Market crashes are nearly as old as the invention of money itself. But, as Gillian Tett underlines in Fool’s Gold, “the latest financial crisis stands out due to its sheer size”. Economists estimate total losses could sum up to $2000 to $4000 billion, a number surprisingly not dissimilar to the British Gross Domestic Product. In its post-mortem, the self-inflicted disaster has commonly brought to light the question: “Did bankers, regulators and rating agencies fail to see the flaws, or did they fail to care?” Importantly, it has also created a hunt for scapegoats and quick fixes.
Many Republicans and industry lobbyists have insisted that the financial meltdown would not have been nearly as bad if not for the deadly Fair-Value Accounting (FVA) standard. It is, however, my stand that accounting is not the root cause of the financial crisis. I argue that the mixed-attribute model prompted considerable accounting-motivated structures. And due to the selective application of FVA, it did not in practice; contribute to the pro-cyclicality of the financial system. Nor would the meltdown have otherwise been avoided under a different accounting scheme. I note that the crisis has had standard-setting implications, and the prompt reshaping of current standards plays an important role in its resolution.
To begin, a recurring allegation amongst critics of FVA is that it contributed to the pro-cyclicality of the financial system. This criticism contended that, during the bust, FVA write-downs led to an overblown write-down of the value of financial assets and an overstatement of losses. This led to the contagion effect and downward spiral of capital destruction as outlined in Figure 1. And hence is pinpointed as a root cause of the financial...
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... to the Financial Crisis?” Christian Laux and Christian Leuz, Journal of Economic Perspectives 2010
• “The crisis of fair-value accounting: Making sense of the recent debate” Christian Laux and Christian Leuz, Accounting Organizations and Society 2009
• “Is It Fair to Blame Fair Value Accounting for the Financial Crisis?” Robert C. Pozen, The Harvard Business Review 2009
• “Blaming the Bean-Counters” The Washington Post 2009
• “Fair Value Accounting: Understanding the issues raised by the credit crunch” Stephen G. Ryan, 2008
• “Accounting Did Not Cause the Crisis” The Global Association of Investment Professionals, CFA Institute 2009
• “Accounting Practices: Did Fair-Value Cause the Crisis?” Australian School of Business 2011
• “Report of the Financial Crisis Advisory Group” 2009
• “US senate committee tackles financial crisis prevention” The Accountant 2011
The financial crisis of 2007–2008 is considered by many economists the worst financial crisis since the Great Depression of the 1930s. This crisis resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. The crisis led to a series of events including: the 2008–2012 global recessions and the European sovereign-debt crisis. The reasons of this financial crisis are argued by economists. The performance of the Federal Reserve becomes a focal point in this argument.
The year 2008 was a very scary one for anyone involved in the US stock market. Due to subprime lending, and cheap mortgages, the housing market became grossly overinflated. Naturally, as with a balloon that’s filled too much, it “popped”. The resulting collapse of the housing bubble had severe implications for the rest of the US economy, housing, and related industries such as lumber, construction, and realty all came crashing down, and the people employed in those fields soon found themselves out of work. As with the stock market crash of 1929, fear of the economic instability caused people to pull their money out of any investments they had. This can be a problem for a healthy bank, being unable to supply the money people are requesting if it’s tied up in loans. However, this would prove to be an even bigger problem if the money never existed in the first place, and would take down one of the largest scams in American history.
In the world of money, firms including banks and nonbank financial companies face adversaries and often fail. When they do, most failures do not result in extreme externalities. In other words, loss of the firm does not place its counterparties into a troubled position. Ergo, the firm would go through a usual resolution process provided by the government. But, some large firms undergo a “special” treatment because of the government’s fear that its losses may have disproportionately big adverse externalities on the economy thus threaten the financial stability. These are the firms to which “too big to fail”, also known as “TBTF” apply. They are also referred to “too important to fail”, “too big to liquidate”, “too big to unwind and, most recently “too big to jail”. (Kaufman, 2013) Because of their capability to melt down the entire economy in the case of crisis, they are showered with public funding along with continuous bailouts. These unconditional supports have fostered generations and generations of controversy. The controversy dealt with in what extend should the government intervene with the financial firms, has it derived the economy to the desired result and flaws of this ironic concept.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
The years 2008 shined a light on a group of people who were considered high society. When the stock market crashed in September 2008, the world shines a spotlight on the financial corporation. Words such as hedge fund manager and financial instrument such as credit default swaps are not words not known to everyday citizens. The economic downturn forced society to ask question not normally asked.
At the end of September and the beginning of October, stock prices began to decrease. The crash was caused by the nervous investors, which sold 16.9 million stocks on the New York Stock Exchange in one day. Many businesses invest most of their money in the stock market to make more money, but when the stock market crashes, so do businesses that have to shut down because they have no money. Most of the nation’s banks also failed because they had to put the depositors money in the stock market to increase, but when it crashed people lost most of their money. Many people started to lose faith in the stock market and “you can’t have a healthy economy without confidence in the market.”
Cabral, R. (2013). A perspective on the symptoms and causes of the financial crisis. Journal of Banking & Finance, 37, 103-117
This is a crucial factor for what caused the 2008 Global Financial Crisis: as the ratio of capital value to variable value was increasing at a faster rate than the rate of surplus value for many years in the lead up to the crisis (Bowman 2009). Thus, business profits had been in steady decline in the years leading up to the GFC and it was inevitable that as long as the rate of profits continued to fall then a financial collapse and economic crisis would
"This is why the market keeps going down every day - investors don't know who to trust," said Brett Trueman, an accounting professor from the University of California-Berkeley's Haas School of Business. As these things come out, it just continues to build up"(CBS MarketWatch, Hancock). The memories of the Frauds at Enron and WorldCom still haunt many investors. There have been many accounting scandals in the United States history. The Enron and the WorldCom accounting fraud affected thousands of people and it caused many changes in the rules and regulation of the corporate world. There are many similarities and differences between the two scandals and many rules and regulations have been created in order to prevent frauds like these. Enron Scandal occurred before WorldCom and despite the devastating affect of the Enron Scandal, new rules and regulations were not created in time to prevent the WorldCom Scandal. Accounting scandals like these has changed the corporate world in many ways and people are more cautious about investing because their faith had been shaken by the devastating effects of these scandals. People lost everything they had and all their life-savings. When looking at the accounting scandals in depth, it is unbelievable how much to the extent the accounting standards were broken.
The "subprime crises" was one of the most significant financial events since the Great Depression and definitely left a mark upon the country as we remain upon a steady path towards recovering fully. The financial crisis of 2008, became a defining moment within the infrastructure of the US financial system and its need for restructuring. One of the main moments that alerted the global economy of our declining state was the bankruptcy of Lehman Brothers on Sunday, September 14, 2008 and after this the economy began spreading as companies and individuals were struggling to find a way around this crisis. (Murphy, 2008) The US banking sector was first hit with a crisis amongst liquidity and declining world stock markets as well. The subprime mortgage crisis was characterized by a decrease within the housing market due to excessive individuals and corporate debt along with risky lending and borrowing practices. Over time, the market apparently began displaying more weaknesses as the global financial system was being affected. With this being said, this brings into question about who is actually to assume blame for this financial fiasco. It is extremely hard to just assign blame to one individual party as there were many different factors at work here. This paper will analyze how the stakeholders created a financial disaster and did nothing to prevent it as the credit rating agencies created an amount of turmoil due to their unethical decisions and costly mistakes.
In previous years the big financial institutions that are “too big to fail” have come to realize that they can “cheat” the system and make big money on it by making poor decisions and knowing that they will be bailed out without having any responsibly for their actions. And when they do it they also escape jail time for such action because of the fear that if a criminal case was filed against any one of the so called “too big to fail” financial institutions it...
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Dowd (2016) runs above and beyond with the clarification to state accounting fraud incorporates the change of accounting records in regards to sales, incomes, costs and different components for a profit motive, for example, boosting organization stock prices, getting ideal financing or maintaining a strategic distance from obligation commitments. Dowd is of the feeling that covetousness, absence of straightforwardness, poor administration data and poor accounting interior controls are a couple of explanations behind accounting fraud. (Dowd,
Warwick J. McKibbin, and Andrew Stoeckel. “The Global Financial Crisis: Causes and Consequences.” Lowy Institute for International Policy 2.09 (2009): 1. PDF file.