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Effectively Managing Crises - the Global Financial Crisis in Perspective

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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).  

 

 

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). 

 

 

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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