How Failures in Financial Engineering Influenced the Recent Financial Crisis

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In this paper, an analysis of how the failures in financial engineering and Corporate Governance have been closely related with the recent Global Financial Crisis is carried out.

The Real Estate Bubble in 2006 leaded to the Subprime Mortgage Crisis in 2007 which expanded from the United States to the whole world generating the biggest financial crisis since the Great Depression of the 1930s. There are multiple factors that originate a crisis like this, and will be explained and analysed later, but in order to understand the global economic situation it is necessary to understand how the changes in the Corporate Governance have been one of the reasons of this and how this changes have been motivated by the Financial Globalization.

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After this, the Corporate Governance of financial companies changed to adapt to the new markets that they were now able to cover.

Regarding the liberalization of the economy, once again the Corporate Governance of the companies needed to change in order to fit the variation in the policy concerning the reduction in the barriers to the free transit, which was inevitably implemented in order to allow the Financial Globalization, and can be sometimes considered as a source of instability.

Either way, both the reduction in the regulation of the banking system and the liberalization of the economy leaded to the Financialization of the Economy, understood as the process in which financial markets take a bigger relevance over the primary and secondary sectors of the economy. Once again, this has consequences in the Corporate Governance of the different companies because of three different factors:

With the decrease in the intensity of the regulations, now all the parts involved in the financial markets can move their assets from one place to another more easily.

After the clear limits between Investment Banking and Commercial Banking disappeared in the 80s, new sorts of institutions that manage different markets at the same time have appeared.

The collective investment schemes, through investment management groups, have increased their relevance in the executive boards of the companies they own.

These factors have been the natural
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