and Endowments
– During the 12 months ended June 30, 2009, the ten largest
endowments lost a combined $36 billion.
• Harvard: $10 billion loss (27.3% loss)
• Yale: $5.6 billion loss (24.6% loss)
• Stanford and Princeton: $3 to $4 billion loss
– Harvard’s responses:
• Halted construction of a $1.2 billion science complex
• Eliminated 275 jobs and frozen salaries
• HBS stopped providing sushi as refreshment during regular seminars.
• …

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A Historical Perspective

Reinhart, C. and K. Rogoff, 2008. “Is the 2007

U.S. Subprime Crisis So Different? An
International Historical Comparison”,
American Economic Review 98

Post War Bank-Centered Financial Crises

• The Five Big Crises:

– Spain (1977), Norway (1987), Finland (1991), Sweden (1991) and
Japan (1992).
– All protracted large scale crises associated with major declines in
economic performance for an extended period.
• Japan (1992): the start of the “lost decade”.

• The Thirteen Other Crises:

– Australia (1989), Canada (1983), Denmark (1987), France (1994),
Germany (1977), Greece (1991), Iceland (1985), Italy (1990), New
Zealand (1987), UK (1974, 1991, 1995), and U.S. (1984).
– The 1984 U.S. Savings and Loan Crisis is just a notch below the
“Big Five” in terms of fiscal costs (3.2% of GDP).

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Is This Time Really Different from History?

• Comparisons:
– Housing prices
– Equity prices
– Real GDP growth
– Public debt
• Time Horizon:
– 4-year period leading to the crises and
– 3-year period following the crises

Housing Prices

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Real Equity Prices

Real GDP Growth

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Public Debt

Striking Similarity!!

• Significant run-up in housing prices prior to crisis.

– Even more so this time than the “Big Five”
• Significant run-up in equity prices prior to crisis.
– Even more so this time.
• Similar inverted V-shape in real GDP growth.
– Growth momentum falls going into the crisis, and
– Remains low for two years after.
• Rising public debt is a near universal precursor for all
crises
– U.S public debt rose slower this time than the “Big Five”.
– BUT, the comparison excludes the huge buildup in private U.S.
debt leading to the current crisis.

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Who Are Responsible?

Almost Everybody!!

Individual

• Failure to take responsibility for understanding the

mortgage commitments
• Dubious and deceitful loan officials
• Greed
• Willingness to go along to get ahead
• Myopia – belief that housing prices would always rise
• …

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Corporate/Institutional

• Growth in securitization and inadequate loan monitoring

• Erosion of mortgage lending standards
• Flawed incentives and failure of the rating agencies to properly rate
CDOs
• Management incentives that rewarded upside but failed to penalize
sufficiently downside
• Failure to recognize the difference between liquidity risk and credit
risk
• Willingness to follow the herd despite growing concerns about
credit quality
• Arrogance – pretending to understand the value of complex
securities
• Cultural unwillingness to tolerate dissenting voices who warned of
rising risk

Government/Regulatory

• Favorable monetary policy following 9/11

• Government initiatives to further home ownership and
incentives to lend to less-creditworthy borrowers
• Inadequate capital requirements for Freddie Mac and
Fannie Mae
• Inadequate oversight of bank and investment bank risk
and capital requirements
• Lack of transparency and regulation of credit default
swaps

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The Roots of the Problem

Darden Case:
“Bear Stearns and the Seeds of Its Demise”

Preceding Events

• A key precipitating event:

– Historically low interest rate environment following 9/11
• Ability to borrow at low rates for a sustained period of time
• Fueling the housing boom

• A reinforcing event:
– Flight to “safety” : large inflows of international capital after
several international credit crises (Asian 1997 crisis and Russian
1998 default)
• Further fueled the housing boom
• Spurred dramatic growth in hedge funds and private equity
• Prompted a search for yield: delivered by new securities such as CDOs

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Transformation of Banking Business

• A major transformation of traditional banking business

– Traditionally, banks originated mortgages and loans and kept
them on their books.
– A new model in town: “originate and distribute”
• Banks originated mortgages and loans;
• Repackaged them (securitization); and then
• Sold them to other financial investors.

• A major transformation of investment banking business

– Traditionally, I-banks’ business mainly consist sof advising and
conducting fee-oriented transactions for corporate clients.
– A new model in town: greater focus on “principal transactions”
• Actively participated in the securitization process
• Heavily invested own capital in such securities

Consequences of securitization

• Distanced the borrowers from the lenders.

• Considerably weakened banks’ incentive to carefully
review loan applications, diligently monitor (and even to
collect) the loan payment.
– Banks held the full risk of the loans for only a few months.
• Led to an erosion of lending standards and to excesses in
lending.
– Teaser rates, no-documentation mortgages, and NINIA (“no
income, no job or assets”) loans.
– Assumption: Why bothering to check background when house
prices would always rise?
• Subprime mortgages accounted for 15% in 2001-2007.
– $1.3 trillion as of March 2007.

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Exhibit 4

Exhibit 5

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The myth of credit ratings

– Big bucks for rating agencies – agency problem?

• Three times higher fees for rating CDOs (12bps) than comparable corporate
bonds (4.25 bps)
– Lack of access to individual loan files to verify credit quality
• “Our expertise is as statisticians on an aggregate basis. We want to know, of
1,000 individuals, based on historical performance, what percent will pay
their loans?” – Claire Robinson, Head of Asset-Backed Finance for Moody’s
– Bad assumptions underlying CDO ratings
• Real estate markets were uncorrelated across the country;
• Defaults were predicted based on past underwriting standards.
– Same investment-grade ratings but different default risks
• Investment-grade CDOs yielded 25% more than similarly rated corporate
bonds.
• Five-year default rates: 24% for Baa-rated CDOs vs. 2.2% for Baa-rated
corporate bonds

Mismatch in maturity:
investing long and borrow short
– Financing structure of SIVs and I-banks
• Invested in illiquidity long-maturity assets: Mortgage
• Financed with short-term ABCP and repos: overnight, 90 days, 1 year
– Deadly interplay between credit risk and liquidity risk
• Mortgage defaults drove down the value of collaterals -- credit risk.
• The ABCP and repo market suddenly dried up – liquidity risk.
– Investors unwilling to extend more credit to banks.
• Unable to rollover short-term financing and facing margin calls, banks were
forced to sell assets.
• The large sell off further drove down the asset value.
• More margin calls …
• More sell off …
• Domino effect soon took out liquidity from the entire financial system

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Credit Default Swaps and Counterparty Risks

– CDS is a contract between two counterparties:

• The buyer makes periodic payments to the seller in exchange for the right to
a payoff in case of default
• The cost of CDS fluctuates as the perceived credit quality of the underlying
company changes.
– Two main functions of CDS
• Allowing a debt holder to hedge against default
• Facilitating an investor to speculate on credit risk without necessitating the
sale of the underlying bonds.
– As CDSs are bought and sold, the amount outstanding for an
individual company greatly exceeds the underlying bonds.
• $1 billion of debt outstanding vs. $10 billion of CDS contracts outstanding
• OTC transactions – no centralized clearing house that guarantees
counterparty risk

Exhibit 7

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The Role of Hedge Funds

Written Testimony of Andrew Lo Prepared

for the U.S. House of Representatives
Committee on Oversight and Government
Reform November 13, 2008 Hearing on
Hedge Funds

Hedge Funds on Hot Seat

• On October 2, 2008, the U.S. House Oversight and

Government Reform Committee announced a hearing
on Regulation of Hedge Funds for Thursday, November
13, 2008.
• Underlying premise: Hedge Funds Are Guilty!
– “Because of the extraordinary greed of American Financiers and
businessmen, they invent all kinds of ways to make huge sums
of money. We can not forget how the 1997-98 American hedge
funds destroyed the economies of poor countries by
manipulating their national currencies.”
• Dr. Mahathir Bin Mohamad, Former Prime Minister of Malaysia, Sep 26,
2008.

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Hedge Funds on Hot Seat

• Ring a bell?
– “We are now witnessing how damaging the trading of money
can be to the economies of some countries and their currencies.
It can be abused as no other trade can. Whole regions can be
bankrupted by just a few people whose only objective is to
enrich themselves and their rich clients…. We welcome foreign
investments. We even welcome speculators. But we don’t have
to welcome share- and financial-market manipulators. We need
these manipulators as much as travelers in the good old days
needed highwaymen.”
• Dr. Mahathir Bin Mohamad, Sep 23, 1997.

Did Hedge Funds Bring Down Asian Currencies?

• No conclusive evidence!
• It is possible that hedge funds involved in currency trade
played a destabilizing role.
• However, there is no evidence that these funds
maintained significant positions in the Asia currency
basket over the time of the crisis.
• As for George Soros, singled out by Dr. Mohamad, his
funds actually lost five to ten percent return per month
over the Asian crisis period.

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Bad Blood between Dr. Mohamad and Hedge

Funds – George Soros in Particular

• In late 1989, Bank Negara (Malaysia’s central bank) was

actively involved in currency speculation.
– Sometimes over $1 billion a day.
– U.S. Fed advised it to curtail its foreign exchange bet.
• Dr. Mohamad defended the speculation as active reserve
management in Dec 1989 as saying
– “We are a very small player, and for a huge country like the
United States, …, to comment on a country like Malaysia buying
and selling currency is quite difficult to understand”.
• In 1992 Bank Negara betted against George Soros on
whether Britain would stay in the European Rate
Mechanism and lost $3.6 billion.
– Malaysia’s loss was Soros’ gain!

Hedge Funds and Financial Markets

• One of the most vibrant parts of the financial sector over

the last decade has been the hedge fund industry.
• Hedge funds have taken on a broad array of risks
unwilling to be borne by other market participants.
– Relatively unconstrained by regulation
– Motivated by profit-sharing incentive fees
– Fueled by constant innovation in investment strategies
• Hedge funds has contributed significantly to the growth
and prosperity of the global economy in the last decade.
– Increased risk-sharing capacity
– Liquidity provision in every major market

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Role of Hedge Funds as Part of the

“shadow” Banking System
• Provided financing to both individuals and corporations.
– Mostly through securitization
• Raised tens of billions of dollars for infrastructure investments.
– Highways, bridges, power plants, waste treatment, and water
purification facilities in India, African, and the Middle East.
• Provided better risk-sharing among market participants.
• Provided liquidity by taking on the role of
– Banks in fixed-income and money markets, and
– Market makers and broker/dealers in equity and derivative
market.
• In short, hedge funds have emerged to be an integral part of the
“shadow” banking system.

Problem: Lack of Oversight

• As part of the shadow banking system, hedge funds lie

outside the purview of the Federal Reserve, the SEC, the
FDIC, and the Treasury.
• Drawing from the lessons learned from the Great
Depression, these agencies were set up and developed
effective tools monitoring traditional banking risk.
– Bank runs are almost non-existent now days.
• However, these regulatory agencies are unable to
definitely determine what hedge funds’ contribution to
systemic risk is.
– No disclosure → No capital requirement → No clues

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Hedge Funds and Systemic Risk

• The search for yield led to large amount of capital

flowing into all parts of the hedge fund industry.
• The “crowdedness” of hedge fund industry led to:
– Lower returns;
– Greater illiquidity risk and higher leverage;
• As hedge funds undertook more exotic investments using greater leverage
to boost their returns.
– Greater correlation among different hedge fund strategies,
particularly with respect to losses.
• Hence, the overall level of systemic risk in the hedge
fund industry has dramatically increased.

Crowded Industry

• Too many “hedge” funds:

– Similar investment styles and strategies
– Not effectively hedged against market downturn
– Only commonality: high incentive structure
• Too many managers testing the water:
– Various background (sometimes unusual)
• Rick Fenney: NFL running back
• Timothy Sykes: College student
• Richard Bank: Gynecologist
– Targeting investors who have little idea about the funds’
investment

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Early Warning Sign:

The 1st Week of August 2007?

• Unprecedented and surprising losses for several

prominent hedge funds on August 7th, 8th, and 9th.
– Primarily invested in liquid, exchange-traded securities, NOT
in subprime mortgage-backed securities.
– Primarily employed quantitative model-driven long/short
equity market neutral strategies, which in principle should
• Have little beta exposure; and
• Be immune to market downturns.

• Market conditions:
– Relatively little movements in fixed income and equity markets
on August 7th and 8th.
– S&P 500 lost nearly 3% on August 9th.

How Bad Was the Losses?

• Ranging from -5% to -30% for some of the most

consistently profitable quant funds. (source: WSJ)
– Renaissance Technologies Corp.: -8.7%
– Highbridge Capital Management: -18%
– Tykhe Capital LLC: -20%
• A small probability event?
– “We were seeing things that were 25-standard deviation moves,
several days in a row…. There have been issues in some of the
other quantitative spaces. But nothing like what we saw last
week”.
• --- David Viniar, CFO of Goldman Sachs

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What Have Happened?

--- Khandani and Lo (2008)

• The losses were initiated by the temporary price

impact resulting from a large and rapid “unwinding”
of quantitative equity market neutral portfolios.
– A sudden liquidation of a multi-strategy fund involved in
mortgage-backed securities;
– Perhaps in response to margin calls from a deteriorating
credit portfolios.
• The price impact of the unwind generated a shock
wave to other quant funds – market-neutral,
long/short, 130/30, or even long-only.
– Cut risk exposure and/or “de-leverage”

What Have We Learned from the Crisis?

Written Testimony of Andrew Lo Prepared

for the U.S. House of Representatives
Committee on Oversight and Government
Reform November 13, 2008 Hearing on
Hedge Funds

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Measures of Systemic Risk

• Systemic risk:
– The risk of a broad-based breakdown in the financial system,
often realized as a series of correlated defaults among financial
institutions that occurs over a short period of time and typically
caused by a single major event.
• Traditional banking panics have virtually disappeared.
– Thanks to the FDIC and related central bank policies
• However, systemic risk exposures have taken shape in
the “shadow banking system”.
– Investment banks, hedge funds, insurance companies, …
– Providing the same services that banks have traditionally
provided, but are outside of the regulated banking system.

Measures of Systemic Risk

• The starting point of regulatory reform is to develop a

formal definition of systemic risk
– Captures the linkages and vulnerabilities of the entire financial
system, including the “shadowed banking system”.
• A collection of quantitative measures, each designed to
capture a specific risk exposure.
– Leverage
– Liquidity
– Correlation
– Concentration
– Sensitivities
– Connectedness

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Better Disclosure

• A pre-requisite for developing measures of systemic risk

– Access to primary sources of data from shadow banking system
• For hedge funds, we need
– Assets under management
– Leverage
– Portfolio holdings
– List of credit counterparties
– List of investors
• Prime brokers can play a more efficient role to provide
these data items to regulatory authorities.
• Caution: confidentiality!

The Capital Market Safety Board

• Technological innovation is always associated with the

risk that the technology outpaces our ability to use it
properly, bringing unintended consequences.
• Misusing technologies repeatedly lead to disasters.
– Space shuttle explosions, nuclear meltdowns, airplane crashes…
• Should we blame the technologies and stop innovations?
– No!
• Instead, we should seek to understand how our misuse
of the technology may have caused the accident.
• We need an independent government agency to conduct
forensic analysis on each financial crisis.

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The Capital Market Safety Board

• One successful model: National Transportation Safety

Board (NTSB)
– Investigating the cause of accidents and making
recommendations for avoiding similar accidents in the future.
• Capital Markets Safety Board (CMSB);
– Investigating, reporting, and archiving financial crashes
– Providing policy recommendations
– Communicating with investor public during the crisis to reduce
panic and overreaction.
– Obtaining and maintaining information provided by the shadow
banking system

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