...‘The US government’s response to the global financial crisis was to prop up some of the key financial institutions stating that they were “too big to fail” because such failures would have extremely serious consequences for the economy and society at large. Research newspaper articles and present a summary of what measures the US government took to protect these financial institutions. Provide examples. Explain and critically analyse both the shareholder and stakeholder models of corporate social responsibility. Can the US government’s actions be justified from either (or both) of these models? Consider both short and long-term consequences of this government intervention. Conclude whether the action taken by the US government is best for society?’ The Global Financial Crisis of the last few years has caused widespread problems for the US government, who were forced to spend billions of (taxpayer) dollars bailing out many of the world’s largest top banks. While a controversial decision, the US government acted on the belief that these institutions were ‘too big to fail’ and their collapse would have far reaching consequences that could have lead to a much dire situation. Throughout this essay, the causes and effects that lead to the GFC and the need for a bank bailout, along with what exactly it entailed will be presented. Then, the US governments’ response in bailing out the banks will be analysed using both a Stakeholder and Shareholder model of Corporate Social...
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...“Anything that is too big to fail is too big to exist Simon Johnson. Discuss. A. What does this mean? What are its implications? Before the 2009 financial crisis banks were conviced that they we're ｫ too big to fail ｻ Before the 2009 crisis, banks were conviced they were too important to fail in the sens that their importance in the market was such that the states could not afford to drop them. Indeed governements can't let any bank fail because of systemic risk and the need to maintain the confidence in the market and between banks. So the banks favored the short-term profitability without thinking of the long term consequences of their decisions because they were convinced they could not fall. The banks then took advantage of their importance and jeopardized the entire economy That's what Simon Johnson then explained by saying that 鄭nything that is too big to fail is too big to existｻ, The main lesson of this crisis is that it's no longer possible to leave as much power in those institutions, indeed it's essential to reduce their size and their influence on the economy so that no futher institution can be ｫtoo big to failｻ B. How is this concept related to Moral Hazard? Moral Hazard occurs ｫwhen a party insulated from risk behaves differently than it would behave if it were fully exposed to the riskｻ. In that definition of moral hazard the idea of risk is very present, so we can easily see how this concept is related to the financial system...
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...Thomas E. Augustyn Iowa School of Banking 2009 Intersession Project Banking Regulation Summary There is one legislative issue which will be ultimately responsible for the future direction and degree of bank regulation. This issue is the management/regulation of the financial services industry that contains “systemically relevant” (aka “too big to fail”) firms. Management & regulation goals must be 3-pronged: 1. It must be strong enough to prevent the failure of “systemically relevant” firms (without artificial outside support)or provide for a less-traumatic winding down of a “systemically relevant” firm. 2. It must prevent the emergence of more “too big to fail” firms 3. It must not be so stifling as to prevent the controlled growth of safe and profitable financial service businesses. Analysis Up to 1999, banking regulation had been fairly constant since the Great Depression ended. The Golden Rule had been the Glass-Steagal Act. The Glass-Steagall Act, was passed by Congress in 1933 and prohibited commercial banks from engaging in the investment business. It was enacted as an emergency response to the failure of nearly 5,000 banks during the Great Depression. The act was originally part of President Franklin D. Roosevelt’s New Deal program and became a permanent measure in 1945. It gave tighter regulation of national banks to the Federal Reserve System; prohibited bank sales of securities; and created the Federal Deposit Insurance Corporation (FDIC), which...
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...caused by a massive movement of the whole banking industry disregarding ethical behavior and leaving the philosophy of sound investing strategies for a philosophy of profits. In evaluating the role of unethical decisions in causing the financial crisis, we will start by defining ethics. Ethics can be defined as rules of behavior based on ideas about what is morally good and bad. In every profession, each person has to abide by codes of ethical standards for that profession. So with regards to the financial crisis individuals acted in an unethical manner which eventually aided in the great recession. In analyzing the sources of the problem in the financial crisis, such as poor risk controls, too much leverage and an almost willful blindness to the bubble-like conditions in the housing market, we can strongly say that ethics did play a major role. Financial firms became unmoored from its ethical base and were free to behave in ways that were in their, top executives, short-term interest without any concern about the longer term impact on the industry’s customers or the broader U.S economy. Integrity and a sense of responsibility to the industry’s customers are at the core of what a financial industry must be all about; otherwise it is just a big Ponzi scheme. The ethical failures in the subprime lending played a major role in the financial as mortgage brokers did not care about the credit worthiness of the borrowers as they were getting paid for the number of transactions that they...
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...Healing the Global Financial Crisis Miranti Kartika Dewi 1 *Researcher of Centre for Islamic Economics and Business ** Lecturer of Department of Accounting Faculty of Economics, University of Indonesia Ilham Reza Ferdian * Student of Master of Science on Finance Programme Kuliyyah of Economics and Management Sciences International Islamic University Malaysia ** Fellow of PT. Bank Muamalat Indonesia ABSTRACT Global financial crisis which hit many too-big-too-fail countries and financial institution in the world was mainly made happen by debt securitization. Derivative instruments resulted from this process obviously were not backed by real asset. When any party came up with investment on these instruments, the investment would never support the development of real sector economy, instead, it just worsen the situation by creating bubble economic. This condition becomes more harmful when the securitized debts default. This practice is strictly forbidden according to Islamic finance principles. It has inherent risk management tools to prevent the crisis. This paper attempts to examine the root of the financial crisis and find the solution from Islamic finance principles. Keywords: Financial crisis, Derivative, MBS, CDO, CDS, Islamic finance 1 Corresponding author can be contacted by email: miranti_k_dewi@yahoo.com. “The credit and capital markets have grown too rapidly, with too little transparency and...
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...“Too big to fail” retells the true events taken place during the financial crisis of 2008. It centers its focus on Henry Paulson’s (Secretary of Treasury) attempts to contain the economic issues that arose in the period of August - October of that year. CEO of Lehman Brothers, Dick Fuld, tries to obtain external investment as their stocks began failing drastically. However, investors were doubtful to consider purchasing Lehman due to its exposure to toxic housing assets. Paulson works towards trying to convince CEO’s from major banks to buy Lehman stocks discretely since the Treasury was “opposed” to offering any kind of bail out as occurred to Bear Sterns. Lehman expressed to have been negotiating the sale of the company with Bank of America and Barclays. However, Bank of America decided to purchase Merrill Lynch. While Barclays was beginning to accept the terms of this merger, British bank regulators refuse to approve the deal. At this point Paulson sees no other solution and advices the CEO of Lehman Brothers to file for bankruptcy. Paulson quickly learns that Lehman's counterparty risk is impacting the entire financial market and the stock market is in freefall. Another crisis arises as AIG begins to collapse. Paulson's team realizes that if AIG is allowed to fail, its entire insurance portfolio will default and the entire financial industry will suffer massive losses. The Treasury decides to takes over AIG. Ben Bernanke, Chairman of the Federal Reserve, then argues that...
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...Is There Evidence of “Too Big To Fail” In the Caribbean? ““Too Big to Fail” means there are certain financial institutions so big and interconnected that their failure would be catastrophic to the economy. Therefore, they must be supported by government when they are facing difficulty. The bigger the company, the larger the risk.” One of these “Too Big to Fail” institutions is CL Financial Group. In 1993, CL Financial began as a holding company, a company that owns other company’s outstanding stock, for Colonial Life Insurance Company (CLICO). As time flew by, the company grew and expanded its services to offer banking, insurance, real estate, energy and beverages. In 2007, their asset totalled US$16Billion, which was equal to 30 percent of the Caribbean’s Growth Domestic Product. So why did such a successful business fail when the Global Financial Crisis hit the Caribbean? Two major issues: 1. The presence of moral hazard as a result of CLICO the British American Insurance Company (BAICO) offering higher returns on customers’ deposits that was higher than other banks. The deposits were then used to finance their real estate and other investments. So when the Global Financial Crisis hit the Caribbean, the investments along with CL Financial crumbled. 2. Better supervision and regulation of large financial institutions’ activities should have been implemented. It is said in the IMF Working Paper on Financial Interconnectedness and Financial Sector Reforms in...
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...System & Financial Crisis Alejandro Cuervo Wilmington University Abstract As we go into our research on the financial crisis of 2007, we will try to answer some questions about what actually cause of the failure of our financial system, which almost collapse the dollar. While there are plenty of faults to go around on what cause this crisis, there was never a clear path on how to reverse the demand that was cause by repealing the Glass-Steagall Act of 1933. Although there has been other regulations and acts pass since the repeal of the Act of 1933, the ability to restore and strength our dollar has been an uphill battle to take control of it. What was known within our economic system to readjust and rebuilt had not worked to establish balance playing field on the world stage or our domestic economy. As we look forward toward corrective action though the Dodd-Frank Act, Sarbanes-Oxley Act or the Global Legal Settlement of 2002 which reduced the conflict of interest as did the Sarbanes-Oakley Act. These conflicts encompass “underwriting and research in investment banks, auditing and consulting in accounting firms and credit assessment and consulting in credit rating agencies.” (Sanati, 2009) So while we have had a slow and diosmose recovery from this crisis, I will try to answer some of the questions presented to us today on our ability to fully recover and instill some preventative measures to ensure a worst and more devastating financial crisis from taking hold of our...
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...Research Paper Matthew Emery memery@capella.edu BUS3004 Developing a Business Perspective Lynn MacBeth 08/12/2012 Too Big to Stay Introduction A financial institution so interwoven in the fabric of the national economy that its failure could cause a massive ripple effect is deemed “too big to fail”. Unfortunately for the taxpayers, their hard earned dollars are the only thing between salvation and failure for these companies. Poor management or industry instability can ruin any business, but the larger an institution gets, the larger the collateral damaged induced by their failure will be. It is the duty of a responsible government to never leave their citizens vulnerable to such a catastrophe. The goal of this paper is to prove that too big to fail policy is what turned a period of stagnant growth into the worst financial crisis since the Great Depression. It is a well known fact that the housing market and therefore the United States economy started slipping in late 2007. As the economy was faltering, it still managed to not slip into recession status until September 2008. It is lees than coincidental that America's fifth largest financial institution, Lehman Brothers, filed for bankruptcy on September 15, 2008, the very same time the economy plummeted. The instability of the market led to runs on banking institutions, which in turn led to more bank failures, which led to massive bailouts. These bailouts, while helpful at the time, lead to unprecedented...
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...Review of Too Big To Fail - In this movie following Treasury Secretary through the 2008 financial crisis as it morphed into a national and international crisis, the mix of staged and true-to-life news recaps was quite compelling. Although I personally know the turn of events (I have several investments that saw the effects of the 2008 financial crisis) I found it unique to start the movie with true news clips which brought great validity to the story line. I personally was constantly questioning “did that really occur or was that Hollywood’s input?”. The start of the movie where a government official – the Treasury Secretary – was asked to call a private investor (Warren Buffet) to assist Lehman Brothers shocked me. Did/Can he really do that? I find that event to be bordering on unethical behavior and wonder what Buffet thought of our government when they asked him that. Later in the movie, Buffet is called again – what power Buffet has!? I also questioned the fact that our Treasury Secretary had former employment ties to Lehman Brothers and could be a bit jaded. His professional experience obviously was something the government wanted to capture. The hasty firing of the higher executives at Lehman Brothers was a bit hasty in my opinion. The movie depicted that their personnel replacements were not well thought out as well (poor handling of the meeting with the Korean representatives). Following that, I found it very odd that our government asked other companies to “help”...
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...The Dodd-Frank Wall Street Reform and Consumer Protection Act The Dodd-Frank, signed in 2010, was passed as a response to the US Great Recession of 2007/2008. The primary purpose is the create a sound economic foundation to grow jobs, protect consumers, rein in Wall Street and big bonuses, end bailouts and too big to fail, prevent another financial crisis. Key Provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act Consumer Protections with Authority and Independence: The Bureau of Consumer Financial Protection has been established to ensure full protection of US consumers with respect to clear and accurate information that they need for mortgages, credit cards and other financial products. This new independent body has...
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...The US Financial Crisis and Bangladesh The devastation left by the recent financial crisis can easily be compared with the natural disasters that visit Bangladesh so often. Lehman Brothers is no more; Merrill Lynch and Bear Stearns suffered a huge loss and forced to sell themselves; AIG, Frannie Mae, and Freddie Mac sought refuge in nationalization. USA’s last two investment banks Goldman Sachs and Morgan Stanley threw their towel and converted themselves to holding companies. The investment banking arena will never look the same again. Unfortunately the woe does not end here. American money-market fund the safest of safe investments has reported a loss (first time since 1994). If investors flee the money markets for treasuries, banks will lose funding and the contagion will suck in hedge funds and corporations. The recent turmoil has been blamed on the sub-prime mess. These relatively unregulated financial institutions’ greed has led to their downfall. What these “hedge-fund operators, leveraged buy-out boys and whiz-kid quants” have created is a financial Frankenstein. They have created loans for borrowers, who in real life do not qualify for them because of their poor credit ratings and low incomes. The risk of these loans have been passed on to investors around the world who are eager to buy securities carrying higher yields rather than those offered by safer investments such as US treasury bonds. According to an article by Knowledge @ Wharton “Mortgage-backed securities...
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...Recently, I watched a movie, Too big to Fail. It depicts the events happened in Wall Street during 2008 US financial crisis. There is a scene in the movie that explained the reasons behind the crisis, which attracts my interest. Then I found and watched another short video, “Credit Crisis”. It takes only 11 minutes to visually illustrate the reasons behind the credit crisis in the United States. After watching it, I have gotten the answers of these questions. What is credit crisis? How did it happen? And who is affected? This credit crisis is also called the subprime crisis. The reason of the subprime crisis can generally be described as follows. In 2001, Federal Reserve lowered the interest rate to keep the economy strong, which not only made the treasury bill became uninteresting to investors but also lower the cost of borrowing money. So investors borrowed a huge amount of money and used “leverage” to make more money. They created a “novel” way to make money by purchasing and selling CDO (collateralized debt obligation). At the beginning, the mortgages were only given to people with good credit records and strong ability of repayment. Everything was good until the occurrence of sub-prime. Include house owners, lenders, bankers and other financial institutes, everybody gained in the process of selling CDOs. In order to sell as many mortgages as possible and make more money, the mortgages were started to give to people who actually don’t have the ability to buy a house. The...
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...UID: 3035198791 Name: Ho Hei Man Course: CCGL 9030 The Credit Crisis of 2008 1.Introduction In the fall of 2008, a financial crisis originated from the U.S. resulted in losing trillions wealth, which affected not only U.S. itself, but all over the world. In this paper, I discuss factors leading to the credit crisis in 2008, explain policies that could have prevented it from happening, and state which of the proposed plans for reforming the financial industry would have the best chance of succeeding. The disscussion of this report is mainly based on the HBS report on the financial crisis. 2.Factors led to the credit crisis This section discusses the factors led to the credit crisis. 2.1 Low interest rate Since there was a relatively low interest rate for borrowing money from the US federal reserve because of the US government policy and foreign money from the ‘savings glut’ like China, Japan and Germany flowing to US, it resulted in relaxed credit conditions which banks and home buyers from the US can then borrow money easily. Thus, easy credits fuelled both hosing and credits bubbles. Low interest rates made mortgage payment cheaper, and it drove up the demand for homes, which helped in pushing up the housing prices. As the rapid increase in hosing prices, more and more borrowers to be priced...
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...Book Review: Andrew Ross Sorkin's Too Big To Fail The financial struggles of 2008 led to myriad books on why the crack-up occurred, and many have been reviewed here. Andrew Ross Sorkin, a writer for the New York Times, approaches what happened differently. He has written a very interesting behind-the-scenes account of the people within government and finance who saw the crisis up close. For those interested in what went down behind closed doors, Sorkin's “ Too Big To Fail” is essential. Thanks to his global access to the individuals involved, the interested reader can expand his or her knowledge about the events behind the events. Too Big To Fail begins in riveting fashion at J.P. Morgan CEO Jamie Dimon's Park Avenue apartment the day before the collapse of Lehman Brothers. Having spent part of the previous evening at the New York Fed, Dimon knew better than most what was ahead, and in a conference call with his top lieutenants, Dimon dismissed the view - one held by Lehman CEO Richard Fuld no less - that the prominent investment bank would be saved by Washington. Dimon's take was "That's wishful thinking. There is no way, in my opinion, that Washington is going to bail out an investment bank. Nor should they (my emphasis)." Instead, Dimon told the listeners on the call that "We need to prepare right now for Lehman Brothers filing. And for Merrill Lynch filing. And for AIG filing. And for Morgan Stanley filing." Before each company mention Dimon paused, then paused...
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