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Financial crisis Overview

March 3rd, 2011

On Thursday Feb. 24, John Carroll University’s Accounting Association, Finance Association, and KPMG Professor of Accountancy, Robert Bloom, put on a panel discussion covering topics relating to lessons learned from the recent financial crisis. Topics discussed include: enterprise risk management, moral hazard, capital maintenance, and financial instruments.

Panelist Victor Alexander of Key Bank illustrated how the definition and understanding of what encompasses risk has evolved as a result of the financial crisis. There are no decisions made without considering how all aspects of the company will be exposed.

Carl Grassi, of law firm McDonald Hopkins LLC, asserted that banks need to write loans that they are willing to hold themselves. He believes that to push away moral hazard, the business community needs personal responsibility at the forefront. If banks can hide behind the corporate veil, moral hazard will continue to be a major problem until there is personal risk. However, it was Martha Raber of Key Bank who maintained that collaterizing debt into securities to obtain liquidity is not problematic and is a sound practice. The problematic aspect was the lack of due diligence in connection to those securities in the years that led up to the financial crisis.

Jason Painley of the Federal Reserve Bank of Cleveland outlined the process of “stress testing” which was used to determine if banks would be able to survive the economic downturn. This process proved to be difficult for him when it came down to expressing opinions about hard realities concerning various banks’ futures. It is difficult to make assertions when it is known that those opinions will affect a company’s future. Mariah Webinger of the accountancy department similarly explained how fair valuation can be a vital tool for companies to give fair representation as to their financial position, but also a burden to the company when the markets are falling. This creates a burden because major write-downs — losses — are required to be taken.

Martha Raber went on to point out that valuation becomes more difficult when these “toxic assets” which have to be written-down do not have ready markets and have to be valued by models. She went on to explain that some of these losses were not as bad as expected. This observation is manifested in the large gains investors made when they came in and provided liquidity to troubled companies during the financial crisis. Additionally during the discussion it was pointed out that many sectors of the economy have revived and are either close to or even ahead of their position before the financial crisis.

The objective of the panel discussion was to enlighten the John Carroll community about the events and decisions that led up to the financial crisis so that the business community as a whole will be better able to ensure that the same path is not traveled again.

Overall this discussion yielded positive results because of both the expertise of the guest-panelists and the insightful questions brought from both the student-panel and students in attendance.