A financial crisis is when financial instruments and assets decrease significantly in value. As a result, businesses have trouble meeting their financial obligations, and financial institutions lack sufficient cash or convertible assets to fund projects and meet immediate needs. Investors lose confidence in the value of their assets and consumers’ incomes and assets are compromised, making it difficult for them to pay their debts.

A financial crisis can be caused by many factors, maybe too many to name. However, often a financial crisis is caused by overvalued assets, systemic and regulatory failures, and resulting consumer panic, such as a large number of customers withdrawing funds from a bank after learning of the institution’s financial troubles.

• What are the Basic Causes of Financial Crisis?
• Who is to Blame for the Financial Crisis?
• What are the Types of Crisis?
• What are the 4 Elements of a Crisis?
• How can we Fix the Financial Crisis?
• Financial Crisis Examples
• What is the Global Financial Crisis?
• Who got Rich Off the 2008 Financial Crisis?
• What are the 5 C’s of Crisis Management?

What are the Basic Causes of Financial Crisis?

A financial crisis may have multiple causes. Generally, a crisis can occur if institutions or assets are overvalued, and can be exacerbated by irrational or herd-like investor behavior. For example, a rapid string of selloffs can result in lower asset prices, prompting individuals to dump assets or make huge savings withdrawals when a bank failure is rumored.

Read Also: Organizational Crisis Management

Contributing factors to a financial crisis include systemic failures, unanticipated or uncontrollable human behavior, incentives to take too much risk, regulatory absence or failures, or contagions that amount to a virus-like spread of problems from one institution or country to the next.

If left unchecked, a crisis can cause an economy to go into a recession or depression. Even when measures are taken to avert a financial crisis, they can still happen, accelerate, or deepen.

The global financial crisis (GFC) refers to the period of extreme stress in global financial markets and banking systems between mid 2007 and early 2009. During the GFC, a downturn in the US housing market was a catalyst for a financial crisis that spread from the United States to the rest of the world through linkages in the global financial system.

As for all financial crises, a range of factors explain the GFC and its severity, and people are still debating the relative importance of each factor. Some of the key aspects include:

1. Excessive risk-taking in a favourable macroeconomic environment

In the years leading up to the GFC, economic conditions in the United States and other countries were favourable. Economic growth was strong and stable, and rates of inflation, unemployment and interest were relatively low. In this environment, house prices grew strongly.

Expectations that house prices would continue to rise led households, in the United States especially, to borrow imprudently to purchase and build houses. A similar expectation on house prices also led property developers and households in European countries (such as Iceland, Ireland, Spain and some countries in Eastern Europe) to borrow excessively.

Many of the mortgage loans, especially in the United States, were for amounts close to (or even above) the purchase price of a house. A large share of such risky borrowing was done by investors seeking to make short-term profits by ‘flipping’ houses and by ‘subprime’ borrowers (who have higher default risks, mainly because their income and wealth are relatively low and/or they have missed loan repayments in the past).

Banks and other lenders were willing to make increasingly large volumes of risky loans for a range of reasons:

• Competition increased between individual lenders to extend ever-larger amounts of housing loans that, because of the good economic environment, seemed to be very profitable at the time.
• Many lenders providing housing loans did not closely assess borrowers’ abilities to make loan repayments. This also reflected the widespread presumption that favourable conditions would continue. Additionally, lenders had little incentive to take care in their lending decisions because they did not expect to bear any losses. Instead, they sold large amounts of loans to investors, usually in the form of loan packages called ‘mortgage-backed securities’ (MBS), which consisted of thousands of individual mortgage loans of varying quality. Over time, MBS products became increasingly complex and opaque, but continued to be rated by external agencies as if they were very safe.
• Investors who purchased MBS products mistakenly thought that they were buying a very low risk asset: even if some mortgage loans in the package were not repaid, it was assumed that most loans would continue to be repaid. These investors included large US banks, as well as foreign banks from Europe and other economies that sought higher returns than could be achieved in their local markets.

2. Increased borrowing by banks and investors

In the lead up to the GFC, banks and other investors in the United States and abroad borrowed increasing amounts to expand their lending and purchase MBS products. Borrowing money to purchase an asset (known as an increase in leverage) magnifies potential profits but also magnifies potential losses. As a result, when house prices began to fall, banks and investors incurred large losses because they had borrowed so much.

Additionally, banks and some investors increasingly borrowed money for very short periods, including overnight, to purchase assets that could not be sold quickly. Consequently, they became increasingly reliant on lenders – which included other banks – extending new loans as existing short-term loans were repaid.

3. Regulation and policy errors

Regulation of subprime lending and MBS products was too lax. In particular, there was insufficient regulation of the institutions that created and sold the complex and opaque MBS to investors. Not only were many individual borrowers provided with loans so large that they were unlikely to be able to repay them, but fraud was increasingly common – such as overstating a borrower’s income and over-promising investors on the safety of the MBS products they were being sold.

In addition, as the crisis unfolded, many central banks and governments did not fully recognize the extent to which bad loans had been extended during the boom and the many ways in which mortgage losses were spreading through the financial system.

Who is to Blame for the Financial Crisis?

Anytime something bad happens, it doesn’t take long before people start to assign blame. It could be as simple as a bad trade or an investment that no one thought would bomb. Some companies have banked on a product they launched that just never took off, putting a huge dent in their bottom lines.

But some events have such a devastating effect that they end up having an effect on the overall economy. That’s what happened with the subprime mortgage market, which led to the Great Recession. But who do you blame?

When it comes to the subprime mortgage crisis, there was no single entity or individual at whom we could point the finger. Instead, this mess was the collective creation of the world’s central banks, homeowners, lenders, credit rating agencies, underwriters, and investors.

The Biggest Culprit: The Lenders

Most of the blame is on the mortgage originators or the lenders. That’s because they were responsible for creating these problems. After all, the lenders were the ones who advanced loans to people with poor credit and a high risk of default.

 Here’s why that happened.

When the central banks flooded the markets with capital liquidity, it not only lowered interest rates, it also broadly depressed risk premiums as investors looked for riskier opportunities to bolster their investment returns. At the same time, lenders found themselves with ample capital to lend and, like investors, an increased willingness to undertake additional risk to increase their own investment returns.

In defense of the lenders, there was an increased demand for mortgages, and housing prices were increasing because interest rates dropped substantially. At the time, lenders probably saw subprime mortgages as less of a risk than they really were—rates were low, the economy was healthy, and people were making their payments. Who could have foretold what actually happened?

Partner In Crime: Homebuyers

We should also mention the homebuyers who were far from innocent in their role in the subprime mortgage crisis. Many of them played an extremely risky game by buying houses they could barely afford. They were able to make these purchases with non-traditional mortgages such as 2/28 and interest-only mortgages. These products offered low introductory rates and minimal initial costs such as no down payment. 

Their hopes lay in price appreciation, which would have allowed them to refinance at lower rates and take the equity out of the home for use in another spending. However, instead of continuing to appreciate, the housing bubble burst, taking prices on a downward spiral with it.

When their mortgages reset, many homeowners were unable to refinance their mortgages to lower rates, as there was no equity being created with the fall of housing prices. They were, therefore, forced to reset their mortgages at higher rates they couldn’t afford, and many of them defaulted. Foreclosures continued to increase through 2006 and 2007.

In their exuberance to hook more subprime borrowers, some lenders or mortgage brokers may have given the impression there was no risk to these mortgages and the costs weren’t that high. But at the end of the day, many borrowers simply took on mortgages they couldn’t afford. Had they not made such an aggressive purchase and assumed a less risky mortgage, the overall effects might have been manageable.

Exacerbating the situation, lenders and investors who put their money into securities backed by these defaulting mortgages ended up suffering. Lenders lost money on defaulted mortgages as they were increasingly left with property worth less than the amount originally loaned. In many cases, the losses were large enough to result in bankruptcy.

Investment Banks Worsen the Situation

The increased use of the secondary mortgage market by lenders added to the number of subprime loans lenders could originate. Instead of holding the originated mortgages on their books, lenders were able to simply sell off the mortgages in the secondary market and collect the originating fees. This freed up more capital for even more lending, which increased liquidity even more, and the snowball began to build.

A lot of the demand for these mortgages came from the creation of assets pooling mortgages together into a security, such as a collateralized debt obligation (CDO). In this process, investment banks would buy the mortgages from lenders and securitize them into bonds, which were sold to investors through CDOs.

What are the Types of Crisis?

Business crises can manifest in many forms, so your team will need to be prepared to handle a variety of unique situations. Your team should ready a range of responses that are each tailored to address a different type of crisis. To help your team get started, we went ahead and compiled a list of the different types of crisis that any business could face.

1. Financial Crisis

A financial crisis occurs when a business loses value in its assets and the company can’t afford to pay off its debt. Typically, this is caused by a significant drop in demand for the product or service.

In these cases, the company must move funds around to cover immediate short-term costs. Then, they’ll need to reanalyze their revenue sources to look for new ways to generate long-term income as well as increase their margins.

2. Personnel Crisis

Personnel crises occur when an employee or individual who’s associated with the company is involved in unethical or illegal misconduct.

Whether it’s within the workplace or an employee’s personal life, these situations can result in a serious backlash against the company. Since the organization employed or supported this individual, its lack of judgment is reflected onto the company’s reputation.

In these cases, you’ll need to identify the scope of the situation, determine appropriate disciplinary action, and if necessary, provide a written or verbal statement. It’s important to first fully evaluate the situation and determine how severely the individual violated your company’s values.

This will help you determine the right responsive action to take against the convicted individual. Finally, if this situation has drawn media attention, you’ll want to be transparent to these outlets and inform them about the actions you’re taking.

3. Organizational Crisis

Organizational crises are situations where the company has significantly wronged its consumers or employees. Rather than creating mutually beneficial relationships, these businesses use their customers as a means of benefiting the company, or abuse their employees to “save face.”

The three types of organizational crises are:

• Crisis of Deception: This type of crisis occurs when a company knowingly lies about public-facing product information or tampers with public-facing data.
• Crisis of Management Misconduct: This type of crisis is a result of management willingly and knowingly engaging in illegal activities.
• Crisis of Skewed Management Values: This type of crisis results when senior leadership emphasizes short-term financial gains over social responsibility and neglects the interests of stakeholders such as customers and employees.

Examples of misconduct include withholding information, exploiting customers, and misusing managerial powers.

Changing company culture is the best way to address organizational crises because these problems are typically caused by employees who neglect customer needs. Embracing an organizational culture that’s dedicated to customer success can reduce the chances of encountering an internal crisis. Additionally, you should proceed to hire employees who are closely aligned with your company’s values.

4. Technological Crisis

In today’s tech-driven age, businesses heavily rely on technology to perform day-to-day functions. So, when that technology crashes, they have a lot more to worry about than a few missing emails. E-commerce sites and software companies can lose millions of potential leads if their servers suddenly break. That’s not only a huge loss of potential revenue, but it’s also a major hit to the product or service’s reputation.

The first step to managing these crises is to work with your IT or tech provider to resolve the issue immediately. Your primary concern should be to prevent the issue from affecting any more customers.

Once your software is back online, the next step is to work with your internal resources to determine what happened to your system and set up safeguards to prevent it from occurring again. Boost up your customer service and customer support teams to make sure they’re ready to handle a sudden spike in calls from angry or confused customers.

5. Natural Crisis

If an earthquake destroys your office, you might call that a crisis. While it may be rare, natural disasters like hurricanes, earthquakes, and tornados can make a significant impact on your business. If your company is located in an area that’s exposed to extreme weather, you’ll need to prepare an emergency response in the unfortunate event that you’re affected.

The best way to handle natural crises is to be proactive. Build your office in a structure that’s resilient to weather in your area and prepare an evacuation plan in the event of an emergency. It will also help to prepare a contingency plan for business operations in case your offices become unavailable.

6. Confrontation Crisis

A confrontation crisis can arise in any number of ways. Your employees may fight. A disagreement may spiral out of control amongst senior leadership. Or, public discontent with your firm can result in a public outcry.

In all cases, the parties involved are looking to get their demands met. This may result in a public boycott or resignations en masse.

To handle a confrontation crisis, first validate the concerns of those who are confronting you. It’s important to recognize that if they were led to this point, the issue must be significant. Next, review the demands, if any, that the parties have issued. Can you affect change that results in those demands being met? If not, then carefully and tactfully state the reason you can’t.

If the confrontation crisis is happening internally, use conflict resolution skills to defuse the situation before it escalates further.

7. Workplace Violence Crisis

A workplace violence crisis occurs when a current or former employee commits violence against other employees. Unfortunately, these crises can come on suddenly, and it could be difficult to act before it escalates further or becomes fatal.

The best course of action, especially when de-escalation isn’t possible, is to involve law enforcement as quickly as possible. If an employee was harmed, send the employee immediately to the nearest hospital to get medical help.

8. Crisis of Malevolence

A crisis of malevolence occurs when a firm’s opponents use criminal or illegal means to destabilize a firm, harm its reputation, extort it, or even destroy it. Examples include tampering with a company’s product to create large-scale harm, using a company’s products in illegal or unaccepted ways, or hacking into a company’s system to steal encrypted data.

General examples of this type of crisis include cybersecurity threats, hacking, kidnapping, spreading of false rumors, and product sabotage — all with the objective of harming an organization, its stakeholders, and its public image.

When dealing with a crisis of malevolence, first secure your employees’ and customers’ safety — whether by involving law enforcement, patching a cybersecurity risk, or recalling a product that has been tampered with. Next, address the perpetrators, when possible, through legal means.

What are the 4 Elements of a Crisis?

Effective crisis management requires four basic elements. If these aren’t in place, your company will likely stumble right at the beginning of a crisis, and will likely make critical errors in the initial response and recovery efforts. Your goal as an organization is to create an effective crisis management team and crisis management process that can help you successfully manage incidents, both large and small.

These four critical elements – that are often missing in company crisis management teams and plans – are:

• Clearly identified team roles and responsibilities
• A formal incident assessment team and process
• Effective Incident Action Planning (IAP) skills
• Effective crisis management team communication

How can we Fix the Financial Crisis?

Unexpected financial emergencies can leave anyone stressed. Whether it’s a job loss, an accident or a medical expense, a sudden change in your financial situation can make you restless and push you to take certain important and quick financial decisions.

To avoid such problems, it is best to take control of your finances immediately, instead of procrastinating. Identify your problems, create a budget and set your financial priorities as soon as you smell the fire. This will help you deal with the issues at hand better and also resolve them quickly. 

So let’s get started by learning some useful tips that will get you motivated enough to take control of your finances:

1. Create a budget:

One of the best ways to deal with a financial crisis is to make a good budget plan. Make a weekly or monthly spending plan and stick with it. Cut down on unnecessary expenses such as eating outside, spending a lot on hobbies and entertainment, etc. This will help you focus on the larger problem and get you through the financial crisis you are in.

2. Stop using credit cards:

Following the budget plan to a T can be difficult; after all, we are all creatures of habit and sticking to a certain rule takes time. However, it is advisable to control your expenditure on credit cards until your financial situation is better. A useful trick is to cut off all the tools that encourage easy spendings such as credit cards. While this is obviously not a permanent solution, it will give you time to make better decisions and focus on the problem at hand.

3. Take a quick personal loan:

You can apply for personal loan from IDFC First Bank that offers quick, paperless disbursal via mobile banking app in just a few clicks. Its competitive personal loan interest rates and flexible tenure options make it one of the few banks in the country that can help you address your immediate needs with minimum paperwork. You can also check you EMI amount with IDFC FIRST Bank’s personal loan EMI calculator. Simply enter your loan amount requirement, period for which you want.

4. Pay your debts:

If you decide to apply for an instant personal loan to get through your financial crisis, do not forget to pay your debt as soon as you can. Unmanaged finances and debts are the biggest cause of financial crisis, so do not fall into the trap again. You can also use money from your savings account to clear any pending dues. Timely payments will help you get out of your entire financial crisis faster.

5. Look for ways to earn extra cash:

Whether it is by selling a possession you no longer need, babysitting, freelancing or getting a second job, everyone has an option to earn a little extra, if only you are willing to put that extra effort. Yes, the amount you make from doing these activities may seem insignificant, but don’t forget – little drops make the mighty ocean. When you are in a financial crisis, every rupee counts and no job is small. Besides, you may even discover that you like your side job enough to make it your full-time career.

Financial Crisis Examples

Financial crises are not uncommon; they have happened for as long as the world has had currency. Some well-known financial crises include:

• Tulip Mania (1637). Though some historians argue that this mania did not have so much impact on the Dutch economy, and therefore shouldn’t be considered a financial crisis, it did coincide with an outbreak of bubonic plague which had a significant impact on the country. With this in mind, it is difficult to tell if the crisis was precipitated by over-speculation or by the pandemic.
• Credit Crisis of 1772. After a period of rapidly expanding credit, this crisis started in March/April in London. Alexander Fordyce, a partner in a large bank, lost a huge sum shorting shares of the East India Company and fled to France to avoid repayment. Panic led to a run on English banks that left more than 20 large banking houses either bankrupt or stopping payments to depositors and creditors. The crisis quickly spread to much of Europe. Historians draw a line from this crisis to the cause of the Boston Tea Party—unpopular tax legislation in the 13 colonies—and the resulting unrest that gave birth to the American Revolution.23
• Stock Crash of 1929. This crash, starting on Oct. 24, 1929, saw share prices collapse after a period of wild speculation and borrowing to buy shares. It led to the Great Depression, which was felt worldwide for over a dozen years. Its social impact lasted far longer. One trigger of the crash was a drastic oversupply of commodity crops, which led to a steep decline in prices. A wide range of regulations and market-managing tools were introduced as a result of the crash.45
• 1973 OPEC Oil Crisis. OPEC members started an oil embargo in October 1973 targeting countries that backed Israel in the Yom Kippur War. By the end of the embargo, a barrel of oil stood at $12, up from $3. Given that modern economies depend on oil, the higher prices and uncertainty led to the stock market crash of 1973–74, when a bear market persisted from January 1973 to December 1974 and the Dow Jones Industrial Average lost about 45% of its value.67
• Asian Crisis of 1997–1998. This crisis started in July 1997 with the collapse of the Thai baht. Lacking foreign currency, the Thai government was forced to abandon its U.S. dollar peg and let the baht float. The result was a huge devaluation that spread to much of East Asia, also hitting Japan, as well as a huge rise in debt-to-GDP ratios. In its wake, the crisis led to better financial regulation and supervision.8
• The 2007-2008 Global Financial Crisis. This financial crisis was the worst economic disaster since the Stock Market Crash of 1929. It started with a subprime mortgage lending crisis in 2007 and expanded into a global banking crisis with the failure of investment bank Lehman Brothers in September 2008. Huge bailouts and other measures meant to limit the spread of the damage failed and the global economy fell into recession.

What is the Global Financial Crisis?

As the most recent and most damaging financial crisis event, the Global Financial Crisis, deserves special attention, as its causes, effects, response, and lessons are most applicable to the current financial system.

Loosened Lending Standards

The crisis was the result of a sequence of events, each with its own trigger and culminating in the near-collapse of the banking system. It has been argued that the seeds of the crisis were sown as far back as the 1970s with the Community Development Act, which required banks to loosen their credit requirements for lower-income consumers, creating a market for subprime mortgages.

The amount of subprime mortgage debt, which was guaranteed by Freddie Mac and Fannie Mae, continued to expand into the early 2000s when the Federal Reserve Board began to cut interest rates drastically to avoid a recession. The combination of loose credit requirements and cheap money spurred a housing boom, which drove speculation, pushing up housing prices and creating a real estate bubble.

Complex Financial Instruments

In the meantime, the investment banks, looking for easy profits in the wake of the dot-com bust and 2001 recession, created collateralized debt obligations (CDOs) from the mortgages purchased on the secondary market. Because subprime mortgages were bundled with prime mortgages, there was no way for investors to understand the risks associated with the product.

When the market for CDOs began to heat up, the housing bubble that had been building for several years had finally burst. As housing prices fell, subprime borrowers began to default on loans that were worth more than their homes, accelerating the decline in prices.

Failures Begin, Contagion Spreads

When investors realized the CDOs were worthless due to the toxic debt they represented, they attempted to unload the obligations. However, there was no market for the CDOs. The subsequent cascade of subprime lender failures created liquidity contagion that reached the upper tiers of the banking system.

Two major investment banks, Lehman Brothers and Bear Stearns, collapsed under the weight of their exposure to subprime debt, and more than 450 banks failed over the next five years. Several of the major banks were on the brink of failure and were rescued by a taxpayer-funded bailout.

Response

The U.S. Government responded to the Financial Crisis by lowering interest rates to nearly zero, buying back mortgage and government debt, and bailing out some struggling financial institutions. With rates so low, bond yields became far less attractive to investors when compared to stocks. The government response ignited the stock market.

By March 2013, the S&P bounced back from the crisis and continued on its 10-year bull run from 2009 to 2019 to climb to about 250%. The U.S. housing market recovered in most major cities, and the unemployment rate fell as businesses began to hire and make more investments.

New Regulations

One big upshot of the crisis was the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act, a massive piece of financial reform legislation passed by the Obama administration in 2010. Dodd-Frank brought wholesale changes to every aspect of the U.S. financial regulatory environment, which touched every regulatory body and every financial services business. Notably, Dodd-Frank had the following effects:

• More comprehensive regulation of financial markets, including more oversight of derivatives, which were brought into exchanges.
• Regulatory agencies, which had been numerous and sometimes redundant, were consolidated.
• A new body, the Financial Stability Oversight Council, was devised to monitor systemic risk.
• Greater investor protections were introduced, including a new consumer protection agency (the Consumer Financial Protection Bureau) and standards for “plain-vanilla” products.
• The introduction of processes and tools (such as cash infusions) is meant to help with the winding down of failed financial institutions.
• Measures meant to improve standards, accounting, and regulation of credit rating agencies.

Who got Rich Off the 2008 Financial Crisis?

You can’t really understand the philosophies and actions of successful investors without first getting a handle on the financial crisis. What happened in the lead up to the crash and the Great Recession that followed afterward remains stamped in the memories of many investors and companies.

The financial crisis of 2007-2008 was the worst to hit the world since the stock market crash of 1929. In 2007, the U.S. subprime mortgage market collapsed, sending shockwaves throughout the market. The effects were felt across the globe, and even caused the failure of several major banks including Lehman Brothers.

Panic ensued, with people believing they would lose more if they didn’t sell their securities. Many investors saw their portfolio values drop by as much as 30%. The sales resulted in rock-bottom prices, erasing any potential gains investors would normally have made without the crisis. While many people were selling, there were others who saw this as a chance to increase their positions in the market at a big discount.

Warren Buffett

In October 2008, Warren Buffett published an article in The New York Times op-ed section declaring he was buying American stocks during the equity downfall brought on by the credit crisis. His derivation of buying when there is blood in the streets is to “be fearful when others are greedy, and be greedy when others are fearful.”

Buffett was especially skilled during the credit debacle. His buys included the purchase of $5 billion in perpetual preferred shares in Goldman Sachs (GS) that paid him a 10% interest rate and also included warrants to buy additional Goldman shares. Goldman also had the option to repurchase the securities at a 10% premium. This agreement was struck between both Buffett and the bank when they struck the deal in 2008. The bank ended up buying back the shares in 2011.

Buffett did the same with General Electric (GE), buying $3 billion in perpetual preferred stock with a 10% interest rate and redeemable in three years at a 10% premium. He also purchased billions in convertible preferred shares in Swiss Re and Dow Chemical (DOW), all of which required liquidity to get them through the tumultuous credit crisis. As a result, Buffett has made billions for himself, but has also helped steer these and other American firms through an extremely difficult period.

John Paulson

Hedge fund manager John Paulson reached fame during the credit crisis for a spectacular bet against the U.S. housing market. This timely bet made his firm, Paulson & Co., an estimated $20 billion during the crisis. He quickly switched gears in 2009 to bet on a subsequent recovery and established a multi-billion dollar position in Bank of America (BAC) as well as an approximately two million shares in Goldman Sachs. He also bet big on gold at the time and invested heavily in Citigroup (C), JP Morgan Chase (JPM), and a handful of other financial institutions.

Paulson’s 2009 overall hedge fund returns were decent, but he posted huge gains in the big banks in which he invested. The fame he earned during the credit crisis also helped bring in billions in additional assets and lucrative investment management fees for both him and his firm.

Jamie Dimon

Though not a true individual investor, Jamie Dimon used fear to his advantage during the credit crisis, making huge gains for JP Morgan. At the height of the financial crisis, Dimon used the strength of his bank’s balance sheet to acquire Bear Stearns and Washington Mutual, which were two financial institutions brought to ruins by huge bets on U.S. housing.

JP Morgan acquired Bear Stearns for $10 a share, or roughly 15% of its value from early March 2008. In September of that year, it also acquired WaMu. The purchase price was also for a fraction of WaMu’s value earlier in the year. From its lows in March 2009, shares of JP Morgan more than tripled over 10 years and have made shareholders and its CEO quite wealthy.

Ben Bernanke

Like Jamie Dimon, Ben Bernanke is not an individual investor. But as the head of the Federal Reserve (Fed), he was at the helm of what turned out to be a vital period for the Fed. The Fed’s actions were ostensibly taken to protect both the U.S. and global financial systems from meltdown, but brave action in the face of uncertainty worked out well for the Fed and underlying taxpayers.

A 2011 article detailed that profits at the Fed came in at $82 billion in 2010. This included roughly $3.5 billion from buying the assets of Bear Stearns, AIG, $45 billion in returns on $1 trillion in mortgage-backed security (MBS) purchases, and $26 billion from holding government debt. The Fed’s balance sheet tripled from an estimated $800 billion in 2007 to absorb a depression in the financial system, but appears to have worked out nicely in terms of profits now that conditions have returned more to normal.

Carl Icahn

Carl Icahn is another legendary fund investor with a stellar track record of investing in distressed securities and assets during downturns. His expertise is in buying companies and gambling firms in particular. In the past, he has acquired three Las Vegas gaming properties during financial hardships and sold them at a hefty profit when industry conditions improved.

To prove Icahn knows market peaks and troughs, he sold the three properties in 2007 for approximately $1.3 billion—many times his original investment. He began negotiations again during the credit crisis and was able to secure the bankrupt Fontainebleau property in Vegas for approximately $155 million, or about 4% of the estimated cost to build the property. Icahn ended up selling the unfinished property for nearly $600 million in 2017 to two investment firms, making nearly four times his original investment.

Keeping one’s perspective during a time of crisis is a key differentiating factor for the investors noted above. Another common thread is having close connections to the reins of power, as most of these men maintained close relationships to the elected and appointed government officials and agencies that doled out trillions of dollars to the benefit of many large investors.over their careers and especially during this period.

The likes of JP Morgan and the Fed are certainly large and powerful institutions that individual investors can’t hope to copy in their own portfolios, but both offer lessons on how to take advantage of the market when it is in a panic. When more normalized conditions return, savvy investors can be left with sizable gains, and those that are able to repeat their earlier successes in subsequent downturns end up rich.

What are the 5 C’s of Crisis Management?

Crises may be unavoidable, but that doesn’t mean an organization has to suffer additional adverse effects. “The impact of a crisis on an organization can be devastating,” Wigley says. “A poorly handled crisis can ruin a company’s reputation, create negative attitudes among stakeholders, and decrease revenue.”

To avoid such disastrous repercussions, students can utilize five best practices: Composure, Context, Content, Channels, and Consequences.

1. Composure

When a crisis occurs, the first step is to stay calm and assess the situation. While people are biologically programmed with a fight, flight, or freeze response, a stress reaction can do more harm than good in a crisis event. Students can use case studies to practice being members of an organization’s crisis communications team, where they can step back and reflect on crises that other brands and businesses have faced. 

Giving students experience with managing crises while in the classroom will equip them to remain calm, collected, and composed when they face crises in the real world.

2. Context

The type of crisis an organization faces will dictate its response. Students should analyze the circumstances of a crisis: is it an intentional crisis, or an act intended to harm a business, its employees, or its customers? Intentional crises may include poor risk management, sabotage, layoffs, and unethical leadership. Or is the organization facing an unintentional crisis, such as a natural disaster, pandemic, or downturn in the economy? Does the crisis impact the organization’s operations? Does it impact the organization’s reputation? Or both?

Time is of the essence, but not at the expense of accuracy. In a crisis, students need to know how to gather information, identify affected parties, and talk to colleagues with diverse backgrounds and perspectives. This process will help them develop a rich, complex understanding of a crisis event and craft an appropriate response plan.

3. Content

Once students have analyzed the situation, they need to decide how to respond. American business magnate and investor Warren Buffett has a popular saying: “One’s objective should be to get it right, get it fast, get it out, get it over. Your problem won’t improve with age.”

To handle a crisis efficiently, students should learn to craft complete, accurate, and transparent statements up front. Apologies should be immediate, and organizations should take responsibility for their mistakes. If the crisis is an intentional one, it’s important to express that it won’t happen again and take steps to ensure it doesn’t. 

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Bad news can’t be hidden, and “cover-ups only make a crisis continue,” says Wigley. Reporters will often expose anything an organization tries to hide, turning the cover-up into the main story and damaging organizational credibility. Additionally, saying “no comment” to the media is unhelpful and implies an organization has something to hide.

4. Channels

Not only do organizations need to decide what to say in a crisis, they also need to choose where to say it.

Students need to practice selecting the best channels to disseminate information to their stakeholders and the general public. With strong media relations training, students can deliver a message to their audiences from a trusted, reliable source.

A concise, informative press release can communicate essential information — the who, what, when, where, and why of the crisis — to the media with precision. A spokesperson can add an empathetic, relatable touch to a live press conference. And with social media, organizations can keep their stakeholders updated and manage their brand’s reputation online.

To prepare, students can craft responses in the classroom for current organizational crises, such as social media posts, press releases, statements for spokespeople, and more.

5. Consequences

The bestselling author Maya Angelou once wrote: “People will forget what you said, people will forget what you did, but people will never forget how you made them feel.” Students learning how to manage crises should always consider how their messaging will be perceived by stakeholders — if they don’t, they stand to make a crisis worse. 

Once the crisis has been addressed, an organization should monitor inbound and outbound communications, address stakeholder questions, and track how audiences are talking about the organization online. “A key component of effective crisis communications is understanding what various audiences and stakeholders are saying about an organization at any given time,” said George Sopko, vice president of Stanton, a communications agency. If an organization is paying attention to its audiences, it can address negative trends before they grow into issues.