Advance Issues In Accounting
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Added on 2020-05-28
Advance Issues In Accounting
Added on 2020-05-28
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Running head: BIG SHORT1Advance Issues In AccountingName:Institution:Date:
BIG SHORT2IntroductionIn 2015, the Big Short movie was realized based on the events that led to an economiccredit crunch. Wall Street guru Michael Burry has noticed that the economic conditions and situations in America has put a number of home loans in danger of non-payment anddefault.Greedy opportunists such as Jared Vennett, banker, Mark Baum, hedge fund specialist and others notice that Burry bets against the housing situation and swapping more than $1Billion of investors’ money into credit. Theses opportunists make a fortune by taking full advantage of impending economic collapse and housing collapse in America (Goodstadt, 2011).In the scene where Mark Baum meets a CDO manager, he realizes that the markets have goneto the dogs. He is frustrated by realizing that the American market will collapse and people will lose the jobs and their investments will run into ruins. In short, bank after bank in America are selling bonds to unsuspecting customers and investors with the guise that they are highly valued and will only reap hefty rewards(Scott, 2010). The bonds are at the time valueless or have a very low value compared to the selling price. After offloading the corporate bonds to the customers, they will later devalue them leading to massive losses to customers and hefty profits to banks. Nobody is willing to tackle the situation. Opportunists like the CDO manager that Mark meets will make a fortune just by buying and selling at the right time(Taylor & Clarida, 2014). The ethical issues in this scene is that the capitalist world is very greedy. People will make a fortune in a capitalistic market where morality is not necessarily followed(Burnett, 2010).Insider information is also crucial in controlling the market and destabilizing the markets. People with insider information like the synthetic CDO manager will manipulate
BIG SHORT3information in the system. They take advantage of deregulations of the bond system. Mark notices that the greed in the system is abnormal and is worried that the number of home loanswill be defaulted(Dolezalek, n.d.). The economy will crumble and the housing bubble will bust. Factors that contributed to the eventDue to deregulation of the financial industry in the United States, banks actively engaged in trading of derivatives using hedge funds. These banks then demanded mortgages to support the sale of the derivatives. That created the global financial crisis that led to the great recession considering the United States is the biggest economy in the world.Securitization is another factor that led to the 2008 financial crisis(Law & Hesselbaum, 2015). This is where hedge funds and other institutions sold market –backed securities and other derivatives to secondary markets and the mortgage is used as a security. The third factor that led to the economic crisis and latter global recession is the growth of subprime mortgages and the fed raising the rates of the subprime mortgage borrower. Due to low rates in subprime mortgages,many people took the loans and could not afford to pay up(Goodstadt, 2011). It had become avery industry worth more than $1.3 trillion.Homeowner’s were issued with bills they couldn’tpay.A financial or accounting event that could go hand in hand with the bubble bust in the housing industry is the collapse of many hedge funds. An example is the collapse of many hedge funds. Dr. Michael Burry a hedge fund manager managing more than $550 million closed his Scion hedge fund. Dr. Burry in one of the scenes visits several banks showing them how the market will crumble under the weight of mortgages but is even laughed at and ridiculed by employees of these top banks(Scott, 2010). Deregulations led to increased sale of derivatives by the banks which in turn led to the financial crisis being experienced. .
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