Risks and Restructuring Built by Stambaugh/2009 Jeff Stambaugh

Risk Management Built by Stambaugh/2009 ■ Traditional view: insure for risks ■ 1970s and onward: risks can be calculated and options sold (Black-Scholes option pricing model) ■ Note: “Risk management” played role in current mess ■ Buehler et al (HBR Sept 2008) ■ ID major risks (4-6) ■ Own risks where you have advantage ■ Determine capacity/appetite for risk ■ Embed risk in all decisions ■ Govern / organize for risk

Pratfalls! Built by Stambaugh/2009 ■ The Black Swan (Taleb) ■ Do people understand these things? ■ Quick Case Study

Restructuring Built by Stambaugh/2009 ■ Asset ■ Capital ■ Management (strategy) ■ James (HBR, 2002) ■ Audit by outside accounting firm ■ Grab the checkbooks (panic spending) ■ Find the hidden heroes ■ If necessary, clean house ■ Act! ■ Develop options ■ Get more money than you think you need

Chapter 11 Bankruptcy Built by Stambaugh/2009 ■ Reorganization vs liquidation (Chapter 7) ■ Court-supervised process ■ Generally shareholders are wiped out ■ Creditors are in drivers seat ■ Contracts can be breached (vendors, employees, leases, customers) ■ Debts may be cancelled (often swapped for equity) ■ DIP lending goes first in line ■ 18 months to have approved plan ■ Why is this unfair? ■ GM as a case study

Hot Topics: Summary Built by Stambaugh/2009 ■ Risk management and restructuring no panacea