Conceptual lessons on ﬁnancial
strategy following the US
System and Engineering Management, Nanyang Technological University,
Singapore, Solbridge International, WooSong University, Daejeon, Korea,
School of Management, University of St Andrews, St Andrews, UK and
Zicklin Business School, Baruch College, City University of New York,
New York, USA
Purpose – On September 18, 2007, the Federal Reserve Open Market Committee took a major step by
cutting the federal funds rate by one-half a percent (50 basis points). The only time this had happened in
the USA was immediately after the September 11, 2001 attacks. Then the sub-prime derivatives market
threatened to engulf the US economy under a dark cloud of uncertainty. The purpose of this paper is an
attempt to draw lessons relevant to international ﬁnancial strategy from the US sub-prime crisis.
Design/methodology/approach – This paper presents reﬂections upon the sub-prime derivatives
market that had begun to evolve since 1993. Reviewing the situation from then until as late as of
October 18, 2007, ﬁve key lessons are conceptualized. Where possible, insights on the major lessons to
be drawn are rendered through simple diagrams.
Findings – Five major lessons may be drawn from the sub-prime turmoil. For easy citation, these are
presented as idioms: “Do not put all bad eggs in one basket,” “Excessive demand outbalances risk and
return,” “Robustness of actions for resolving a crisis,” “Banks to stay respectable as banks,” “Outcome
of innovation, greed, and politics.” In conclusion, all these lessons are integrated through an overview.
Practical implications – These lessons are explained in a manner so as to render them useful for
both practitioners in the ﬁnancial industry globally and a broader audience of interested readers. In
particular, a thinking approach to learning is emphasized. Financial innovators are reminded of the
wisdom of the ancients (eggs in a basket), and the applications of artiﬁcially intelligent forecasts of
ﬁnancial futures; speciﬁcally, US$ exchange rates are brought into the discussion.
Originality/value – This is an original piece of thinking on what lessons may be drawn from a
major highly turbulent event: the sub-prime crisis. It is an event that is a direct consequence of
innovation in the ﬁnancial markets.
Keywords Financial risk, Return on investment, International ﬁnance, Financial management,
Artiﬁcial intelligence, United States of America
Paper type Viewpoint
As a result of technology that integrates global ﬁnancial markets, many believe ﬁnance
to be no longer a national but a world phenomenon. For simply at the press of a button,
billions of dollars may “e-cross” national boundaries. This concept is reinforced, for
The current issue and full text archive of this journal is available at
This paper was developed out of reﬂections by Dr Foo Check-Teck following his Channel News
Asia interview on Tuesday, September 18, 2007 in Singapore – the day of FOMC met to set the
Federal funds rate.
The author wishes to thank the reviewer and editor for their comments.
The Journal of Risk Finance
Vol. 9 No. 3, 2008
q Emerald Group Publishing Limited