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

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Corporate Governance And Global Financial Crisis. (June 27, 2021). Retrieved from https://www.freeessays.education/corporate-governance-and-global-financial-crisis-essay/