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Cause of the 2008 financial crisis
Cause of the 2008 financial crisis
Cause of the 2008 financial crisis
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1. Introduction
The financial crisis started in the USA because of subprime mortgage crisis in 2007. As a consequence of it, a credit crunch was originated and it quickly spread from the real state sector to other sectors, and furthermore, from USA to other countries. This caused a series of financial and economic crises like the collapse of housing markets in Europe, the global stock markets, global financial systems and markets, along with a lot of large banks and financial institutions, as (Sun, et al., 2011) explained.
The financial crisis from 2007 has caused the greatest global economy recession since the Great Depression and also the European sovereign debt crisis. The consequences and cost are enormous. Due to this fact, explanations and responsibilities for financial crisis are searched so that the role of corporate governance and financial engineering is set on the spotlight.
The financial crisis has been said to be a case of financial engineering and corporate governance gone wrong. In this paper I will discuss this statement and demonstrate that wrong financial engineering practice and corporate governance effectively caused, or at least in part, the financial crisis.
2. The role of Financial Engineering in the Crisis
The origins of the crisis have been discussed and a number of different causes have been pointed out. According to (Sun, et al., 2011), the roots of the crisis have been identified to be in the preference for deregulating financial institutions and markets, which resulted in the prompt growth of securitization.
Financial engineering allowed a great burst of global derivatives setting the context in which major financial institutions thoughtlessly disregarded risk management and corporate governance. In th...
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Sun, W., Stewart, J. & Pollard, D., 2011. Corporate Governance and the Global Financial Crisis. Cambridge: Cambridge University Press.
The New York Times, 2008. The End of an era for Wall St., even at Goldman. The New York Times, 28 September.
Vasudev, P. & Watson, S., 2012. Corporate Governance after the Financial Crisis. Cheltenham: Edward Elgar Publishing.
Weiß, G. N., Bostandzic, D. & Neumann, S., 2014. What factors drive systemic risk during international financial crises?. Elsevier: Journal of Banking & Finance, Volume 41, pp. 78-96.
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.
Jake Clawson Ethical Communication Assignment 2/13/2014. JPMorgan Chase, Bailouts, and Ethics “Too big to fail” is a theory that suggests some financial institutions are so large and so powerful that their failure would be disastrous to the local and global economy, and therefore must be assisted by the government when struggles arise. Supporters of this idea argue that there are some institutions that are so important that they should be the recipients of beneficial financial and economic policies from government. On the other hand, opponents express that one of the main problems that may arise is moral hazard, where a firm that receives gains from these advantageous policies will seek to profit by it, purposely taking positions that are high-risk, high-return, because they are able to leverage these risks based on their given policy. Critics see the theory as counter-productive, and that banks and financial institutions should be left to fail if their risk management is not effective.
The presence of systemic risk in the current United States financial system is undeniable. Systemic risks exist when the failure of one firm may topple others and destabilize the entire financial system. The firm is then "too big to fail," or perhaps more precisely, "too interconnected to fail.” The Federal Stability Oversight Council is charged with identifying systemic risks and gaps in regulation, making recommendations to regulators to address threats to financial stability, and promoting market discipline by eliminating the expectation that the US federal government will come to the assistance of firms in financial distress. Systemic risks can come through multiple forms, including counterparty risk on other financial ...
Blair, Margaret M. (1995) Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century. Washington, DC: Brookings.
Graham, John R., Sonali Hazarika, and Krishnamoorthy Narasimhan. "Corporate Governance, Debt, and Investment Policy during the Great Depression." NBER. National Bureau of Economic Research, 2011. Web. 24 Apr. 2014.
Investment banks, Rating agencies and Insurance companies are key components of the financial market. In this presentation, I’m going to explain how these three key roles worked together to create the 2008 financial crisis.
Mackay, Tim. "The Ethics Of The Wolf Of Wall Street." Charter 85.2 (2014): 67.Web. 23 Mar. 2014.
The financial crisis occurred in 2008, where the world economy experienced the most dangerous crisis ever since the Great Depression of the 1930s. It started in 2007 when the home prices in the U.S. Dropped significantly, spreading very quickly, initially to the financial sector of the U.S. and subsequently to the financial markets in other countries.
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.
Bibliography: Turnbull, S. (1997). Corporate governance: its scope, concerns and theories. Corporate Governance: An International Review, 5 (4), pp. 180--205.
The Asian Financial Crisis which exposed the corporate governance weaknesses was a wake-up call for all the policymakers, standard setters as well as the companies (OECD, 2014). The parties that involved and affected from the crisis started to realize the importance of having strong corporate governance practices in their countries. Consequently, the Asian economies along with the OECD established the Asian Roundtable on Corporate Governance in 1999, in order to support the enhancement of corporate governance rules and practices (OECD, 2014).
Nottingham Trent University. (2013). Lecture 1 - An Introduction to Corporate Governance. Available: https://now.ntu.ac.uk/d2l/le/content/248250/viewContent/1053845/View. Last accessed 16th Dec 2013.
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.
Warwick J. McKibbin, and Andrew Stoeckel. “The Global Financial Crisis: Causes and Consequences.” Lowy Institute for International Policy 2.09 (2009): 1. PDF file.
The failure of adequate board accountability has indicated strong adverse effects on corporate performance including, the bankruptcy of various public companies, thereby casting serious doubt on the credibility and efficacy of board accountability. For example, Lehman Brothers scandal, the largest bankruptcy in U.S history, Northern Rock was a large failure of a financial institution in the United Kingdom (Hull 2015:16). In Ireland, the Anglo-Irish Bank created a huge bubble that plunged the state into economic recession. In September 28, 2008, the Irish Government signed into law, the “bank guarantee” which provided with immediate effect a guarantee arrangement to safeguard all deposits in retail, commercial, institutional and interbank transactions, covered bonds, senior debt and dated subordinated debt (Lenihan 2008). Banks in Ireland clearly needed yet more capital from the State (Irish Times 19 November 2011) and this underscores the need for the government’s bailout