The report demonstrates why internal looting of companies is still a major problem in the United States despite having the best regulatory measures across the world and the effect of the looting on capital losses and lower rate of return. Notably, the main focus of the report is to provide important information to Mr. Smith regarding his concerns about capital losses and lower rate of return because of his decision to become a venture capitalist.
Systemic risk as some would say. The idea that the risk to the financial system as a whole would be too great if Bear Stearns would be allowed to go bankrupt. Unfortunately the Federal Reserve was unable to directly give money to Bear Stearn. So they thought up a plan to give the money to JP Morgan, the bank that backed Bear, and then they would pass it on to Bear Stearns. Former Secretary of the Treasury Henry Paulson got involved.
Amadeo records, “Most of its business was traditional insurance products. When it got into ‘credit default swaps,’ it got into trouble. These swaps insured the assets that supported corporate debt and mortgages. AIG was too big to fail because, if AIG went bankrupt, it would trigger the bankruptcy of many of the financial institutions that bought these swaps.” (Amadeo) AIG was eventually saved by an 85 billioon, two-year loan form the Federal Reserve. It prevented AIG from furthur stress on the financial industry.
The financial crisis in 2008 was been considered as the worst financial crisis since the Great Depression. One of the major reasons of the crisis was that banks in the States were given permission by the repeal of the Glass-Steagall legislation, which allowed banks to affiliate with insurance, real estate, security. The goal was to create financial firms “better equipped to compete in global financial markets”. With the firewall between commercial banks, which make loans and take deposits, and investment banks, which underwrite securities removed, an opportunity rise for banks to create and push more money and eventually to speculate on financial markets. The financial crisis reminded us that the banking industry has a serious influence on the economy and it should be under strict regulations.
According to Abdulkareem Abu al Nasr, The CEO of NCB, or Al-Ali Bank, global financial crisis happens because of " excessive use of structured debt and securities which drove unsustainable levels of financial leverage'' (Could Islamic Banks Help, 2012). On the other hand, Islamic banks that prohibits riba prevents this kind of situation from happening. Islamic banks focused their activities mainly on domestic markets, where most of the activities involved tangible objects instead of debt based financing. That way, Islamic banks would not be seriously affected even when financial crises hits the economy. Conventional banks gain their profit mainly from giving out loans to borrowers and receive interest in the process by using money deposited by customers.
These high risk mortgages were processed as securitisation; this is a financial practice of combining mortgages into one large pool. Most of the pools became mortgage – backed security (MBS) and were traded on the financial markets by firms such as Fannie Mae and Freddie Mac. These MBS delivered high rate of return for the traders increasing their bonus but were not sound investments for the bank. This careless disregard of the compan... ... middle of paper ... ... to guarantee these banks & their debts, economies & Countries would collapse. Society as a whole could have collapsed.
The enormous amount of money firms invested, and the risky transactions bet on, called for Congress and regulators to act. However, banks, whose revenue from proprietary trading is essential, fear the proposed limitations could result in major loss. They argue that many banks would fail because there would be no government cushion to fall back on, taxpayers would not be held responsible for bailing out declining firms. Further, if a bank avoided failure, the amount of money the firm would lose in the process of saving the institution would result in such a significant loss that it would n... ... middle of paper ... ...buted to the financial crisis. Government sponsored enterprises, such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) helped further political interests of the Community Reinvestment Act.
The analysis of the Lehman Brothers will show the acts of unethical financial reporting and the effect it had on this financial banking firm. The trouble for the Lehman Brothers became apparent around the time the housing bubble burst. Lehman acquired more risk, ignoring the truth and began eliminating assets that were overvalued. They did not want to lose confidence from the investors, so they reported assets that had little to no value. “Lehman Brothers balance sheet grew rapidly beginning in 2006, and included many long-term investments financed through short-term borrowing”.
In mortgage market, investment bankers combined thousands of subprime mortgages and started selling them as Collateralized debt obligations (CDO) to the investors. These CDOs were the baskets of subprime mortgages that ranged in various risks. CDOs were rated high by rating agencies so that they can be insured. ... ... middle of paper ... ... the world and dragged the whole world economy in recession. Iceland didn’t have the financial derivatives like mortgage backed securities or collateralized debt obligations but borrowed 10 times more than its GDP and took lots of risk when lending those funds.
In recent history, there have been quite a few memorable cases of corporations manipulating financial reports in order to deceive stakeholders. Deceptive accounting practices are like a disease, and should be rooted out immediately. These practices undermine the stability of U.S. financial markets, and can make people less willing to invest in stocks. Financial reporting is the key to maintaining trust in the financial system and any manipulation should not be tolerated. The purpose of financial statements Financial statements are the primary instruments used in assessing the performance of a business and its managers (Gibson , 2013).