Financial Risk Management Even at Case Study

Hence, the likelihood of having to repurchase a large amount of repurchases would result. This was increasingly risky as the company spiralled into much lower reserves than it would admit publicly. The increasing risks were recognized by New Century employees. Despite efforts by these employees to suggest changes, the response by Senior Management was generally to reject or ignore these suggestions.

Senior Management was therefore fully aware of the increase of early payment defaults on loans as early as mid-2004. Although rising interest rates exacerbated the risks inherent in the type of products offered by New Century, these were ignored by Senior Management, who continued to capitalize on investor demand without any regard for the probability of repurchase requirements. The inevitable, however, occurred, and New Century faltered under the pressure.

Additionally, Senior Management also failed to provide inadequate attention to the issue of investor "kickouts." Relatively elementary loan rejections such as missing documentation received no attention and therefore increased the number of rejected loans by about $800 million.

Finally, a further mistake was that Senior Management failed to set an appropriate tone for business. While employees were left to rationalize that the company was operating similarly or better than its competitors, the basic accounting mismanagement was allowed to continue unchecked.

In addition to the basic difference of opinion between Senior Management and employees, there also existed considerable friction between the Board of Directors and Senior Management. This eroded the basic collaboration efforts upon which businesses tend to thrive. Particularly, this friction occurred at a time when the company was going through a crisis and would have benefited much from collaboration.

Hence, in addition to faulty financial planning, there was a basic lack…