Effectively Managing Crises – the Global Financial Crisis in Perspective
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1 Effectively Managing Crises: The Global Financial Crisis in Perspective Introduction When global banking corporations collapsed in 2008, the world’s financial system was brought to its needs. What started with theturnoftheUShousingmarket,resultedinachain reaction of the deteroation of national financial systems; destabilising the global economy (The Economist, 2013). The series of perpetual and undesirable effects that occured in the period between 20072008 has been referred to as the Global Financial Crisis (GFC). This paper aims to discuss theGFCbycriticallyexaminingandevaluatingits;1)mainfactorsand contributions, 2) the role played by key stakeholders, 3) its impact on the global economy, and finally some 4) learning lessons from the event. 1) Main factors of the GFC There are many factors that contributed to the GFC. For the purposes of this study, perspectives from corporate governance, ethical leadership, and corporate culture will be applied. 1.1) Corporate governance perspective As well as contingent factors, there are failures in corporate governance practices and processes that account for the GFC. Corporate governance is the framework of rules, practices and systems by which an organisation ensures the protection of the interests of all stakeholders (Samson & Daft, 2015). 2 In the GFC, the policies that encouraged home mortgages were based on the theory that housing prices would continue to increase. To keeptheeconomystrong,theFederalReserve used a loose federal interest rate policyforacontinuousperiod,whichsupportedandbloated the housingmarketwithcheapexcessivecredit.Itmadeborrowingmoneyeasyforbanksand led them to the excessive use of leverage, resulting in an overpriced housing market (Yeoh, 2009). Therefore for banks exposed to high risks, a shock to the financial system would effectively wipe out their capital base (Acharya, Philippon, Richardson, & Roubini, 2009). In a large number of financial service companies, their corporate governance arrangements did not protectthemagainstexcessiverisk.Atthebeginningof2004,themainregulatorthat supervisedinvestmentbanks,calledtheSecuritiesandExchangeCommittee(SEC),produced
an idea that financial service companies should be allowed to decide their own capital requirements accordingly with their internal risk management systems, and without any regulatory supervision (Elson, 2015). This indicates how regulation was not a top priority, encouraging high risk decisions to be made, thus leading to the collapse of these firms. 1.2) Ethical leadership perspective The second factor are the questionable trading practices of individuals and institutionsmade on behalf of both buyers and sellers. One of the free market assumptions that people will pursue selfinterests sensibly is flawed to a certain degree (Yeoh, 2009). Moreover, it becomes problematic when the alternative options or behaviours are considered undesirable because of their potentially unthical effects, making it very difficult to make the “right” decision (Samson and Daft, 2015). 3 In the GFC, a large number of firms chose an individualistic approach, pursuing shortterm rewards at the expense of long term benefits. Take Goldman Sachs creation, Abacus: a mortgagebacked investment fund that was settofail.Thecompanymisledtheirinvestorsby concealingaconflictofinterestinsubprimemortageinvestmentsitbetagainst,asitpushedit on its investors during the turn of the housing market (Delaney, 2010; Samson & Daft, 2015). 1.3) Corporate culture perspective The third factor is the compensation structures set by corporate culture that prioritized shortterm deal flow over long term value creation, and its consequences on the long run (Bloom, 2013). Culture is the values, beliefs, behaviours, shared knowledge and ways of thinking among members of a society. Although strong corporate cultures are incrediby important, they can also promote negative values and behaviours (Samson & Daft, 2015). In the GFC,whencreditdefaultswaps(CDS)becameagototooltoguardagainsttheriskof purchasing unsafe mortgage backed bonds, no restrictions were placed. The unsustainable corporate culture of American Insurance Group, Inc. (AIG), a huge insurance company issuing CDSs, allowed for many risky actions to be made without considering the catastrophic social and financial impacts. Luckily for the firm, it was provided with a