Financial and Other Disasters

Sergio Scandizzo

Four Case Studies

None of the case studies in this chapter corresponds to a specific historical event in full, but in each of them the reader will easily find elements of some famous cases. This is a key feature all scenarios share, as it is extremely difficult to construct scenarios out of events that have never happened. On the other hand, known events and circumstances can happen in conjunction with entirely new ones and can combine, giving rise to totally new, and unexpected, consequences. For each case we will discuss the key failures, the individual consequences and the related losses, as well as the overall final impact of the resulting scenario.

Scenario 1: Lending and Investment Banking

Imagine a bank that is active in both investment banking and lending. Its investment banking arm advises a major client in the chemical industry on a strategy to hedge the risks of movements in the price of key raw materials based on the usage of complex derivative products. At the same time, its commercial banking arm finances the same company in the construction of a large industrial facility.

Unfortunately, raw material prices move in such a way as to reveal a large gap