Corporate Finance: Examining the Global Financial Crisis and its Impact

Running head: CORPORATE FINANCE
Corporate Finance
Name of the Student
Name of the University
Authors Note
Course ID

1CORPORATE FINANCE
Table of Contents
Introduction:...............................................................................................................................2
Examples of Financial Crisis events:.........................................................................................2
Effect of Lehman failure Balance of Payment:..........................................................................4
Possible causes of financial crisis:.............................................................................................4
Can GFC repeat again?..............................................................................................................5
Impact of GFC in different economies:.....................................................................................6
Actual or proposed reformation that have eventuated:..............................................................7
Conclusion:................................................................................................................................8
References:.................................................................................................................................9

2CORPORATE FINANCE
Introduction:
Currently, the world is facing severe financial downturn with the increasing
joblessness and lesser manufacturing production because of the failure in business and
reduced consumer spending. The main reason for this depression is the worldwide financial
crisis had initiated in the US and prolonged across the world in 2008 (Lane and Milesi-
Ferretti 2018). The economic crisis led to bankruptcy in several banks and monetary
organisations in US and across world. The study here would examine the how the financial
crisis has took place and the reasons which resulted in the failure of monetary system.
The fiscal market deregulation and the lack of management has contributed to the
mortgage crisis in several banks of US and across the world. Disproportion across the world
trade, US pattern of consumption and global reliance on the US exchange with multifaceted
financial derivatives market were amongst the principal reasons that contributed towards
crisis (Bénétrix, Lane and Shambaugh 2015). To evade the upcoming crisis, the financial
markets should be efficiently controlled and administered. The international trade should be
balanced and an improved financial system should be applied by the IMF.
Examples of Financial Crisis events:
The crisis of credit directly led to the failure of US mortgage market. The difficulty
began in 2001, when the federal reserve bank of America undertook the decision of reduced
interest rates to 1% so that it can overcome the ill effects of growth in the economy. The
actions of FED escorted the inflow of money from rising China and Middle East nations that
led to higher credit in US (Balakrishnan, Watts and Zuo 2016). Financial investors
represented by Wall Street were seeking higher return on investment of greater than 1% FDI
rates. They seized on the occasion that was offered by the mounting amount of mortgage in
the country. Abundant availability of credit stimulated several Americans to purchase home

3CORPORATE FINANCE
by getting loans from the Mortgage Lenders. The higher lending increased the demand for the
new houses where majority of Americans entered into mortgage market. This led to
flourishing real estate market from 2002-06 where the price of house tripled during this
phase.
The mortgage businesses packed these loans and sold the same to Investment banks
that characterised the loan as per their risks and sold the same as financial derivatives under
diverse names and returned to investors across the world (Ang et al. 2018). This shifted the
risks from mortgage lenders to Investment banks and then later to monetary stockholders.
The scheme was considered risky but till the time the home owners paid their monthly
instalments, all appeared regular and satisfactory. In order to smooth up the procedure
financiers began running out of credit worthy applications and stared to make risky
applications with the poor credit history.
The investors used this scheme as they did not required paying any down payment, no
proof of earnings and lure new risk applicants. A justification sub-prime loans was formed
where any investors default their houses will be sold to someone else at higher than
anticipated to be sold to somebody at greater price (Claessens and Van Horen 2015).
Nevertheless, the rate of default was higher with sub-prime credits were issued than the
estimated. The higher supply of houses over the demand has burst the bubble and the price of
house began falling. The decline in price resulted the prime home holders to non-payment
because it is useless to make payments to low-priced houses.
All through the country there was a default in payments where investment and
investors finished up with the higher credits and useless houses. The mortgage lenders were
unable to discovery new contenders and could not sell their loans to investors (Sui and Sun
2016). The entire financial system was frozen in the nutshell. This resulted in collapse of