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.
It was the result from risky mortgage loans and falling estate values (Brue) . Additionally, the financial crisis of 2007 was the result of underestimation of risk by faulty insurance securities made to protect holders of mortgage-back securities from risk of default and holders of mortgage-backed securities (Brue). Even to present day, America stills suffers from the aftermaths of the financial crisis. The Mortgage Default Crisis A majority of mortgage defaults that Americans used were on subprime mortgage loans, which were high-interest-rate loans lent to people with high risk credit rates (Brue). Despite knowing the risks, the Federal government encouraged major banks to lend out these loans to buyers, in hopes, of broadening ho... ... middle of paper ... ...arch 4, 2014, from http://www.bls.gov/spotlight/2012/recession/pdf/recession_bls_spotlight.pdf Brue, S. L., Flynn, S. M., & McConnell, C. R. (2011).Economics principles, problems and policies.
The problems arrived over a period of time from 1995 to 2008. The first and main problems that lead to the economic collapse was sub prime mortgages. Sub prime mortgage is a certain kind of loan granted to people with poor credit histories, who which wouldn’t usually be qualified for conventional mortgages (Investopedia). These sup prime mortgages would backfire on banks across the nation resulting in huge financial loses. According to USA Today, “Housing crisis deepens.
(New York Stock Exchange) This investment was hoping that people could make a profit and repay the loans they made. But just as one would expect, events didn’t unfold as planned. When the stocks ended up crashing, people were completely out of money, and had nothing to give to repay the banks, which were also in need of money. The crashing of the stocks was a pivotal moment, and eventually led to the Great Depression In the 1920s Americans naively believed that the economy... ... middle of paper ... ...n, was one of the most traumatic events The United States has endured. With the deadly combination of faulty investments, false assumptions of prosperity, and naive economic decisions, America was plunged into a depression.
The U.S. financial crisis of 2007–2008 is considered one of the worst financial crises since the Great Depression of the 1930s. It almost made large financial institutions collapse and stock markets declined in a dramatic way around the world. The consumer wealth declined in trillions of U.S. dollars and played a significant part in the failure of key businesses and declines in economic activities. All these factors led to the 2007–2008 global recession and played a major role in contributing to the European sovereign-debt crisis. The easy availability of credit in U.S, Russian debt crises and Asian financial crises of late 90’s showed the way to a housing construction boom in the USA.
The Lehman Brothers, an investment banking firm filed for bankruptcy in September of 2008 due to poor financial choices. The company made many bad decisions because of their greed and unethical decision to manipulate the books. The lack of success by the Lehman Brothers shows that it is imperative to be self-evident with financial reporting. The bankruptcy shows that they failed to use factual figures by disguising their actual financial position. The analysis of the Lehman Brothers will show the acts of unethical financial reporting and the effect it had on this financial banking firm.
Company boards were directly responsible through their compensation committees and consultant advisors for a sharp rise in executive compensation during the 2000s that may have contributed to undue short-term risk-taking among the financial service companies that helped spark the recession . Moreover, defective corporate governance processes attributed to the failure of risk management systems in many of the failed banks. Boards of failed banks did not take into consideration the risk factors before approving the company strategy. Company 's disclosures of about the foreseeable risk factors and about systems for monitoring and managing risk were obviously lacking in many banks. The accounting and regulatory environment was even not efficacious.
Unfortunately, the Countrywide Financial case was not an isolated case. Many top name mortgage companies have been guilty of unethical behavior. Just as the American housing market was starting to recover from its worst battering since the Great Depression, a new scandal, an epidemic of flawed or fraudulent mortgage documents, threatens to send not just the housing market but the entire economy back into a tailspin (Nation, 2010). Countrywide Financial got greedy and started to make questionable and unethical decisions to make money. Countrywide Financial preyed on consumers that could not qualify for conventional loans and those that could to make more money with subprime loans.
Their actions contributed to and ultimately caused the collapse of the subprime mortgage market, which was the lynch pin of a whole series of linked financial flows, spreading beyond the borders of the United States. The Global Community are angry because they bought into America, figuratively and literally, and feel that they’re interests weren’t protected. They assert that the USA had a duty to protect the financial system, which it failed on multiple levels. It failed to oversee itself domestically, whilst also failing to limit and regulate its links to the international system. Given its unique (and self crafted) position in so many vital international monetary institutions (Calleo 2009, pp94-95), its use of this power was seen to be short sighted, self-serving and dangerous.
Though the laissez-fare policy was a huge contributing factor, it could have been the sole factor for the stock exchange collapse as its policy of not interfering caused lots of problems. As a result the US went into the one of the worst economic downfalls the world has ever had. There were numerous domestic and foreign economic policies and beliefs put in place by the Republican government to try and better America. In the end most of these were causes of the depression. The government was trying to isolate America from the rest of the world so they passed the Fordney-McCumber Act (1922) and the Smoot-Hawley Act (1930), both of which imposed high import tariffs (taxes) on all good being imported into the US.