...Links between Ghoshal's article, Agency Theory and the 2008 Global Recession. We are all too familiar with the mayhem caused by the global financial crisis; we are still recovering from the after effects of this mayhem. In this essay I will try to investigate the relationships between the Agency theory, Ghoshal’s article on how bad management theories are destroying good management practices and the Global Financial Crisis of 2008. I will start off by introducing the Agency theory and looking at some of its pros and cons, then I will go on to relate the theory to the causes of the global financial crisis of 2008 and finally show how some of the actions based on the Agency theory could have been the foundations of the meltdown. I will then talk about how Ghoshal, in his article, talks about the complete amoral education and scientific measurement methods of the new age management schools which are fueling an ever increasing mistrust between the stakeholders and management. “Agency Theory concerns how two parties in a contractual relationship may interact depending on their attitude towards risks and whether their individual goals align” (Jon Tan, 2009). The agency theory sees two problems that can occur in an agency relationship where one party (stakeholder) delegates work to the agent. The first problem arises when the desired goals of the principal (stakeholder) are not aligned with those of the agent and it is difficult or expensive for the principal to verify what the...
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...Table of Contents 1. Introduction 1 2. Analysis for problems associated with using models 1 2.1. Model error 1 2.1.1. Wrong or simplifying assumptions 1 2.1.2. Over dependence on historical data 3 2.1.3. Black swans 4 2.2. Implementing a model wrongly 4 3. Improvements of the usage of models 5 4. Conclusion 7 1. Introduction The financial sector plays crucial roles that mobilize savings and allocate credit in economic performance. In recent years, there has been significant technological development within the financial sector, which has enable banks to effectively manage their internal risk through the application of risk models. The use of models to measure risks is the preferred approach by most banks, for example Goldman Sachs applies the Value at Risk model. However, according to Office of the Comptroller of the Currency (2011, p1), “the expanding use of models in all aspects of banking reflects the extent to which models can improve business decisions, but models also come with costs”. Besides, in a recent study (Jorion 2009), it is argued that many financial institutions experienced large losses over the past few decades due to limitations of using sophisticated models. Therefore, it is essential for Andrew Bank Ltd. to have an in-depth understanding of disadvantages relating to using models and solutions to improve these model risks. 2. Analysis for problems associated with using...
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...manufacturing, then using the money it saved on aggressive marketing campaigns. However, the process of outsourcing work internationally proved to be problematic for Nike in a variety of ways particularly in regards to low wages provided workers and poor working conditions and environment. This paper intends to evaluate Jeff Ballinger’s argument against Nike, as well as determine how convincing Nike’s response was to Ballinger’s allegations. Lastly, strategies are provided as to how Nike moves forward after the smoke of the crisis has cleared. Evaluation of Jeff Ballinger’s argument against Nike Ballinger’s main argument that “any company has a significant obligation towards even its lowliest workers” is a very convincing one on many levels—social, ethical, and financial. Companies, such as Nike, make large profits and benefit tremendously from workers’ low wages in their international manufacturing companies. After reviewing Exhibit 1 (Nike Inc. Financial History 1989-1999) and Exhibit 4 (Summary of Revenue and Expense Profile of Minimum Wage Workers by Demographic Type) it would appear that Nike could indeed offer its workers higher wages at least to a level where workers can survive and help their families, some additional benefits, and provide safer working environments in the manufacturing plants in the countries that Nike inhibits. Additionally, from further research and the general tone of the case study it appears that Ballinger may have personally had some issues...
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...at the center of the financial crisis and probably without AIG the subprime crisis would not be as severe as we seen. AIG was used as an instrument to fuel the housing boom. The AIG executives were running the financial product unit ethically but not efficiently. From the email communication one thing is apparent that the executive were very optimistic and they never priced in the risk effectively. The assumption that there will be no calls from counterparties to execute the credit default swaps related to subprime market were not unethical and may have been completely driven by the amount of revenue generated by the credit default swaps for the financial product division. The situation was unprecedented and except very few no one was able to predict the extent of the mortgage defaults in USA. There was lack of the risk assessment standards within AIG that is apparent from the communications. The person who was running the Financial Product division Cassano did very poor job for adapting to the changing market conditions. Again AIG could have limited the losses by pricing the credit default swaps correctly by integrating in it the changing market conditions. If we look at the conduct when it happened the situation did not seem like violation of ethical conduct. Back than when AIG was making big profits no one realized the post effect of the failure of these complex securities and AIG was one of the preferred investments due to performance of its financial product unit. It was...
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...Private Equity Investments - Final Exam (July/ 4/ 2011) Question 1-a a. What are financial theory and concepts that support and rationalize activities of parties involved in the events leading to the financial crisis? Why and how did the meltdown happen? Is the model used in the process wrong? Answer 1-a Moral hazard nurtured by Real estate and MBS bubble; House prices of the United States had risen steadily since 1975. This trend accelerated in 1996, and reached about 12 percent per annum in late 2005 and early 2006. One reason for the rise in house prices is the Federal Reserve’s policy of maintaining low interest rates after the 2001 recession. Under these market situation, mortgage loan and mortgage backed securities market became more popular and bigger. The financial markets’ appetite for mortgage product also resulted in more creative and complex financial products and strategies such as MBS (Mortgage-backed securities), CDO (Collateralized debt obligation), ABCP (Asset-backed commercial paper), Conduits, SIV (Structured investment vehicles). For example, according to the case, the S&L crisis also boosted the securitization of mortgages by two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. Starting with bundles of mortgages purchased from mortgage originators, the GSEs created and sold mortgage-backed securities (MBSs), which delivered to holders the payments made on these mortgages. In exchange for a fee, the GSEs guaranteed...
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...pResented by the society of ActuARies, the cAsuAlty ActuARiAl society And the cAnAdiAn institute of ActuARies Risk Management: The Current Financial Crisis, Lessons Learned and Future Implications Copyright 2008 by the Society of Actuaries. R I s k M a n a g e M e n T: the current financial crisis, lessons learned and future implications introduction the current financial crisis presents a case study of a “financial tsunami” (as former federal Reserve chairman Alan Greenspan recently called it) on what can go wrong. its ramifications are far-reaching and the lessons learned will be embedded in risk management practices for years to come. As one of the premier enterprise risk professions in practice today, the actuarial profession is sharing its substantial insight into what went wrong and the implications for the future. on behalf of the society of Actuaries, the casualty Actuarial society and the canadian institute of Actuaries, we are pleased to provide a series of essays on Risk Management: The Current Financial Crisis, Lessons Learned and Future Implications. this e-book is the result of a call for essays on the subject coordinated by the following groups: • • • • The Joint Risk Management Section of the Society of Actuaries, Casualty Actuarial Society and Canadian institute of Actuaries The Investment Section of the Society of Actuaries International Network of Actuarial Risk Managers Enterprise Risk Management Institute International ...
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...providing long-term care, anticipation of the costs should be a major element of every family’s financial planning. Current information suggests however, that very few families or individuals give this consideration. What factors might impede this advance planning? What measures might be effective in raising awareness among the Americans about this important matter? Age, diagnosis, and ability to perform personal self-care and the sites of care delivery vary widely. Also, the unrelenting progression of time is the one constant that expresses the diverse range of life's possibilities. According to Calmus (2013), Long-term care in the United States is in crisis. The current system is not meeting the needs of the frail elderly and disabled populations. As the 77 million baby boomers enter retirement, the Long-term care crisis will likely grow, both because of the sheer number of the baby boomers and because of medical advances that have increased longevity. Regrettably, few have prepared to pay for their Long-term care, either through insurance or savings. Policymakers need to move swiftly to reform the current system to ensure that tomorrow’s retirees have access to high quality care without bankrupting future generations. According to the article "5 Big Reasons Why Americans Don't Save Their Money," Savings aren’t just important for buffering life’s emergencies; research shows that financial assets, more than income, are a strong predictor of upward mobility. They’re also crucial...
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...overestimated the ability of people to learn from their mistakes. I discuss the parallels between these two watersheds in recent economic history in three steps. The first and most important step is the causes of the crises and their relation to economic theory. The second step is the spread of the crises as they affected the whole world. I close with the final step, recovery—at least as far as we can see it at this point. Marx said famously that history repeats itself, “the first time as tragedy, the second as farce.”2 I argue that this observation also fits our current condition. Both of these dramatic and costly economic crises came from the interaction of economic imbalances in the world economy and the ruling ideology of financial decision makers who confronted these imbalances. The first imbalance came from the First World War. This paroxysm of violence brought the long economic expansion of the nineteenth century to a sudden end. Britain, the workshop of the prewar world, was exhausted by the struggle. America, the rising economic behemoth, was unready to take responsibility for its new role in the international economy. Germany, having unsuccessfully challenged the Anglo Saxon powers, refused to acknowledge its defeat. The easiest way to see the imbalance is through the international movement of capital. There were many reasons why this imbalance was allowed to grow over the postwar decade, and one of the...
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...predatory selling of mortgages to the sub-prime market and (iii) mortgage-backed securities generated a housing bubble in the United States of America before September 2007. There were quite a few “players” that helped cause the financial crisis and gave birth to a bubble in the USA’s housing market. One of them is the consumer demand for the housing. Obviously consumer demand was high for people to own their own home in America “with bankers offering home buyers 0%-110% mortgages” encouraging buyers to want to buy a home even more, then with that America tried to meet the demand, supplying more houses due to constructing new ones. Luci ellis said that “Firstly, the US housing construction boom itself helped create this vulnerability. In contrast to some other countries, strong housing demand was met with additional supply that exceeded underlying needs. When the boom stopped, the United States was left with an overhang of excess supply that other countries have not built up” so By the end of that year, housing starts had fallen by around 40% “ therefore in the end the supply was greater than the demand and the US had spent money on houses that no one needed. However Paul Krugman, (September 2009) said that “Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy” so if the economists could see it and banks...
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...Stakeholder Theory 4 3.2 Positive Accounting Theory 5 3.2 Efficient Market Hypothesis 7 4.0 Discussion and findings 8 5.0 Conclusion 10 Reference 12 Relationship between Fair Value Measurements with Investor Confidence during Global Financial Crisis Abstract As investor, the needs of information which can reflect accurate financial information matching with current market condition is essential. Using fair value methods and measurement for asset valuation is one of the best accounting methods which can reflect current market condition accurately. But FVA cannot be separated from the critique especially when global financial crisis hit the world. Critique said FVA decrease investor confidence to invest in market which made more illiquid market during the time. In this paper, our aim is to find the relationship between fair value accounting, method, and measurement with investor confidence. We have been searched the data from previous journal that has been worked before to prove our assumption which are Fair value has decrease investor confidence and investor rely on information which is provided only by fair value measurement. 1.0 Introduction and Motivation There have been many studies on the role of FVA to global financial crisis (GFC) which may result in different opinion and open debate in the future. Most of the past research papers consist of the focus of this paper which is to find in depth more on how the fair value (FV) measurement may or may not affect recent...
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...rise and fall of structured finance Abstract The financial crisis of the year 2007 and 2008 saw the world affected negatively with the economy affected adversely (Smith & Mendoza, 2011). Several scores have been directed to increased demand in the housing sector while other have resulted in concluding it was the failure of the financial regulation authorities. The severe effect caused the United States economy job market loss approximately 8 million workers as the inflation rate declined to near zero. The main purpose of the paper is to give clear insights of what caused the increase in the structured finance market and eventually its fall. In this study, the researcher set out to show that only securities that exhibited confidence when underlying them and how they attracted investors by making them appear as high paying. The study will also go an extra mile in explaining the correlation that is existing in the financial market components. Applying the structured prototype in security of finance, the researcher uses CDO (collateralized debt obligation) in illustrating that issuance of capital structure increases the likelihood occurrence of under evaluating of underlying securities and evaluation of risks. The researcher obtains data from secondary sources and Wall Street Journals. The results obtained indicated that credit rating agencies over rated their credits against collateral securities leading to miscalculation and wrong presumptions that saw the economy rise and then...
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...development of neuroeconomics has provided a new a fascinating ways of engaging conventional economic theories. This essay seeks to outline what neuroeconomics is and how it has been received by its critics and proponents. It will provide examples that neuroeconomics can shed light on that conventional economics has struggled to explain. This essay will also outline key assumptions in neuroeconomics and how they vary from standard economics. It will address the global financial crisis from a neuroeconomic point of view and finally it will offer real world applications for the insights neuroeconomics offers. Neuroeconomics is the name that has been given to the latest generation of study in the field of economics. The field of economics has seen a number of developments in recent times as scholars have sought to use other disciplines to further illuminate economic theories. Psychology has been tried but over the last decade the focus has shifted to the more scientifically measurable field of neuroscience. The result is a new area of study that seeks to clarify and correct many of the previously unmeasurable assumptions about the way humans make economic decisions. While this new field of neuroeconomics has seen many papers on the topic published, not all scholars agree. Ariel Rubinstein makes an interesting observation. "The rise of neuroeconomics is coming at a point in time when economic theory is not producing any exciting insights." (2008, p.485) Rubinstein critiques the...
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...Standard Deviations in the Business World Ilyas Khairi QRB/501 March 22, 2015 Erica Woods Standard Deviations in the Business World Case 1 Purpose of the Study There has been a financial crisis happening around the world over the last decade. It is important to understand why and what is impacting the financial crisis and how it can be improved. Black Swans in this study are events that were the Achilles heel of financial models. There are usually 25 standard deviations evens that happen several days in a row. The purpose of this study is to discuss the implications of black swan events in asset pricing and risk management. Black Swan events disappeared for S&P Index returns are measured relative to standard deviation of the conditional S&P distribution. In this study a one day lagged VIX is used to provide an understandable measure of conditional S&P standard deviation (Marsh & Pfeiderer, 2012). The Research Question How did economists and others get it so wrong and what can be done to change it? Have risk modelers created an industry whose intense technical debates with each other lead gullible outsiders to believe that this is a profession with genuine expertise? Hypothesis "Extant models that properly encompass predictable shifts in investment risk ameliorate much of the alleged "black swan" problem and securities markets do in fact seem to be attuned to the risk of rare economic disasters and "price in" their risk"(Marsh & Pfeiderer, 2012...
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...Alyssa Filkins Module 11 – Enron Professor White 07/16/2014 1) The Enron debacle created what one public official reported was a "crisis of confidence" on the part of the public in the accounting profession. List the parties who you believe were most responsible for that crisis. Briefly justify each of your choices. Arthur Andersen & Co. – This company that started many years ago preached about honesty, integrity, and a strong work ethic. Through their motto that was widely portrayed and talked about, they instilled trust with their clients, auditors, regulators, and potential investors. When their significant role in Enron’s downfall and in turn, fraudulent practices, was brought to light, it was shocking that a company with such high ethical standards would fall short of anything less than what they preached since day one. By preaching such high standards and doing the opposite, the confidence in all companies of the like certainly decreased. Of course, the chief officers/executives were responsible for the fraudulent financial reporting and therefore, confidence crisis. Kenneth Lay, Jeffrey Skilling, and Andrew Fastow intentionally participated in financial reporting tactics that violated GAAP and general ethical standards. This caused such a crisis because investors, clients, and the general people expected a lot of ethical success from Enron and Andersen because they appeared to be doing good, legitimate day to day business and spoke very highly of...
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...Giant Pool of Money Analysis The awful subprime lending crisis is truly one of the most convoluted, wreaking messes conjured by the financial industries in the 20th century. There are so many layers of bad choices and megalomaniacal errors intertwined into this ugly event that picking out just two biases/heuristics to analyze and discuss will surely fail from being a complete analysis. Nonetheless, this is a the task at hand and, though we will not but scratch the surface of this behemoth, teasing out a couple biases will make for a viable illustration and application of the concepts and issues we have discussed thus far in class. The bias that caused the most havoc in this lending crisis scenario was articulated beautifully by Bazarman and Moore as The Confirmation Trap. The Confirmation Trap boils down to whether or not a person merely searches for data that supports the decision they wish to make rather than looking for proper, empirical data to prove the assumption correct. In other words, does a person looking to make a decision actually look to prove their assumption incorrect. Sadly, at nearly every stage and at every level of the subprime lending fiasco there is evidence that all the players fell victim to The Confirmation Trap. Wason writes, “ . . . that obtaining the correct solution necessitates a willingness to attempt to falsify hypotheses, and thus to test those intuitive ideas which so often carry the feeling of certitude.” None of the characters in our...
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