Financial Crisis
The problem which i would like to discuss here concerns the present financial meltdown. Allow us to begin with a brief summary about the reason behind the financial meltdown. In August 2002, a macroeconomist discovered a housing bubble. Dean Baker noted that the prices of houses from 1995 were built with a significant increase above inflation-based increases. His claim was based on a research conducted by Robert Shiller, an economist at Yale University.
Rescue One Financial
Simultaneously, financial corporations like Fannie Mae were increasing home mortgages, even making credit requirements easier on loans bought from lenders. Moreover, because of the low interest, investors and banks borrowed large amounts of cash that they could only return if house prices did not drop. Unfortunately, the structure boom caused the provision of homes to improve tremendously, ultimately causing an accident in prices. As a result, those who made an investment within their houses was lacking the ability to return their loans and financial corporations realised they didn't have sufficient funds. The collapse of several financial corporations ensued, such as Lehman Brothers and Bear Stearns, and takeovers, like that relating to Fannie Mae and Freddie Mac. International trade plunged, and goods, currency values and stock markets became volatile. Hence, the world economy went into a monetary crisis.
Rescue One Financial
At this time, I would like to address a thought that has been bothering me: Why many senior managers such as the those of failed financial corporations like AIG, Bear Stearns, Lehman Brothers, Fannie Mae and Freddie Mac did not react to the warnings of investors and economists like Warren Buffet and Dean Baker, in regards to the trouble financial corporations were entering and also the prediction of your resulting economic crisis. These managers continued over-leveraging, increasing risky mortgage loans, opposing mark-to-market accounting regulation, laws on credit default swaps, greater transparency for hedge funds, and insisting that mortgage bankers obtain fiscal reports before granting mortgages. Why didn't any manager speak up to propose that the financial corporations stop their practices and rescue the system? Maybe it was really simply because they didn't expect the economic climate to break down?
The testimony of Lehman CEO Richard Fuld at Capitol Hill provides us some clue. On 7 October 2008, the Washington Post reported that Fuld admitted to no mistakes during his testimony. Instead, he blamed investors for his bank's collapse. The action of pushing blame to other people implies that Fuld wanted to take no responsibility for your failure of Lehman Brothers.
Additionally, news has spread concerning the large payouts the senior managers of failed financial corporations including AIG CEO Martin Sullivan, Freddie Mac CEO Richard Syron and Lehman CEO Richard Fuld have obtained even though their financial corporations are not performing well. As a result one worried about the motivations of these managers - did they really have the full interests of the financial corporations in mind?
Thus, the report that the senior managers of failed financial corporations did not believe the economic system could collapse is weak. How the senior managers of such financial corporations weren't motivated by the performance of their financial corporations, but by other factors, such as opportunistic behaviour and greed would have been a stronger argument. These folks were satisfied after they received their salary and had no issues with the stakeholders.