The so-called corporate financial early warning, early warning that the financial failure is defined by the

daily financial operations of the enterprise for continuous and effective monitoring to prevent
deterioration of corporate finance to creditors and investors losses. The higher sensitivity of the financial
failure of early warning, the sooner to find the problem and inform the business operators, more
effectively prevent and resolve problems and prevent financial crises from occurring. Therefore, an
effective early warning system for financial failure should have the following functions:
        1. Predict a sign of the financial crisis. When the enterprise's financial situation likely to endanger
the key factor appears, the financial failure of early warning system to give advance warning to remind
the business operators to be prepared or take measures to reduce the financial loss.
        2. To prevent or control the financial crisis, its further expansion. When the financial crisis, when
symptoms occur, an effective early warning systems for financial failure, and notice not only predict, but
also a timely search for led to further deterioration of corporate financial reasons, so that the operators
know these, even know why they are to develop effective measures to prevent financial the further
deterioration of the situation and avoid a serious financial crisis really happened.
        3. To avoid similar financial crisis from happening again. The financial failure of an effective early
warning system not only in time to avoid the existing financial crisis, but also through the systematic
detailed record of its occurrence reason to address the measures to address the findings and make
recommendations in time to make up for enterprise Financial Management and operations of existing
deficiencies, improve the financial failure of early warning system, which provides both a lesson for
future similar situations, more fundamentally eliminate hidden dangers.
        Financial Distress Prediction Method
        1, single-variable models
        Single-variable model is the use of a single failure of the financial variables on the enterprise's
financial sub-models to predict risk. There are William Beaver in 1966, proposed an early warning model
of a single variable. Through his right during the period from 1954 to 1964 a large number of failed
businesses and a successful enterprise a comparative study of the 14 types of financial ratios to choose
and ultimately arrive at an effective rate of financial failure prediction were as follows:
        1. Debt guarantee ratio = total debt ÷ cash flow
        2. Asset-liability ratio = Total liabilities ÷ total assets
        3. Return on assets = net income ÷ total assets
        4. Assets ratio = equity cash rate security - asset-liability ratio
        Beaver that the debt guarantee ratio can best determine the financial position (the lowest false
positive rate); followed by asset-liability ratio, and the closer from the failure of Japan, the lower the false
positive rate. However, all ratios to determine accuracy in different circumstances will be different, so in
practical applications often use a set of financial ratios, rather than a ratio, so as to achieve good
prediction.
        2, multi-variable model
        Multi-variable model is the use of the composition of the differential function of multiple variables to
predict the corporate financial failure model. Early use of multi-variable prediction is that the United
States, Altman, he was the first to use discriminant analysis (discriminant analysis) study of business
failure warning people. 1946 ~ 1965, he selected 33-year period of bankruptcy, and normal operations of
companies, 22 financial ratios used to analyze the company's potential failure of the crisis. He used
stepwise discriminant analysis (MDA) and gradually delineating five kinds of the most common
predictive ability of financial ratios, set up a similar regression equation, the differential function - Z
scorecard model. The model is through the five variables (five kinds of financial ratios) will reflect the
corporate solvency indicators, profitability indicators and operational capacity indicators organically
linked to a comprehensive analysis and forecasting business failure or bankruptcy of financial
possibilities. Expression is as follows:
        Z = 0.012X1 0.014X2 0.033X3 0.006X4 0.999X5
        Where: Z is the value of discriminant function
        X1 = (working capital ÷ total assets) * 100
        X2 = (retained earnings ÷ total assets) * 100
        X3 = (EBIT ÷ total assets) * 100
        X4 = (common stock and preferred stock market value of the book value of total liabilities ÷ total) *
100
        X5 = sales ÷ total assets
        In general, Z value is lower, businesses are more likely to bankruptcy. Reposted elsewhere in the
paper for free download
        Altman also made to determine the critical value of enterprise bankruptcy: If Z ≥ 2.675, it indicates
that corporate financial position is sound, are less likely to occur bankruptcy; if Z ≤ 1.81, then there is a
big business bankruptcy risk; if the model 1.81 In fact, through the five variables (five kinds of financial
ratios), will reflect the corporate solvency indicators (X1, X4), profitability indicators (X2, X3) and
operational capacity indicator (X5) organically linked a comprehensive analysis and forecasting business
failure or bankruptcy of financial possibilities. Failure in the enterprise before a year or two, the
prediction success rate is high; forecast period longer, the accuracy was decreased, from the failure of the
first five years of the forecast accuracy rate is only 36%.
        Multi-variable model introduced in addition to the above model of Z scoring method, but also the
Japan Development Bank's multi-variable forecasting model, China Taiwan Chen Zhao-rong of the
multi-forecasting models, as well as Chinese scholars Zhou Shou-Hua, Yang Ji-Hua F scores of models.
However, these types of models in practical application is not widespread. Up to now, Z scorecard model
is still occupy a dominant position.
        Of financial fraud occurs when the financial early-warning
        In an enterprise in financial fraud, although the financial failure of these early-warning method can
quantitatively describe the business, but still can not make corporate financial failure of this conclusion,
investors still need to subjective judgments.
        1, Hope
        Hope is to see the major Industry background: to see the industry is at sunrise or a sunset industry,
industry, are in full competition or the protection of monopolies, is a mature industry norms, or the lack
of necessary supervision of the industry, is an endless stream of new business or a business is relatively
simple industries because they can not avoid the risk of enterprise risk.
        Generally speaking, the sunrise industry, protection of monopoly industries, the lack of the necessary
regulatory industry, an endless stream of new business sectors with a higher risk of financial fraud.
Therefore, special attention should be industry risks. If the industry crisis, companies are certainly going
to feel. As the old saying puts it well: 'the nest, seems ridiculous eggs will survive? '
        Second, Wen
        Wen is to see the main enterprise strength: Enterprise of the status in the industry, enterprise
products are mature products or just out of the new product development, corporate reputation among
consumers how the soundness of the internal management of enterprises, the enterprise's products are
market Welcome to what extent, employees of the mental outlook of how to change how corporate
management.
        Today, the message is developed, companies can not completely monopolize information, we can
through the press, radio, newspapers, Internet and other media to understand a business operation. In
general, the internal management of enterprises is not perfect, staff morale is poor, management
turnover, are there such a sign of failure.
        Third, ask
        Asked the key is how corporate governance: Q Enterprise strategic goals, corporate strategic
objectives to see whether the country's industrial policy is consistent with the actual situation of
enterprises; asked enterprises to invest in strategy, business Investment to see whether the business is too
scattered, whether the proportion of financial investment business is too large, whether the excessive
expansion of such a large scale.
        In general, corporate strategic goals too high or too low, if the development will affect the
development of enterprises. Corporate investment is too scattered, will also affect the implementation of
business strategy, distributed enterprise management, energy and can not resolve the problems arising
from business, affecting the competitiveness of enterprises.
        4, cut
        Cut the key is how corporate cash flow: Cash flow is the blood of business. Profits can be cosmetic,
but the enterprise's cash is real chain. If the funding chain stretched too tightly, enterprises have to face
the risk of bankruptcy, so the cash flow can not be a problem. Examine corporate cash position, you can
analyze the enterprise cash flow statement. If the long generated by operating activities less net cash
flows, companies must defeat phase appear in some areas, and to find ways to cover up the shortage of
funds through other means, such as through borrowing, virtual income, advance identification of income
for a cosmetic.
        In short, an enterprise fraud If there is a long time, because the money will eventually be stretched
too tight and break the chain. As long as investors look carefully at their investments will always find
some clues, and then a professional analysis of methods to determine and thus able to improve their
ability to hedge risks. Reposted elsewhere in the paper for free download

====
The financial crisis has been one of liquidity. This refers to the ability of an asset to be converted to
cash. It is important for banks because if there was a sudden decline in deposits, they need to have
cash on hand to cover their reserves. They acquire this cash by selling assets such as investments,
securities, or now most famously, collateralised debt obligations (CDOs). CDOs are where the trouble
began. Many CDOs were secured (collateralised) by mortgages. When, due to the plunge in housing
values, those CDOs became totally worthless (most investors were totally unwilling to buy them), a
lot of banks were stuck with them. The value of these assets continued to drop and banks started
needed cash to cover it. Had these bad debts been easily liquidated, we wouldn't be in this situation.
Now we need to get liquidity back into the markets. Banks are still strapped for cash and we are
starting to witness a decline in lending. This causes businesses to have to cut back. This is why we
are now seeing an increasing unemployment rate.

Realizing that answer does not directly answer the question, we have to ask ourselves "How do we
get liquidity back into the market?". That is not as easy as some suggest it to be. Economists refer
constantly to the "pushing on a string" analogy when it comes to government policy effects on the
economy. It is very very easy for government to pull back on the economy and slow it down or even
stop it (pulling on a string) but it is extremely difficult for government to push the economy forward
(pushing on a string). Governemnt policies cannot grow the economy very easily. Nor can they solve
this crisis easily.

Answer

Revoke the charter of the Fed and set up a new national banking system that is constitutional
and reflects a sound money policy. Texas Rep. Ron Paul has been trying to get congress to
face up to this issue for years.

Answer

There are many things that drive an economy, but one certainly is consumer confidence. If
people have a belief in future success they will invest their time, energy and capital in ways
that will restore the economy to a growth path. Confidence has been undermined in many
ways over the last two decades. One of the greatest problems has been the lack of investment
in manufacturing in this country. The result has been a loss of what the politicians term "good
jobs". A series of articles discusses the problem and things to be considered in a long term
solution. Please see the related links below.

Answer

Tax cuts! Further reduce individual and corporate tax rates across the board and announce
that there will be no tax increases for at least two years. Do this at both the Federal and state
levels. This will increase the confidence of individuals and businesses, will increase trade,
investment, business growth, and hiring. As businesses and individuals all become more
successful, even low tax rates applied to a higher volume of trade will actually bring in more
income to governments, not less. When the capital gains task rate was recently lowered,
revenue to the government increased!

Answer
The crisis is a lack of trust among banks. We still don't know the sleeping dogs. The first step
would have to be a total transparency of large interbank loans, similar to stocks. Since banks
don't like this, only government can order disclosure of essential loan data. Pouring money
into the system does not solve the problem. There is enough liquidity, it is just not being
used.

Read more: http://wiki.answers.com/Q/What_is_a_solution_for_the_financial_crisis#ixzz1D0JiMf80

Recommendations

1. Stabilize the financial system.

2. Stabilize the economy.
3. Arrange long-term financing for steps #1 and #2 with our foreign creditors.

Click on the above links for details.  A conclusion follows below, explaining why we will not
implement such measures and the the possible consequences.  The above links go to posts
explaining each recommendation in greater detail.

I.  Stabilize the financial system

No modern economy can survive the meltdown of its financial system.  There are many ways
to avoid this, illustrated by the following.

(a)  Recapitalize the financial sector by a transfer of wealth from the taxpayers to banks and
brokers – This is probably the key element of the Paulson Plan, done by the government
buying assets at above market prices.

(b) Close defunct or weakening financial institutions under new bankruptcy legislation, under
which the courts could act with extraordinary speed and authority.  This should involve
replace managements.  New managements could be selected by a bi-partisan committee of
business leaders that should have only a minority of members from the financial industry.

(c)  Outright nationalization — As done the defunct Savings and Loans during the early
1990′s, and today with the GSE’s and AIG.  Large scale nationalizations might be required. 
If so, our political regime’s survival might depend on how this is done.  Not just their
acquisition, but their operation and eventual privatization (if any).

Creation of an agency like the Depression era Home Owners Loan Corporation, as
recommended by Nouriel Roubini, can play a role in any of these policy choices.

II.  Stabilize the economy.

(a)  Why wait?  Set up the job training and education programs now, rather than throw them
together in haste when they are needed yesterday.  There will be many unemployed, and this
is an opportunity to upgrade their skills for the next cycle.
(b)  Many local governments will go bankrupt, as so many are vulnerable (e.g., NYC).  Work
with the States now to prepare the necessary legal and financial apparatus to handle these.

(c)  Implement a massive monetary stimulus, such as taken by Japan at the start of their dark
decade after the 1989 crash.  That means near-zero interest rates (far below the level of
inflation) and a rapid increase in the balance sheet of the Federal Reserve.  The government
has not taken these steps because they might lead to currency flight from the US Dollar, and
the government does not want to take the necessary measures to prevent this (see III).

III.  Arrange long-term financing for steps #1 and #2 with our foreign creditors

This means a negotiated agreement with the foreign central banks who are our primary
creditors, with the appropriate support from Congress.

We will need to reschedule our debt and obtain new financing.  Our government will have to
rollover roughly $500 billion/year, plus the trillion or so in additional borrowing (as tax
revenue declines and expenses skyrocket) for the next two years (perhaps
longer).  Plus measures will be needed to stabilize the value of the US dollar, allowing a
orderly decline.

These extraordinary negotiations will be inherently destabilizing, putting in question both the

US Dollar’s role as reserve currency and America’s role as global hegemon.  This is the price
paid by our past folly, getting us into this crisis.

Obtaining and executing this agreement must be concluded successfully.  It is a jump across a

chasm to a new world.  But the chasm lies ahead of us, and must be crossed eventually.  Let’s
strike a deal while we can negotiate from a position of strength.  Rather than waiting until we
are desperate.

The cost will be high.  An agreement will be in the best interest of all, but that does not mean
that we will not have to make concessions.  To give just one example, China might ask that
the US break our relations (esp military) with Taiwan.

Conclusion

I believe that the downturn can be mitigated by immediate and decisive action.  Building
public support for these measures and avoiding panic will require the highest level of
statesmanship by our leaders — and responsible citizenship by us.

Of course we will not take such actions in a timely fashion.  Our leaders’ happy talk was
intended to maintain spending and investment during a brief slowdown.  The unintended
consequence is that the American people are psychologically unprepared for this crisis.

Worse, our Observation-Orientation-Decision-Action loop is broken.  Despite years of

warnings (see this list) we have not seen the danger ahead.  Now that it is upon us, our fixed
optimism prevents us from orienting ourselves to changed conditions.  I doubt that our
leaders can either formulate adequate plans or execute them.
================

In this spirit, I would propose that any new recommendation should satisfy three constraints:

 Only good (policy) news is allowed. Any amendment to their plan must do more, not
less, for the financial institutions and their stakeholders. This principle should be
advertised broadly right away
 It must have a reasonable cost. The amendment cannot be significantly more
expensive for the US government than the current plan, and
 It must be wealth enhancing. It cannot go against, and it hopefully should reinforce,
the fiscal stimulus package.

The following plan satisfies these constraints:

 Raising private capital. Announce today that banks in need of more capital if
aggregate conditions worsen (the stress test), will be given an option between the
previously announced programme and one in which new private capital raised
receives a government guarantee for a price five years from now set at the February
2009 price used for the preferred shares. Alternatively, the government may invest in
common shares but give the right to new investors to repurchase the government
shares within five years at that price plus an interest rate charge. This guarantee holds
regardless of whether the financial institution survives the crisis. Any difference
between the expected costs of these two options is paid as a premium by shareholders
(and possibly debt-holders).
 Insuring aggregate risk. The return on hard to value assets, whether they remain on
the books of the financial institutions or are sold into the PPIF (public-private
investment fund), should be guaranteed by the government at the insurance prices
prevailing before the Lehman-AIG crisis. These assets can be subject to a
“representations and warranties” clause where the financial institution pays a penalty
if the performance of its insured assets is worse than the average of the corresponding
category, five years hence.

The first item is clearly a positive development for shareholders since it adds an option which
has no additional value over the current programme if the financial institution’s post-crisis
future is poor, but is very valuable otherwise.

Interestingly, whenever the option has value, it also helps the government since now the
private sector injects the capital in exchange for a guarantee that is not likely to be executed
in such a scenario. Moreover, by bringing some sense of a floor, this policy also would
trigger a stock market boom and hence reinforce the aggregate demand effects of the fiscal
package. The second item has similar virtues, and it deals directly with one of the key adverse
selection problems complicating asset valuations at this time (that banks will sell and insure
their worst assets).

Will these policies be enough? Surely not, but if we are all rowing the same boat in the same
direction, and keep a cool head, we will get out of this mess sooner rather than later.