Corporate Financial Management: Causes, Effects, and Reforms

Running head: CORPORATE FINANCIAL MANAGEMENT
Corporate Financial Management
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1CORPORATE FINANCIAL MANAGEMENT
Table of Contents
Introduction:...............................................................................................................................2
Examples of Financial Crisis:....................................................................................................2
Collapse of Financial Markets:..................................................................................................2
Possible causes of Financial Crisis:...........................................................................................4
Can Global Financial Crisis happen again?...............................................................................5
Effect of GFC in different economies:.......................................................................................6
Actual or recommended reformation:........................................................................................8
Conclusion:................................................................................................................................9
References:...............................................................................................................................10

2CORPORATE FINANCIAL MANAGEMENT
Introduction:
The strengthening of international economic crisis, followed by the insolvency of
Lehman Brothers in 2008 made both the monetary and economic environment very difficult
all through the world. The occurrence of global financial crisis could be considered as an era
of change for both the monetary regulation systems and central banks. Economies all around
the world during 2008-09 suffered the most difficult financial tremor ever since the Great
Depression in 1930 (Balakrishnan, Watts and Zuo 2016). The international financial crisis is
considered as the deepest financial downturn ever since the Second World War. Although the
national financial crisis happens fairly and periodically but the international financial crisis is
very rare and only accounts the third instance ever since the Long Depression of 1893-79.
Parallel to the present Great Recession was the “Great Trade Downfall” where the
trading environment across the world declined sharply commencing from the third quarter of
2008 till the second quarter of 2009. The decline was considered largest over the last forty
years (Rey 2015). This paper explains the root cause of financial crisis and its impact on the
economies. More specifically, it would provide an overview of financial crisis in some of the
economies around the world and suggested recommendations to further avoid the catastrophe
from happening again.
Examples of Financial Crisis:
Collapse of Financial Markets:
The credit crisis is regarded as the direct resultant of mortgage market failure in US.
In 2001 the difficulties has commenced when the decision of Federal Reserve Bank was
implemented to reduce the rate of interest to 1%, so that it can overcome the negative impact
of September 11 on the economic growth (Jackson 2018). The decision of reducing the
interest rate by Federal Reserve Bank resulted in inflow of money from the emerging nations

3CORPORATE FINANCIAL MANAGEMENT
such as China and Middle East leading to huge availability of credit in the US. The investors
that were represented by the Investment Banks looked for strong return on their investment
which were greater than the 1% of the Federal Reserve Bank. The investors capitalized on the
opportunity that was presented by the rising mortgage market in country.
With the availability of higher credits several Americans were stimulated to purchase
their own house by borrowing from the Mortgage Lenders. With high amount of borrowings
the demands for new houses among the Americans grew further (Fligstein and Roehrkasse
2016). As a result of this there was a boom in the Real Estate Market from 2002-06 and the
price of the house tripled during this period. The mortgage companies packaged these
borrowings and sold the same to the investment banks that later characterised these
borrowings based on their risks and sold the loans to financial derivatives under variety of
names and returned back to the investors across the world. The risk was shifted from the
mortgage lenders to the investment banks and finally to the financial investors. The scheme
appeared risky however the home owners paid their monthly instalment and everything
appeared normal.
In order to keep the process smooth, the mortgage lenders began running out of the
customers that are credit worthy and started attracting applicants that were risky with history
of poor credit. The money lenders used schemes such as no down payment, no proof of
earnings and no kind of credit check to lure the uncertain applicants (D'souza 2016). The
venture of sub-prime loans resulted the mortgage market to for the explosion. The
justification for the subprime loan was that even though the risky applicants turns into
defaulters their home would be sold to somebody else and that too at a greater price.
However this was not the case as the rate of defaulters in the sub-prime loans were several in
number than expected and the investment bank were having several houses but did found any
buyers.