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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...n of markets, institutions and regulation. Elsevier: Journal of Banking & Finance, Volume 35, pp. 502-511.
OECD, 2004. Principles of Corporate Governance. Paris: OECD Publications Service.
Steering Group OECD, 2009. Corporate Governance and the Financial Crisis, s.l.: Organisation for Economic Co-operation and Development.
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.
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