The Global Economic System: How Liquidity Shocks Affect Financial Institutions and Lead to Economic Crises

Chapter 1. Motivation for Understanding Liquidity Risk

The global economic crisis of 2008 and 2009 caught many of the most astute investors in the financial markets by surprise. While only 49 hedge funds failed during all of 2007, 344 hedge funds failed during just the third quarter of 2008, and another 778 hedge funds failed during the fourth quarter of 2008. Similarly, while only 3 banks failed in 2007, 25 banks failed in 2008, and 140 failed in 2009. Endowment funds, the financial backbone of private universities, which had posted stellar investment results throughout the 2000s, had an investment return of -19% during fiscal 2009. The four biggest funds, with widely acclaimed investment managers, posted returns of -27% (Harvard), -25% (Yale), ...