Government Oversight and Corporate Ethics

The financial crisis in 2008 that led to a crisis in the banking sector, and which nearly led to a complete collapse of the economy globally, was not only caused by changes in the regulatory, regulation and legislation oversight, but also fiscal and monetary policies. Many believe that, expansion of excesses monetary and irresponsibility of some of the government agencies led to the crisis. According to reports by Taylor (2009), excesses monetary policies were the main cause of the 2008 financial crisis. He reports that, in 2003-2005 the federal reserves held its interest rate target below the well known monetary rules that state that historical experiences should be the base of a good policy. He says that, Federal Reserve tracked their rates according to what worked better in the earlier decades, instead of lowering the rates in order to prevent the crisis.

The Economist (2008) ‘Confession of a risk manager’, [Online], Available: http://www.economist.com/node/11897037.htm. [30 Oct 2013]. Wilfield, W. E. (2013) Ethical reflections on the financial crisis 2007/2008: making use of Smith, Musgrave and Rajan, New York and Heidelberg: Springer, pp. 1-4.

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.

The Enron Corporation‘s flawed accounting practices were perpetuated through the utilization of fraudulent special interest entities that were used to hide losses and rising debt sustained by the company during previous fiscal periods. The Wall Street Meltdown can be highly attributed to the use of mortgage backed securities and other creative investment vehicles that were distributed throughout the world as safe investments with rewarding returns. Both of these events were a product of the improper use and abuse of off-balance sheet accounting methods. The government’s reactions included the creation and revision of new and existing laws and governing bodies. As a direct result of the current corporate scandals, The Sarbanes-Oxley Act of 2002 (SOX) was created.

“The Global Financial Crisis: Causes and Consequences.” Lowy Institute for International Policy 2.09 (2009): 1. PDF file. Richard Portes. “Global imbalances.” London Business School and CEPR (2009): 2. PDF file.

(Lorrette, 2013) Apart from that, the credit crisis has also affected the productivity of firms as the process of production was disrupted due to the limited availability of funds. (Akiyoshi and Kobayashi, 2010) There were a few causes to the credit crunch, one of the most debated issues was “Bank CEO Incentives were the major factor in the credit crisis”. The topic which has been debated by academic experts on “World Bank All about Finance Blog” has provided an insight to the people in the financial field. (Luo and Song, 2012) According to their research, Rene M. Stulz and Rudiger Fahlenbrach disagree with the statement above. The authors argue that Bank CEOs have taken actions that... ... middle of paper ... ...Meegan, R. 2009.

Regulation of Banking and Financial Services The Failure Process Imposed Upon Financial Institutions The concept of systemic risk sprung to the foreground of the public’s consciousness during the financial crisis of 2007-8 as the Too Big To Fail (TBTF) banks were bailed out by the various US Federal Government agencies e.g., US Treasury via the Troubled Asset Relief Program (TARP) and the US Federal Reserve via Quantitative Easing (QE). However, as it turns out, the concept of systemic risk is not so easy to define in legal terms—as illustrated by the difficulty in nailing down the definition by US Congress via the Dodd-Frank legislation or by the US Treasury and the Federal Deposit Insurance Corporation (FDIC) via regulation (Horton, 2012). One thing is certain—the public has no stomach for any further bailouts, thus, the era of TBTF banks and non-bank financial companies has ended. The FDIC, under new regulatory powers granted by Dodd-Frank, will resolve systemically important bank and non-bank financial institution failures i.e., bank and non-bank financial institutions that become insolvent (Horton, 2012). This process is similar to the way that the FDIC utilizes its traditional regulatory powers to resolve non-systemically important bank failures.

107-204 Dey, A. (2010). The Chilling Effect of Sarbanes-Oxley: A Discussion of Sarbanes-Oxley and Corporate Risk-Taking. Journal of Accounting And Economics, 49(1-2), 53-57. doi:http://proxy.ulib.csuohio.edu:2279/10.1016/j.jacceco.2009.06.003 Kim, J. (2011).

The theory and practice of corporate risk management. Journal of Applied Corporate Finance, 21(4), 60-78. http://dx.doi.org/10.1111/j.1745-6622.2009.00250.x Sudacevschi, M. (2010). The innovations on the financial markets. Using derivatives for banking market risk coverage. Internal Auditing & Risk Management, 20(4), 49-60.

The three most important things that I learned in this course are as follows: 1) Causes of Financial Crisis Financial crises have influenced the os of financial markets in past. The most important the Great Depression in 1929-30, the 1970s inflation failures and the banking difficulties in the 1990s led to problems in the financial markets causing serious disturbance. The recent financial crisis which became known in 2007, though the roots were implanted much earlier, has been the worst situation financial markets have ever faced. Causes of the Financial Crisis Several financial statements have been prepared to describe the causes of this current financial failure. There are a variety of factors that has resulted in the explosion of this financial crisis.