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). The financial crisis of 2007-2008 with the failure of Lehman Brothers is a great illustration of the credit crisis. A sudden change of the financial circumstance in the credit market had started a global financial crisis which has left a significant effect almost every part across the financial world (YaleGlobal Online, 2013). After that, many researchers started to investigate the causes that lead to this credit crisis. Particularly, some of them argue that bank chief executive officer (CEO) incentives are the major factor that causes credit crisis. Bank CEOs Incentives Initially, bank CEO incentives are a kind of performance based bonus aligns with shareholder interest (John and Qian, 2003). Whereby, shareholders gain and falls will affect the incentives of the CEOs. Generally, bank CEO incentives structure has been blamed for leading to the happened of credit crisis becau... ... middle of paper ... ...incentives can be said as one of the factors that lead to the happened of the credit crisis but it is not the major factor that triggers the break out of the credit crisis. Besides that, corporate governance, interest rate and subprime mortgage are factors which causes credit crisis. As refer back to the happen of financial crisis in 2007-2008, these breakout made few large global institution's approach insolvency thus the whole financial sector of the world was affected. The government had given a lot of support to slow down the effect and recovery of the economy in their country. In fact, one factor itself does not cause this mess. The credit crisis is derived from a bunch of economic factors. Credit crisis is a vicious cycle, therefore it is vital to find out the causes which brought to the credit crisis and take suitable solution to solve the problem.
In this essay, the author
- Defines credit crisis as a situation where borrowers default on their loans and the financial institutions reduce the lending or increase the cost of borrowing to recover their loss. the financial crisis of 2007-2008 with the failure of lehman brothers is an example.
- Explains that bank ceo incentives are a kind of performance based bonus aligned with shareholder interest, and shareholders gain and fall will affect the incentives of ceos.
- Argues that ceo compensations aren't a major cause of the credit crisis. fahlenbrach and stulz (2011) oppose that bank ceo incentives affect bank's performance during the crisis, stating that the poor outcomes are not evidence of ceos trying to gain self-interest.
- Explains that interest rates are a factor that leads to credit crisis. low interest rate encourages investment in assets such as houses and drives up the price of houses.
- Explains that selling risky subprime mortgage loans also causes credit crisis. the collapse of lehman brothers was due to default on loans where credit default swaps were used.
- Explains that credit crisis is caused by the failures and weaknesses in corporate governance of an institution. institutional ownership and board independence had an important impact on performance of the firm during the crisis.
- Concludes that bank ceo incentives, corporate governance, interest rate, and subprime mortgage are factors which cause credit crisis.
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In this essay, the author
- Argues that it is unacceptable that banks claim the investors have lack of understanding the risks rather than themselves, because the banks decided to invest with their own judgment.
- Opines that subprime financial crisis: the good into the pot, the bad into crop’ (2010) is an international review.
- Explains dharmapala, dhammika, ‘what problems and opportunities are created by tax havens?’ (2008) 24(4) oxford review of economic policy
- Describes fossen, anthony b van, money laundering, global financial instability, and tax havens in the pacific islands.
- Describes jickling's research report, the enron collapse: an overview of financial issues.
- Analyzes lucci, john paul, and the international ricochet of sarbanes-oxley.
- Analyzes how steiglitz's article, 'the anatomy of a murder: who killed america’s economy', states that there are causations which influenced and provided an impact through the us financial system.
- Explains that banks are an expert in risk management, but they often take a high risk without the concerning of the outcome.
- Explains that moral hazard plays a significant role in many top managers who have lack of ethical and integrity and that will lead them to commit financial crimes.
- Argues that stiglitz's article does not focus any type of financial crimes such as tax evasion, security fraud, money laundering, account manipulation and bribery.
- Argues that the sarbanes-oxley act is reformed to provide the development of the us security financial market. poor corporate governance due to lack of transparency and low ethical obstruct the improvement of financial system.
- Concludes that stglitz's article provides significant points as who was main causation of the us financial crisis, but leaves some important points which should be argued in this counter point.
- Cites albrecht, w. steve, conan c., and blickman, tom, 'fraud and corporate executives: agency, stewardship and broken trust'.
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2371 wordsRead More - The Credit Crisis of the Centuryanalytical essayThe financial crisis of 2007 should be referred to as the credit crisis of the century. Despite what many Americans may believe, the financial crisis was a worldwide fiasco that affected everyone. There is no one to particularly blame for the financial crisis of 2007, but the understanding of subprime mortgages, collateralized debt obligations, credit default swipes, and frozen markets can explain the economic devastation that is still felt today.
In this essay, the author
- Argues that subprime mortgages, collateralized debt obligations, credit default swipes and frozen markets can explain the economic devastation that is still felt today.
- Explains how the financial crisis of 2007 began by brining two groups of people together that had no prior direct relationship history.
- Explains that before the financial crisis of 2007, investors had abundant money and were looking for opportunities to invest. the federal reserve chairman, allen greenspan, lowered interest rates to one percent to keep the economy strong.
- Explains that moral hazard and cheap credit allowed investment banks to go make deals using leverage. leverage is borrowing money to amplify the outcome of a deal.
- Explains how successful leveraging deals in the early 2000’s caused wall st to grow exponentially and investors began to want in on some of the action. the financial systems connected the investors directly to the homeowners through the use of mortgages.
- Explains that investment banks bought mortgages directly from mortgage lenders and now sell them to investors, hedge funds, and investors.
- Explains that the banker now wants more profits and calls the mortgage lender to find more homeowners. the only issue is that all of the qualified homeowners have homes.
- Explains how the subprime mortgages became colossal when investment bankers began to own more homes and bring in less mortgage payments.
- Describes how the investment banker is left with houses that have no value and calls up other investors in an attempt to sell the cdo but the investor is no longer interested because he is in the same situation. the ripple effect is at its peak and everyone goes bankrupt.
- Explains that the government attempted to save the economy three separate attempts. quantitative easing is a monetary policy approach of purchasing large quantities of long term assets.
- Analyzes how the second round of quantitative easing came in 2010 when the government decided to purchase over $600 billion in treasury bills over a six month period.
- Opines that the only true healer is time. the government has tried to save the economy from falling into a depression, but there are no signs of huge growth in the housing market in near future.
1459 wordsRead More - Volcker Rule Essayopinion essayThere were many factors that triggered the financial crisis in 2008, with one of the main ca...
In this essay, the author
- Explains that the volcker rule, named after the former chairman of the united states federal reserve, was first publicly discussed in january 2010.
- Explains that the glass-steagall act was repealed in the late 1990's under the clinton administration, which rapidly created disorder in an unregulated system of bank funds.
- Opines that the volcker rule created benefits within the american financial standpoint. it regulated and removed most of the risky activity done by large banking firms.
- Opines that the volcker rule has a logical intention to help the stability of the banking industry in the long run, but there are disadvantages and loopholes within the ruling.
815 wordsRead More - The Financial Crisis of 2007-2008 and The Federal Reserveanalytical essayThe 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.
In this essay, the author
- Describes the relevant polices the federal reserve made before and after the financial crisis started.
- Explains how the federal reserve could prevent and solve financial crises. the background of the financial crisis and what kind of monetary policy the federal reserve made.
- Argues that the financial crisis of 2007–2008 is considered by many economists the worst financial crises since the great depression of the 1930s.
- Explains that the federal reserve, as a central bank, stands at the centre of the financial an economic system of united states.
- Explains that when the economy is stable, the federal reserve uses low interest rate policy to excite it. when the financial market is disrupted, it provides shot term credit to financial institutions.
- Explains that the federal reserve implements low interest rate policy to deal with the weak economy, slow job growth, and low inflation. however, ben bernanke claims that monetary policy is not an important factor of raising the houses' price.
- Compares the changing of federal funds rate and the theoretical rate which based on taylor's rules, from 2000 to 2006. the deviation led the monetary excesses and encouraged the housing boom.
- Compares the housing boom-bust and counterfactual housing trading. the jagged line indicates the real housing during the period from 2000 to 2007.
- Analyzes the global saving and investment as a share of world gdp during the period from 1970 to 2004.
- Explains that the federal reserve was not the only central bank that made interest rate deviating from the taylor's rule. the housing boom was measured by changing housing investment as a percentage of gdp.
- Explains that the housing boom and bust affected the financial market and led to foreclosures and delinquencies. the low interest rate policy and excess risk taking are relevant.
- Argues that the monetary policy of the federal reserve led to the financial crisis caused by the assets bubble in house market.
2612 wordsRead More - Causes for the 2007 Recessionanalytical essayBased on this case study, it is clear that a plethora of reasons surrounding the U.S housing market led to the financial crisis, and consequently, the Great Recession of 2007. Most notable among the factors were subprime mortgage lending by mortgage lenders, poor risk management and investment choices by financial institutions and banks, and the ancillary agencies that were ready to transfer credit risk to other parties in order to make the most profit for themselves.
In this essay, the author
- Explains that the trend of lax mortgage processes and risky loan applications caused house prices to shoot up to an all-time high by the year 2006. the danger of adjustable rate mortgages became obvious to buyers when their teaser period expired.
- Explains that more and more houses ending up in foreclosure led to huge losses for the financial institutions, with recovery rates as low as 25% of the amount.
- Explains the concept of asset-backed securities, which became rampant during the housing bubble.
- Explains that the great recession was attributed to the burst of the u.s. housing bubble and the subprime mortgage crisis.
- Analyzes how lax standards on the part of lending organizations led to the financial crisis and the great recession.
1027 wordsRead More - Repercussions of the Financial Crisisexplanatory essayHowever, before I go on to the repercussions of the financial crisis, it is essential to know why it occurred. The roots of the crisis can be traced back to the previous years, where the economy was prospering. The Republicans, who were in charge then, overestimated the market’s ability to self-correct. They believed that the lesser government intervention the better, as the market could regulate itself better than the government could. However, an economy needs some discipline, regulation, and oversight too.
In this essay, the author
- Opines that the financial crisis is the most important thing on many people's minds now. the effects, like the companies firing employees to cut costs, can be felt all around the world.
- Explains the roots of the financial crisis can be traced back to the previous years, when the economy prospered. the republicans overestimated the market's ability to self-correct.
- Explains that alan greenspan, then chairman of the federal reserve, had consistently advocated for the "loosening of regulations."
- Explains that greed and corruption on wall street created a growing bubble, eventually leading to the current crisis.
- Explains that many people were lured by their offers and took up loans that they could not afford to pay. when the economy was good, people clamored to buy houses.
- Opines that banks will eventually sell houses for money, so they won't run out of money even if they make a loss. the banks now have to turn to other banks for cash, but others are cautious about lending their money out.
- Explains that the bankers had brought it upon themselves as their previous mistakes began to take a toll on them. without cash, the banks have to cut costs and employees are fired.
- Explains that people who lost their jobs and savings will cut down on their spending. restaurants, cars, and fashion industries will suffer as sales continue to go down. companies that lost money together with the collapse of the banks also close.
- Explains that big insurance companies like aig also suffer badly. they insure many companies and have to pay owners money when they go bankrupt.
- Opines that the financial crisis can be prevented without the bankers' greed. the government should have regulated the market so that none of this would happen.
- Opines that the whole financial crisis has its slight advantages too. companies that were not run well were 'kicked out' and the survivors will,hopefully, learn a lesson.
942 wordsRead More - Financial Crisis Essayopinion essayThe 2008 financial crisis started long before the market crash of 2008. After the Great Depression, America enjoyed a time of “Great Moderation”(economist) named for the consistently low interest rates and steady growth of the economy following the Great Depression. Financiers took note of this and eventually started to make more and more risky investment decisions; financial firm’s profits would increase as long as low interest rates and stable economic growth continued. Financiers eventually grew blind with greed. They “claimed to have found a way to banish risk when in fact they had simply lost track of it”(economist). The financial crisis was a result of poor government regulation, lax policies and the housing bubble burst that caused homeowners to default on their mortgages.
In this essay, the author
- Explains that the 2008 financial crisis started long before the market crash of 2008.
- Explains that by lending mortgages to "subprime buyers," banks created a potentially huge problem if homeowners started defaulting on their mortgage.
- Explains that market consistency encourages investors to make risky higher yielding decisions in the long run, but if interest rates are low and unstable, investors will invest in long-term stable investments.
- Analyzes how the federal reserve's lax enforcement of laws and regulations on banks impacted banks' ability to make risky decisions.
- Explains that the 2008 financial crisis was caused by a series of failures by the government regulate united states financial institutions.
- Opines that the federal reserve should have bailed out lehman brothers before other banks would become subject to the same fate.
- Opines that the federal reserve's lax regulations were one of the biggest mistakes leading up to the 2008 market crash.
1076 wordsRead More - Financial Crisisanalytical essay“How does a credit crisis begin? The basic structure of a credit crisis is excessive liquidity leads to excessive lending which leads to excessive leverage which leads to excessive-risk taking. The result of this equals tremendous spread tightening that leads to a credit bubble that will eventually burst. This cycle is inspired by the government’s lax laws on borrowing money. Even though people should worry about deflating the bubble. The start of th...
In this essay, the author
- Explains that credit derivatives shift credit risk from one borrower to another debt holder or corporation. they are tied to a reference entity or reference obligor.
- Explains the concept of cdos in the 1980's by a bank called salomon brother by securitizing the loans and converting them to bonds.
- Explains that the housing market was coming down but inflation was going up and the u.s. central banks tried to combat the rising inflation by increasing interest rates.
- Explains that cdo traders operate separately from the bank and their job is to make sure the credit quality of the securities doesn't change.
- Analyzes how the 2008 financial crisis punched the banking sector right in the gut, causing banks to harvest huge losses.
- Explains how aig was hit the hardest by the financial crisis. it had to pay out insurance claims and restore its collateral losses.
- Analyzes how the feds and the treasury department have loaned out more money to aig, sending shock and panic throughout the world that the biggest insurer needed to be rescued.
- Explains that the government owned aig's role in the financial crisis. other banks like fannie mae and freddie mac were rescued by a federal takeover.
- Explains that the increase in riskier loans and mortgage backed securities was inspired by the amplified earnings that were achieved from a unique refinancing boom.
- Compares ginne mae to freddie mac and fannie mae, which is under full ownership of the department of housing and development.
- Analyzes how the treasury department and the federal reserve took action to inspire confidence in the government sponsored agencies.
- Explains that fannie mae and freddie mac were the foundation of the housing market that was collapsing.
- Explains that the treasury's order to give funds for keeping fannie mae and freddie mac afloat was limited to the sum of debt that government can give by law.
- Explains that the financial crisis of 2007-2008 was cataclysmic and was motivated by the subprime mortgage crisis.
3254 wordsRead More - Reasons Of The Financial Crisis By Raghuram Govind Rajananalytical essayIn the book writer Raghuram Govind Rajan puts forward the reasons of latest financial crisis. He carries the book with the historical perspective. Rajan digs deep to find the reasons for the world economic stresses and prolonged recessions. While searching the main causes for crisis he also tried to explain why structural problem piled up, how household banks and politicians acted for self interest while ignoring the risk of financial crisis. He also mentioned in the book that policymakers were reluctant to act. The great economic crisis broke up in the housing sector of the US economy and quickly spread to other sectors of the economy through ruined balance sheets of different economic units and severely hit household consumption.
In this essay, the author
- Analyzes how raghuram govind rajan digs deep to find the reasons for the world economic stresses and prolonged recessions. he explains how household banks and politicians acted for self-interest while ignoring the risk of financial crisis.
- Analyzes how economists took the world economy at the brink of disaster and it can be repeated unless they recognize what went wrong.
- Explains that technological advancement is a good thing for everyone in the long run, but disruptions can persist if people don't adapt. the gap between skilled and unskilled labour is rising constantly.
- Explains the role of formal education in forming an individual human capital, family, community, income, and career prospects. the book speaks about the lifestyle of educated people.
- Explains that developing countries initially relied on their imports, running trade deficits to absorb the excess supply of the exports. asian countries faced crisis in 1990s and a well implemented export lead strategy has taken out many countries out of poverty.
- Analyzes how the weak safety nets forced governments to push fiscal and weak stimulus to the economy.
- Opines that public has lost faith in a system where the rule of the game seems to favor few. if we don't mend the fault lines, we could face the next crisis.
- Argues that government should limit the role of the financial sector to do damage while harnessing its creative energies. borrowing through developments such as credits cards, home equity loans are good or bad.
- Argues that free societies revert to more paternalism and more constraints on choice after a crisis. the trend in democratic societies is to expand choices for all and constrain it for few.
- Argues that managed capitalism in the form of export led growth has proved to be extremely successful in its objective to get countries out of poverty, but it is not ever sustainable strategy to implement.
- Opines that rajan's book is a must-read for those interested in the structure of the us housing market, history of housing credits, and creation of financial products for mortgages.
1514 wordsRead More - Overview of Executive Compensation in United Statesanalytical essayThis paper will fundamentally provide a substantive evaluation of how executive compensation correlates with the firm’s performance in the listed corporate firms in the United States. Equally important, such firms which are the beneficiaries of the public funding are entitled to expressly owe the public authorities the obligation to regulate the executive compensation levels. The paper will also delineate the regulatory approaches in U.S. along with the issues facing the executive compensation since the start of the dramatic economic crisis. The impositions of legally specified levels of executive compensation have not been in place since the start of the economic crisis. Even though the French president Nicholas liberated for the placement of the limits upon the bonus issuance to the executives at the Summit G20 in 2009 in the United States, this model was never at all implemented. However, softer regulation as an approach to regulate the executive pay has been analytically useful in achieving better governance of executive paying levels. Subsequently, the paper will give a vivid description of economic development prior to the fore said crisis. The development of executive pay policies on executive compensation has been popular in many national economic contexts since the economic crisis began. For instance in 2008, the emergency Economic Stabilization Act established that they would provide leverage benefits to the firms in case of the financial crisis.
In this essay, the author
- Analyzes how executive compensation correlates with the firm's performance in listed corporate firms in the united states, and the regulatory approaches in u.s. since the start of the economic crisis.
- Analyzes the implications of the current national and international policy system that regulates and controls the executive compensation.
- Explains that the u.s. field of governance has ideally configured the regulations on issuing of such benefits and stocks. the criticisms of existing executive compensation regimes have mainly focused on social-economics issues.
- Explains that executive compensation regulations were the supreme subject of discussion and subsequently led to agreement at g20 summits in the year 2009.
- Explains how the organization of executive compensation policies has been prevalent in many nations since the start of the economic crisis.
- Concludes that the high rates of executive compensation were fundamentally a western economic trend.
- Explains that rates of income tax continued to decline as the globalization intensified competition between national tax regimes.
- Analyzes how the table 2 depicts executive compensation declined for normal employees while the highest paid executives received yearly pay packages of over ten million dollars.
- Explains that the rates of income tax have declined internationally in previous financial years.
- Cites de la porte, c., and pochet, p. 2002: building social europe through the open.
- Opines that moral pressure has proliferated in many countries internationally.
- Analyzes how icbc and ccb banks had the highest rates of market capitalization in the international finance sector in 2008, but the levels of executive compensation at these banks were below fifty times compared to specific western banks.
- Explains that the income tax is utilized as a means of distributing the national wealth and cutting down the top salary earners.
3033 wordsRead More