Global Financial Crisis
The global financial crisis dates back to mid 2007 and it was characterised with the collapse of major financial institutions and stock markets. The crisis led to the foreclosure of key institutions, reduction in consumer wealth, and huge financial commitment by government inform of bailouts which affected economic activity. When the global housing bubble collapsed, securities which were tied to the pricing of real estates declined considerably weakening many financial institutions (Sims, 2009, p.4). Increased default rates were then experienced on subprime as well as adjustable rates mortgages (ARM). Attractive loan packaging and a consistent increase in housing prices made people to take difficult mortgages, but an increase in interest rates and a decline of housing prices made refinancing of loans difficult.
Investment banks had bonus structures which were cited by many economists as contributing to the crisis (SBS, 2009). 32.7 billion pounds paid out in form of bonuses in 2008 on the basis of retaining talent led to widespread public outrage. Managers’ pay corresponded with positive stock performance (Ruzich, Grant, 2009, p.63). However, recent studies by Forbes discovered that the pay of CEOs increased by more than 13% compared to shareholder return. The executive management enjoys “non-value-maximising behaviour” and an
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The issue of insufficient corporate governance made firms to implement weak financial policies. The regulatory body made up of the CEO and board of directors played a significant role with other stake holders playing minor roles. CEOs influence the selection of board members and rarely is a person appointed against their wishes. Such cronyism does not benefit shareholders and therefore, regulatory authorities should tighten financial policies to promote integrity. Whistle blowers such as Paul Moor, head of regulator risk (HBOS), was sacked after revealing some under the table deals by the management (Ruzich, Grant, 2009, p.68). American firms have many passive shareholders contributing to the boards having poor long-term goals, and this may explain why the crisis emanated from America. The financial system in Germany has tighter dividends control and owners of shares are few but made up of large parties (Sims, 2009, p.11). Expanding data disclosures should be encouraged and promoted.
Weak corporate structures and inappropriate incentive schemes contributed to poor management of risks. Traders such as nick Leeson contributed to the “collapse of Baring”, and a junior trading officer called Jérôme Kerviel from Société Générale, played a part in the loss of $7.2 billion because of many loopholes. 66 percent of all write-offs were as a result risk management failures. According to studies by Bloxham, 2008, lack of efficiencies on resource balance and “power forces” played a major role and this made it extremely hard for the team dealing with risk management to control activities of traders.