Miraculous Financial Engineering or Toxic Finance? (Keynote Speaker Presentation)

Main triggering factors of the global financial crisis:Self-regulating ideology assumption of large financial institutions and overconfidence in the risk management models, which were based on historical data from low volatility periods; Lax underwriting standards for the subprime mortgage loans; Massive growth of “exotic” mortgage products; Massive adverse selection of poorly screened subprime borrowers; Failure of regulators to consider the high level of interconnection among financial institutions due to the complexity of the innovative financial engineering products (CDOs), the globalization of the markets, high speed transactions, and poor regulated shadow banking sector; Excessive confidence (or moral hazard) in the risk distribution process (transfer) through the OTD securitization process and “pseudo-credit insurance protection” with the CDS. Bad forecasting, scenario analysis, and stress testing without a systemic industry-wide perspective (extreme tail events); Major failure of financial institutions’ corporate governance, risk management, audit, internal controls, due diligence, information disclosure, application of Basel capital adequacy framework; Inability to properly integrate in the risk models/bureau scores macroeconomic indicators and industry-wide indicators; Inability of many financial institutions to develop a real corporate social responsibility, business ethics, and sustainability culture; Failure to consider the potential risk of an industry-wide exponential growth, during a housing and lending boom period (bubbles), of undercapitalized and overleveraged financial institutions (or financial vehicles), over-exposed to risky and complex asset-backed securities of highly interconnected organizations financed mainly short-term.