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Dangerous Markets: Managing in Financial Crises

ISBN: 978-0-471-22686-4
320 pages
September 2002
Dangerous Markets: Managing in Financial Crises (0471226866) cover image
A corporate guide to crisis management in volatile financial markets

Current financial crises in Argentina, Japan, and Turkey are being played out on the front pages of newspapers, and these are just the most recent financial crises that have rolled across the globe in the last decade and whose far-reaching impact hurts business around the world. Dangerous Markets: Managing in Financial Crises recognizes that no global corporation or financial institution can afford to ignore the potential of a financial storm and will help top management and financial professionals navigate through this often disastrous maze.

While many books discuss financial crises and their ramifications, none has presented an action plan for managing these storms—until now. Dangerous Markets: Managing in Financial Crises presents a method that allows executives and financial professionals to recognize the warning signs of a financial crisis and act appropriately before the situation spirals out of control. Based on years of research and practice in cleaning up the mess, McKinsey consultants Barton, Newell, and Wilson reveal the warning signs of potential financial catastrophes and provide unique principles that can be followed to shape and manage a strategy for survival.

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Preface.

Why Manage Financial Crises Proactively?

Why We Wrote Dangerous Markets.

Acknowledgments.

CHAPTER 1: Introduction to Dangerous Markets.

Financial Storms Are Destabilizing.

Financial Crises Can Be Understood, Anticipated, Managed, and Prevented.

What This Book Is and Is Not.

Who Needs to Read Dangerous Markets?

Part I: Understanding Financial Crises.

Part II: Earning the Right to Win.

Part III: Managing Unique Banking Risks.

Part IV: Building for the Future.

PART I: Understanding Financial Crises.

CHAPTER 2: Recognizing New Global Market Realities.

Increasing Risk of Financial Crises.

Why Financial Crises Are on the Rise.

You Can Run, But You Can't Hide From Crises.

Looking Ahead.

CHAPTER 3: Using Crisis Dynamics to See Growing Risks.

The Chronology of a Crisis.

The Dynamics of a Financial Crisis.

The Corporate Sector: Assessing Value Destruction.

The Financial Sector: Banks in Distress.

Understanding the Impact of Macroeconomic Catalysts, Foreign Funding, and Asset Bubbles.

Conclusions and Outlook for Future Crises.

Appendix 3.1: Ten Warning Signs of a Financial Crisis.

Appendix 3.2: Estimating Value Destruction in the Economy.

Appendix 3.3: Why Corporate Sectors Underperform in Crisis Economies.

PART II: Earning the Right to Win.

CHAPTER 4: Managing the First Hundred Days.

Taking Five Tactical Steps When a Crisis Hits.

Developing a Crisis Management Approach.

Managing the CEO Agenda.

Appendix 4.1: Painting the Picture of a Financial Crisis.

Appendix 4.2: How Companies Can Strengthen Funding Before a Crisis.

Appendix 4.3: Using Scenario Planning in Financial Crises.

CHAPTER 5: Capturing Strategic Opportunities After the Storm.

Recognizing Significant Opportunities in a Crisis.

Moving from Boundaries to Greater Degrees of Freedom.

Executing Successfully to Capture Crisis Opportunities.

Appendix 5.1: Leveraging Strategic Opportunities in Financial Crises: The Successful Story of NCNB.

PART III: Managing Unique Banking Risks.

CHAPTER 6: Driving Successful Bank Turnarounds.

Ensuring Turnaround Success: Seven Management Actions.

Mellon Bank's Successful Turnaround.

Christiana Bank's Successful Turnaround.

Filanbanco's Failed Turnaround.

Government Stewardship of Troubled Banks.

Government's Role in Bank Turnaround Strategies.

Appendix 6.1: Building a Rationale for Official Support in a Financial Crisis.

CHAPTER 7: Minimizing Costs Through NPL Recovery Excellence.

Developing World-Class NPL Recovery Capabilities.

Special Issues Raised When NPLs Are Managed by Governments.

Management Lessons: Good Banks/Bad Banks in Scandinavia.

PART IV: Building for the Future.

CHAPTER 8: Strengthening System Safeguards.

Moving to Global Standards for Corporate Governance.

Adopting Better Accounting Standards.

Developing Capital Markets.

Resetting Regulatory Regimes.

Building an Effective Legal Foundation.

Appendix 8.1: Sixteen Elements of Good Corporate Governance.

Appendix 8.2: Singapore's Development as an International Financial Center.

Appendix 8.3: The Discipline of the Market for Corporate Control: Issues for CEOs.

CHAPTER 9: Designing a New, Market-Driven Financial Architecture.

Recognizing the Limitations of Current Standards and Approaches.

Enhancing the Private Sector's Role in Setting Standards to Reduce the Risk of Future Crises.

Appendix 9.1: FSF Compendium of Standards.

Endnotes.

Glossary.

Index.
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DOMINIC BARTON is a director with McKinsey & Company and managing partner of the Firm's Korea practice. He also is a leader in the Firm's financial institutions practice. Barton has advised the Korean Financial Supervisory Commission on restructuring their banking system as well as strategized with the Monetary Authority of Singapore. He led a major McKinsey study on how to transform companies into sustainably high performers and has led numerous studies for private and public sector clients in the financial sector. He holds an M. Phil. in economics from Oxford University, where he was a Rhodes Scholar, and a BA in economics from the University of British Columbia.

ROBERTO NEWELL is a former director at McKinsey & Company where he led projects for governments and private sector clients in financial crisis. Dr. Newell has served clients immersed in financial crises throughout the Americas, including Argentina, Colombia, Ecuador, Mexico, the United States, and Venezuela. He holds a BA and MA from the Universidad de las Americas in Mexico and a PhD in economics from the University of Texas at Austin. A Mexican citizen, he is currently CEO of FESSA (Fondo de las Empresas Expropiadas del Sector Azucarero), a Mexican government entity charged with turning around and privatizing twenty-seven failed sugar mills. With Luis Rubio Frieberg, Newell wrote an award-winning book on Mexico's financial crisis of the 1980s, entitled Mexico's Dilemma: The Political Origins of Economic Crisis.

GREGORY WILSON is a principal in McKinsey & Company's Washington, D.C. office, specializing in strategic issues that affect private and public sector clients in the financial services industry. Wilson has worked on financial sector restructuring around the world, including many recent crisis countries in Asia and South America, and has conducted numerous client studies on policy, strategic, regulatory, and structural issues. He holds a BA in history, and politics and government from Ohio Wesleyan University. From 1974-1976 he attended the Fletcher School of Law and Diplomacy where he studied international business and law. Prior to joining McKinsey, Wilson served as Deputy Assistant Secretary for Financial Institutions at the U.S. Treasury Department during the U.S. savings and loan crisis.
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"...an intriguing methodology to spot pre-crisis warning signs...some practical solutions..." (Financial Times, 30 December 2002)

"offers a practical guide for all major participants in a financial crisis... the book draws helpful lessons from the numerous financial crises of the past two decades, including U.S. domestic experience. It usefully reminds readers that crises provide opportunities for shedding out-of-date practices - and for making money - as well as impose economic costs." (Foreign Affairs, March 2003 (United States))

"...an intriguing methodology to spot pre-crisis warning signs...practical solutions as to how companies and countries can best deal with financial crashes..." (Financial Times, December 30, 2002 (United Kingdom))

"very popular in German banking circles at the moment. It deals with the warning signals relating to financial crises, the momentum associated with them, and ways of dealing with them... [It] provides a riveting insider report on system crises in newly industrialized countries and financial difficulties in the banking sectors of G7 states." (Handelsblatt, February 21/22, 2003 (Germany))

"a hefty chuck of valuable intelligence that deserves the hours of serious study it demands of a reader. The authors offer general observations on past crises, then provide detailed analyses on strategies that succeeded and failed in the past. They focus on the performance of individual company managers and pepper the book with lists of dos and don'ts." (Far East Economic Review, February 27, 2003 (Asia))

"The timing of this book couldn't be better. As political crises continue to escalate globally, financial crises will likely follow. And companies need all the help they can get." (Business Finance, February 2003 (United States))

"The authors...cite five boundary conditions that are changing in times of crisis.... The five "degrees of freedom" in volatility are: regulatory regimes; competitive landscape; customer behavior; organizational capacity for change; and social values. It is the ability of managers to grasp the impact of these changes, prompted by the crisis, and then turn them into opportunities that leads to many successful stories of companies highlighted in the book." (Jakarta Post, October 12, 2002 (Indonesia))

"Critics rate the book highly, noting while many books discuss financial crises and their ramifications, none has presented an action plan for managing them. The book presents a method that allows executives and financial professionals to recognize the warning signs and act appropriately before the situation gets out of hand...also details best practices that help corporations weather crises." (Business World, October 15, 2002 (Philippines))

"highly readable and actually a quick read...a management toolkit, with all the tools neatly arranged and ready on hand when the need arises. On an unlit, stormy night when the manager's company suffers a flat tire, that manager would surely wish he'd bought this handy-dandy toolkit." (Business World, October 16, 2002 (Philippines))

"Dangerous Markets concludes that financial crises like the one that swept Asia have become more frequent in the past decade or so and will become more frequent as developing economies enter the global economy...
"So what should managers and investors do if they see signs of an imminent crisis? The authors point to companies that have prospered in the past by seeing crisis as an opportunity to gain on less well-prepared competitors.... What these examples have in common is that managers took advantage of the situations rather than adopting a defensive posture to crisis conditions." (Wall Street Journal, October 14, 2002 (Asia))

"Financial crises are hardly limited to the purview of central bankers and regulators. The authors skillfully demonstrate that financial crises offer both peril and promise. A 'must read' for top management of any global company, whether a financial or a nonfinancial institution." —Ronald P. O'Hanley, Vice Chairman, Mellon Financial Corp.

"Based on their vast experience in financial crises around the world during recent years, the authors have developed an impressive review of the origins of and solutions to financial crises. The cost of such crises can be minimized and the path to recovery established earlier if bankers, other corporate executives, and public finance officials take advantage of this effort and apply the lessons learned from their significant work." —Charles H. Dallara, Managing Director, Institute of International Finance, Inc.

"Dangerous Markets is a 'must read' in the current global environment for all serious investors and senior executives. The McKinsey authors bring a unique practitioners' perspective to the challenges of anticipating, managing, and succeeding in financial crises, and close with an intriguing call for leading private sector players to step up their role in promoting new market standards and structures to help avoid future financial crises and minimize their potential impact." —Robert R. Glauber, Chairman and CEO, National Association of Securities Dealers, Inc., former Under Secretary of the U.S. Treasury Department, former Harvard Business School professor

"The authors address an issue of enormous importance in today's volatile world. They emphasize the critical role that the management of financial institutions can play, not only in leading their own institutions through choppy waters, but in helping shape the development of more robust financial systems." —Peter Sands, Group Finance Director, Standard Chartered Bank

"Barton, Newell, and Wilson provide new and important insights into financial crises based on their extensive and successful work with private financial institutions and with governments. They offer clear and persuasive guidance on how best to avoid crises, how to see them coming, and what to do when they happen. This is best-practice counsel from three leaders in the field. They have worked in the trenches, and bring a vital private sector perspective." —Martin N. Baily, Senior Fellow, Institute for International Economics, former Chairman of the Council of Economic Advisers

"The book results from a fresh and imaginative approach to financial crises in the past few years, considering corporations' standpoint. The insights are precious to top executives as well as to regulators and academics; in fact, the book provides a very skillful demonstration of the value of the dialogue between all interested parties on the issue of financial crises. Since the focus of such crises is now moving toward nonfinancial corporations, the book becomes even more timely and important." —Gustavo Franco, Partner, Rio Bravo Investimentos, Professor of Economics, Pontífica Universidade Católica, former Governor of the Central Bank of Brazil

"As a member of the private equity investment community, I recommend Dangerous Markets to all members of the world business community. Their insights provide valuable lessons which if applied can make the world markets much more efficient and stable." —Steven Lee, Partner, Lone Star Fund

"Based on their unparalleled experience consulting during financial crises, Barton, Newell, and Wilson offer a fresh perspective on such episodes. The microeconomic focus - as opposed to the conventional macro view - provides important new insights into the difficult art of forecasting and surviving these storms." —Dr. José A. Scheinkman, Chaire Blaise Pascal de l'État et de la Region Île de France, Theodore Wells '29 Professor of Economics, Princeton University

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