However, with or without human judgment, financial models of credit risk are subject to manipulation, both legally and fraudulently. The forced liquidation of some $3 trillion in private label structured assets has been deprived from the financial markets and the U.S. economy has obtained a vast amount of liquidity that the banking system simply cannot restore. It is not as easy to just assign blame within these case however it is noted that the credit rating agencies unethical decisions practices helped add onto the financial crisis of 2008 and took into account the company’s well-being before any other stakeholders.
Notably, when a financial crisis emerges, the liquidity rate for money reduces to a level where saving cannot help in salvaging the already worsened money situation. For instance, one of the most prevalent financial crises took place in 2008 when the global money market went through a massive recession period thus creating a huge economic fuss across the globe. In any situation of financial crisis, companies and businesses are often faced by the problem of ethical dilemma on how to react to the financial crisis at hand. These ethical dilemmas are brought about by the fact that the business might have several options on reacting to the situation that is responsible for the financial crisis. Basically, this research paper aims at exploring the threats that most users of financial information have gone through in divergent parts of the world over the recent past.
The freezing of the flow of money is a financial crisis. Today, the global flow of money is at risk. This risk is a result of Debt and Credit imbalances: "Persistent trade surpluses in some countries and deficits in others did not reflect a flow of capital to countries with profitable investment opportunities, but to countries that borrowed to finance consumption or had lost competitiveness. The result was unsustainably high levels of consumption (whether public or private) in the US, UK and a range of other advanced economies and unsustainably low levels of consumption in China and other economies in Asia, and some advanced economies with persistent trade surpluses, such as Germany and Japan." The debt and credit imbalances have created global systemic risk as economic markets have become more interdependent.
Furthermore, it became a worldwide phenomenon; “the way the debt was sold on to investors gave the crisis global significance. The US banking sector package sub-prime home loans into mortgage-backed securities known as CDOs (collateralised debt obligations). These were sold on to hedge funds and investment banks who decided they were a great way to generate high returns (and big bonuses for the oh-so-clever bankers that bought them). When borrowers started to default on their loans, the value of these investments plummeted resulting in huge losses for banks globally”, (timesonline.co.uk). As this was going on, consumers felt the effect of basic necessities prices increasing.
Ocaya (2012) state that the credit crisis is a financial market or economic meltdown of borrowing the funds to the borrower and cannot get back, it evaluated by severe shortage of money or credit bring accumulation of bad debts, defaults and falling financial institutions among others. However, the experts and economists are unclear as what form a credit crisis. The Wall Street defines a credit crisis as a “period during which borrowed funds are difficult to get and, even if funds can find, interest rates are very high”. Credit crisis mostly began in 2007. The effect of the credit crisis has brought fall down on the housing market in some country resulting in foreclosures and unemployment.
Introduction Credit crisis can be simply defined as a situation where there is a lack of funds available in the credit market due to default on loans of the borrower to the financial institution. This situation happened as more borrowers default on their loans and the financial institutions simultaneously will stop receiving a large amount of payments. Then, the financial institutions will reduce the lending or increases the cost of borrowing to a higher rate to recover their loss. When there are limited funds available in the market along with interest rates that is unaffordable to most, it will affect the chances of borrowers to obtain financing and lead to a higher risk to most of the corporate and individual’s exposure to bankruptcy. Finally, credit available in the market had become lesser and lead to the boom of the credit crisis (Investopedia, 2013).
What is worse, it may bring much harm to the country and even the world’s economy. Before financial crisis in 2008, speculators including investment banks in Wall Street securitized mortgages by using OBS (Off-balance-sheet Operation), and used CDS (Credit Default Swap) to hedge funds. Finally, financial risk exposed, which caused heavy loss to the whole economy in U.S. The key reason that it is harmful is not only that commercial banks engage in investment banks’ activities, it is because commercial banks, by engaging in securities organization, misappropriated credit funds and inter-bank borrowing(lending) business for their own investment, including in security market or real estate market. This would create a “bubble” economy and if the “bubble” is broken, the whole country’s economy will seriously suffer from it.
The credit crisis is referred to as economic downturn by credit squeeze, provision of doubtful debt and bankruptcies among others. (IMF, 1998) Credit crisis is known as a credit crunch, it is an extension of recession. According to the Ocaya (2012), Credit crisis is a sudden shortage of loan and tightened the requirement of economy and society needs of getting loan from financial institutions. In such situation, lender started keeps the cash and stop lending money because they are worry about a large of debtor bankrupt and mortgage defaults. Lender had adjusted the interest rate of borrowing to unaffordable rate.
Financial crisis is defined as a situation when one or more than one institutions lose a huge or major part or their nominal values. Financial crisis can be further explained as the situation when the supply of money cannot compensate for the demand for money, which can also be explained where institutions quickly loses liquidity on its asset, caused by money that is withdrawn from the bank. Due to the growing economy all around the world, financial crisis has become a very common phenomenon across the globe especially in some specific sectors of the economy. Financial crisis can be further divided into varieties of crisis, and each of these crisis can be caused by different reasons, depending on the crisis. However, financial crisis is
The banking industry understood that the subprime loans came with higher risks and they packaged the subprime loans with less risky investments to protect themselves from the risky investments. While it made sense to package the subprime loans and spread the risks, what the industry did not take in consideration was the unethical behavior of the financial industry. Financial institutes misrepresented the loans when they packaged them and sell; therefore relieving them of the risky loans. However the losses were much greater than anyone expected and created the banking industry meltdown. The subprime mortgage crisis and resulting foreclosure fallout has caused dissension among consumers, lenders and caused frustration with legislators and created a furious debate over the causes and possible fixes to the subprime mortgages and financial industry risky and greedy behavior.