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
Corporate governance in itself has no single definition but common principles which it should follow. For example in 1994 the most agreed term for corporate governance was “the process of supervision and control intended to ensure that the company’s management acts in accordance with the interest of shareholders” (Parkinson, 1994)1. Corporate governance code is not a direct set of rules but a self-regulated framework which businesses choose to follow. This code has continued to change in the past 20 years in accordance with what is happening in the business world. For example the Enron scandal caused reform in corporate governance with the Higgs Report which corrected the issues which were necessary. Although it does not quickly fix problems, it gives a better framework to
The financial crisis from2007 to 2008 is considered the worst financial crisis since the Great Depression of the 1920s and destroyed the U.S. economy severely. It led the housing prices fell 31.8%, the unemployment rate rose a peak of 10% in the United States. Especially the subprime market, began defaulting on their mortgage. Housing industry had collapsed. This crisis was not an accident, it caused by varies of factors. The unregulated securitization system, the US government deregulation, poor monetary policies, the irresponsibility of 3 rating agencies, the massed shadow banking system and so on. From my view, the unregulated private label mortgages securitization is the main contribute factor which led the global financial crisis in 2008.
Financial crisis is really a major concern for all economies in the world. Every time a crisis occurs, companies, banks and financial institutions should draw their own lessons, because if the lessons are not recognized, they may still go on the trail of failure of
The collapse of Lehman Brothers, a sprawling global bank, in September 2008 almost brought down the world’s financial system. Considered by many economists to have been the worst financial crisis since the Great depression of the 1930s. Economist Peter Morici coined the term the “The Great Recession” to describe the period. While the causes are still being debated, many ramifications are clear and include the failure of major corporations, large declines in asset values (some estimates put the drop in the trillions of dollars range), substantial government intervention across the globe, and a significant decline in economic activity. Both regulatory and market based solutions have been proposed or executed to attempt to combat the causes and effects of the crisis.
The Glass-Steagall Act of 1933 that defined the roles for commercial banks, investments banks and insurance firms was over ridden by the Gramm-Leach-Bliley Act (1999) which repealed the provisions that restricted affiliations in financial institutions. Hence one solution is to overcome the incentive problem and the conflict of interests that arise when financial institutions simultaneously undertake financial activities of varied nature.
The financial crisis from 2007 to 2009 may well be called the financial engineering and corporate authority gone wild. The birth of the financial crisis can be draw back to the property asset bubble in the US between 1997 and 2006. This financial bubble was enabled by a badly regulated subprime mortgage industry and the assumption that property prices would continue to
The passing of the Financial Services Modernization Act of 1999 repealed the Glass-Steagall Act, and the rescinding of the 1956 Bank Holding Company Act. “The legislation spurred a flood of mergers and acquisitions” by permitting banking, insurance, and securities firms to be affiliated/associated with one another, as a result it became extremely profitable and advantageous for financial institutions to consolidate and diversify their holdings. In doing so a financial firm was capable of offering a multitude of financial products and serviced through one encompassing entity.
The most prominent and possibly the most notable market crash is the ‘Global Financial Crisis’ which was a direct repercussion of the neo-liberal policies which were implemented at the time and for which many of today’s global economic problems has stem from. These policies predominately include the replacement of government functions and services with profit-seeking entities, or more commonly known as privatisation and most importantly the deregulation of the economic market (Beder, 2006). Due to the deregulation, financial institutions and other economic players were able to invest in more complex financial markets which were beyond their understanding and a result a market crash occurred and the detrimental effects were widespread. If regulation had been put in place to monitor investment activity then it has been argued that the Global Financial Crisis would not have occurred and the associated global economic problems we are experiencing today would not have eventuated (Dag Einar Thorsen, 2013). As neoliberal policies where implemented around the world casing the global financial crisis the world disparities in wealth and income increased as well as poverty, contradicting neoliberal theories that by increasing the wealth at the top everyone becomes better off.
commercial banks are back by the FDIC, which give the incentive for the traders and bank to
I concluded six months ago (Truman 2008) that there was no shared diagnosis of the origins of this crisis. Nothing that I have heard or read since then has convinced me otherwise. If anything, disagreements have become more intense, in the meantime. This fact hampers our ability to learn the proper lessons from this crisis. This fact also means that it is useful for me to declare my own biases in advance. Conventionally, causes of this financial crisis include some or all of the four following elements: macroeconomic policies, financial-sector supervision and regulation, financial engineering, and the global activities of large private financial institutions. The context for each element is the United States or other similarly advanced countries.
o Weakness: there is a societal imbalance in the distribution of resources, and it is virtually impossible for courts/legislatures to make important decisions that do not make someone worse off
The purpose of this paper is to show that the “regulatory capture” has played a role not easily measurable in causing the global financial crisis. To illustrate this, the first step will to describe the “regulatory capture” in its three possible qualifications; then, I will explain, providing some examples, how each of these categories played a possible role in posing the basis for the financial crisis. While illustrating the different forms of capture I will present some questions that leave space to different answers. Finally, I will conclude that the regulatory capture have surely played a role in generating the crisis, but it is not possible to evaluate the effective role it had in causing it.
Corporate governance refers to ‘the ways suppliers of finance to corporations assure themselves of getting return on their investment’ (Shleifer and Vishny, 1997: 736). Corporate governance discusses the set of systems, principles and processes by which a
In this essay, we are trying to look at the factors responsible for the global financial crisis in 2008-09 which started in US and later spread across the world. By now, a lot of studies have been done on the global financial crisis of 2008. We explain briefly the role of the financial engineering which leads to combination of various financial securities, the actual risk of which is not clearly assessed and hence leading to the financial crisis. There were also some serious lapses in regulation and failure of the rating agencies in assessing the risks assumed by the financial products which accentuated the crisis.
This will enable financial institutions and markets to better execute their important function that is to monitor investments and exert corporate governance. Their control can compel firms to pursue activities which generate higher value and retain investor’s confidence which is essential for continuous flow of capital