Bank CEO Incentives and the Credit Crisis

The system of banks, promotes the consumption and therefore improves the economy of the country. However, banks also hold a great risk. The Global Financial Crisis in 2008 was caused by the decline of the bank the “Lehman Brothers Holdings Inc.”, because the costumers could not repay their debt to the bank. The decline of one bank often leads to the decline of other banks, because banks interact with each other by lending and borrowing money. Therefore, when one bank is unable to pay, other banks are also unable to fulfill their duty.

The financial crisis of 2008 was estimated to be the most dangerous since the Great Depression of the 1930’s (The financial crisis, 2009). The catalyst was the 2007 bubble burst of the housing market which spread quickly to the US financial sector and ultimately affected the global economy. The American auto industry was devastated by this crisis. Detroit’s big 3 companies Ford, Chrysler and GM’s had their debt problems exposed as a result. Increased debt and lower cash flows forced the automotive giants to seek solutions that would allow them to remain a viable entity in the coming years.

Ethical corporate behavior has been a recurring issue of public policy. Recent events have brought this issue into sharp focus beginning with the Enron scandal in 2001 and more recently the financial crisis of 2008. Subsequent regulation such as the Sarbanes-Oxley act seem to be in reaction to the public clamoring for government action in the wake of painful economic outcomes. A deeper examination of the events leading up to Enron and the financial crisis both seem to indicate that government agencies were asleep at the switch. Policy such as Sarbanes-Oxley in the wake of Enron have not prevented the more recent financial crisis of 2008.

Bonus Paper The Great Recession of 2007-2009 was very harmful to the economy of the United states. Many people lost their jobs and were forced to work at lower wages, so the demand for consumer goods dropped. Homeowners were also hurt because the value of housing and real estate crashed. This decrease in wealth pushed back the retirement age for many people. The financial situation was especially worrisome for my personal household during the Great Recession.

The process of foreclosure starts immediately once the homeowner misses the mortgage payment at the expected time. Failure to pay at the stipulated time may be due to joblessness, divorce, medical problems, conditions of the loans, and death (Laing, 2009). Foreclosure is the current threat to the United States financial market and the economy. The advertisement of foreclosed homes which are being sold is causing a decrease in home prices and lowering the values of homes which are in the neighborhoods. Because of this, consumer expenditure has suffered seriously and the situation has worsened financial crisis with the Americans watching the value of their valuable properties, their homes lose worth.

The policy makers was also lack of accountability that fail to encourage optimism about the reforming the policy process itself (Adrian & Atkinson 2009). The decision by the U.S. Treasury and the Fed to let a major bank (Lehman Brothers) fail led to a system-wide loss of confidence that exacerbated the crisis. The failure of policy makers to deal with the crisis should be seen as a factor in aggravating the crisis. (1) Housing market failure - An Economics professor Taylor conducted a research in 2009 and suggested that the financial crisis was due to government policy and intervention that leaded to excessive money and contributed to housing boom and bust (Taylor 2009). By using the information given in The Economist (October 18, 2007), Taylor indicated that the federal funds interest rate was deviated from the suggested rate based on Taylor Rule – Fed interest rate should be adjusted according to economic situations such as the inflation & employment level.

Retrieved from http://search.proquest.com/docview/229746269?accountid=38569 Federwisch, A. (2014). Ethical Issues in the Financial Services Industry. Retrieved from http://www.scu.edu/ethics/practicing/focusareas/business/financial-services.html Financial Accounting Standards Board. (2008).

The Twin Crises: The Causes of Banking and Balance of Payment Problems, American Economic Review, 89, (3), 473–500. Killoren, G.D. (2009). How Government Economic Policies Caused the Financial Crisis of 2008. Retrieved from http://rawfinanceblog.com/2009/07/23/how-lax-u-s-monetary-policy-contributed-to-the-financial-crisis Lothian, J.R. (2009). U.S. Monetary Policy and the Financial Crisis.

Wadsworth Publishing. Belmont, California, pg. 270. 10 Shaw, W. (1999). Business Ethics.

Finally, credit available in the market had become lesser and lead to the boom of the credit crisis (Investopedia, 2013). The financial crisis of 2007-2008 with the failure of Lehman Brothers is a great illustration of the credit crisis. A sudden change of the financial circumstance in the credit market had started a global financial crisis which has left a significant effect almost every part across the financial world (YaleGlobal Online, 2013). After that, many researchers started to investigate the causes that lead to this credit crisis. Particularly, some of them argue that bank chief executive officer (CEO) incentives are the major factor that causes credit crisis.