The Financial Crisis and its Impact on Managing Business Models

The US response to the crisis and recovery scenarios

Sid Ahmed Benraouane, Ph.D.

Agenda

1. Introduction2. Macroeconomic data: Impact of the financial and economic

crisis on the US economy

3. The US Government response to the financial and economic crisis

4. Recovery scenarios

5. New business models: managing uncertainty

I. Introduction

• Magnitude of the crisis

• Impact of the crisis

FirstThe Impact of the Financial and

Economic Crisis on the US EconomySources IMF

G-7 economies in Q4 of 2008 experienced severe contractions and are expected to experience the sharpest annual contraction in 2009.

Source: IMF, Average Annual growth rates, WEO (2008 Estimate, 2009 Forecast)

Credit marketSource: Bloomberg, Quarterly, IMF Group of 20 Meeting Brief. Credit loss between 2007 and March 2009

Market capitalization and impact on the banking industry

• Market capitalization refers to the stock market value of a firm.

• It is an estimation of the value of a business that is obtained by multiplying the number of shares outstanding by the current price of a share

• 51.2 Trillion dollars and in September 2008 went down to 40 trillion dollars

Market Cap of major banks in 07 and 09

Source: JP Morgan

Morgan Stanley

16

Deutsche Bank

10.3

Societe Generale

26

BNP Paribas

32.5

Goldman Sachs

35

JP Morgan

85

HSBC

97

Market Value as of January 20th 2009, $Bn

Market Value as of Q2 2007, $BnSource: Bloomberg, Jan 20th 2009

Global Trade

Impact on the US Labor marketSource: SHRM

US Labor market segments affected Source: SHRM

US Government response

1. TARP The Troubled Assets Relief Program (TARP)

2. Economic stimulus package

3. Financial stability plan

4. Problems with the FSP

• Stress Test

• Executive compensation

1.The Troubled Assets Relief Program (TARP)

$ in billions

COMMITTED UNDER THE BUSH ADMINISTRATION COMMITTED UNDER THE OBAMA DMINISTRATION

2. Economic Stimulus Package 939 Billion Dollars

$ in billions

3.Financial Stability Plan

• Components of the FSP

1. The stress-test for banks with excess of 100 billion USD in assets

2. Increased Transparency and Disclosure

3. Capital Assistance Program

4. Public-Private Investment Fund

5. Consumer and Business Lending Initiative

6. Increasing transparency and accountability

3.Financial Stability Plan: “Banks Stress Test”

• Banks are unwilling to lend to each other because they do not know what’s on each other’s balance sheets

• A comprehensive review to determine whether the financial health of major banks will support the recovery IF the economic situations deteriorate further.

• Three assumptions were made:Unemployment at 10%Housing price deteriorates to 22%Economy contracts further

Financial Stability Plan: Two Problems 1. Stress test results: Friday May 8th, 2009

• The results of the testTotal potential losses for this year and next year were set

at $600 billion 10 of the big 19 banks were ordered to raise a total of $75

billion in additional capitalThe rest were given a clean bill of health.

2. Executive compensation

Exemplas: Comparison of CEO’s and CFO’s Salary in different companiesFigure 06/07

$ in millions

3.Financial Stability Plan

1. Capital Assistance Program

• Banks that undergo stress test will be provided with an assistance that will help them to buffer consequence of worse than expected economic downturn.

2. Public-Private Investment Fund

• The purpose of this fund is to help financial institutions clean their balance sheets from “legacy assets or toxic.”

• Government will provide up to 500 billion USD in financing to allow private sectors to buy these assets.

3.Financial Stability Plan

3. Consumer and Business Lending Initiative

• This initiative help consumers to have access to the credit market with lower interest rates for auto loans, small business loan, credits cards loans and commercial loans. This initiative will provide up 1 trillion dollars.

4. Increasing transparency and accountability

• This initiative requires firms to show how the assistance provided by the government will expand and unfreeze lending.

Recovery Scenarios

Impact of the Crisis on Current Business ModelsSource: PricewaterhouseCoopers 2009

What do global leaders think of the impact of the banking industry on the their business?

• 67% think it will affect expansion plans

• 79% think it will increase the cost of finance (interest rates)

• 73% think it will restrict investment plans

• 67% think it will reduce growth expectations

1. Flexible strategic planning

• “Just In Time Strategy”

• Examples of questions that managers need to ask are: What new products best fit different scenarios?If one competitor goes out of business how will we react?Which acquisition could be attractive? And how much capacity and capital is required?

2.Business Intelligence and Decision Making

• Managers need to understand the evolution of the market in real time.

• Use of BI to promote effective decision making

• Create a network of information to analyze information, market sense of it and move it vertically and horizontally

3. Strategic Alliances and Joint Ventures

• In order to deal with the lack of financing managers may rely on collaboration in the form of Joint Ventures and Strategic Alliances.

• JV and SA are managerial tools that allow two firms to pursue agreed goals while remaining independent.

• SA allows companies to operate in an environment of instability, ambiguity and evolving patterns.

9–27

3. Strategic Alliance and JV

CombinedCombinedResourcesResourcesCapabilitiesCapabilities

Core CompetenciesCore Competencies

ResourcesResourcesCapabilitiesCapabilities

Core CompetenciesCore Competencies

ResourcesResourcesCapabilitiesCapabilities

Core CompetenciesCore Competencies

Firm AFirm A Firm BFirm B

Mutual interests in designing, manufacturing,Mutual interests in designing, manufacturing,or distributing goods or servicesor distributing goods or services

How did we get here?

The Crisis of the Credit