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92 Risk management technology in financial services
just a couple of young engineers. Not watching a project like that through top-level
design reviews is plainly irresponsible – and its results show up in a big way in the
Following the significant delivery delays, and their technical problems in the back-
ground, orders for the giant A380 have slowed to a trickle. Total orders of 159 are
100 short of the number at which the company breaks even. And even if Airbus is
sticking to its development figure of $11.7 billion, there are rumours of over-runs.
Moreover, the market for a 555 seater is not self-evident. Boeing reckons that the
big growth in air travel will come from smaller planes, carrying 250–400 passengers.
These will enable people to travel direct rather than changing at hubs. Airbus sees the
value of this, too, but it has been so busy designing the A380 that its smaller models
have been neglected. Lulled by the white elephant:
EADS ignored demands of its customers, and
Underestimated archrival Boeing which came up with a new fuel-efficient airplane.
And as if EADS needed more problems, in mid-September 2006 a political challenge
emerged. A Russian state-owned bank took a 5 per cent stake in the Franco-German
airframe, missile and aerospace firm, making it the biggest investor in Airbus’s parent
company outside its ‘core’ group of shareholders. Analysts think that the EADS
equity holding was bought on behalf of a Russian state company set up to coordinate
strategy in the country’s aerospace industry.
5.6 The product problems of Long-Term Capital Management
On Thursday, September 24, 1998, bank regulators in the United States scrambled
to contain the financial fallout of a hedge fund’s meltdown: the Long-Term Capital
Management (LTCM). That day, under the patronage of the Federal Reserve Bank
of New York, some of the world’s largest commercial and investment banks put
together a $3.5 billion rescue plan. The money was intended to save the highly geared
hedge fund that was rapidly sinking under the weight of its wrong bets.
As in the cases of GM, Ford and EADS/Airbus, the problem was that LTCM’s top
brass had not attended to the problems the firm faced with its products and risks
embedded in them. As first the rumours and then the news spread, the shares of all
sorts of financial institutions fell sharply both in the United States and in Europe.
Investors were concerned that in the end, the effort to keep Long-Term Capital
Management afloat would not bear fruits because of its huge losses.
These losses were the result of very high gearing, to an astronomical 340 per cent
of the capital. Moreover, the oncoming collapse of LTCM was the fall of what many
insiders believed to be the most brilliantly engineered deals by a hedge fund and had
the potential to precipitate a financial crisis. The risk was not managed despite:
The market skills of three Salomon Brothers alumni: John Meriwether, Lawrence
Hilibrand and Eric Rosenfeld, and
The rocket science know-how of two Nobel Prize-winning economists: Dr Robert
Merton and Dr Myron Scholes.