Corporate Financial Management: Causes, Impact and Recommendations

Running head: CORPORATE FINANCIAL MANAGEMENT
Corporate Financial Management
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1CORPORATE FINANCIAL MANAGEMENT
Table of Contents
Introduction:...............................................................................................................................2
Discussion of Examples of Financial Crisis:.............................................................................2
Collapse of Financial Markets:..............................................................................................2
Lehman Failures and Balance of Payments:..........................................................................4
Possible Causes of Financial Crisis:..........................................................................................4
Could GFC repeat again?...........................................................................................................6
Impact of GFC in different economies around the world including the home country of
Australia:....................................................................................................................................7
Proposed Recommendations:.....................................................................................................8
Conclusion:................................................................................................................................9
References:...............................................................................................................................10

2CORPORATE FINANCIAL MANAGEMENT
Introduction:
The global financial crisis that hit world a decade before is regarded as the worst
economic crisis that has been ever witnessed since the 1929 Great Depression. The economic
crisis has shaken some of the largest banks of the industrialized nations and forced the
American Central Bank to revolutionize the process of intervention so that it can enable the
financial system to function again (Balakrishnan, Watts and Zuo 2016). The financial crisis
of 2007 showed the world that economy of America cannot anymore survive by its own self
and it requires the cumulated capitals from the Asian nations as well as the producing
countries around the world.
The financial crisis of 2007 considered to be severe because it has touched the real
estate capacities of the American households. Even though the crisis appeared a subject of
concern for the US sub-prime mortgage, it increasingly extended the entire monetary markets
with the help of derivative products, bank securities and distribution of credits (Dias,
Rodrigues and Craig 2016). This paper assesses the possible causes that erupted the global
financial crisis and swept the industrialized banks across the world under bankruptcies. The
paper would assess the impact of financial crisis in economies around the world and would
also propose reformations to further avoid the occurrence of catastrophic financial disaster.
Discussion of Examples of Financial Crisis:
Collapse of Financial Markets:
The crisis of credit paved way for the failure of the US mortgage market. The
commencement of the problem was in the early years of 2001 when the decision of FED was
to reduce the rate interest to 1% with the objective of overcoming the adverse impact of
September 11 growth in the economy (Lane and Milesi-Ferretti 2017). The action taken by
the FED led to the heavy inflow of money from the emerging nations of Middle East and

3CORPORATE FINANCIAL MANAGEMENT
China that gave rise to huge amount of credit in US. Investment Banks and companies of
Wall Street were looking forward to certain concrete return for their investment which were
greater than the FED 1 per cent rate of interest. These investors from the Investment Bank
and Wall Street took advantage of the opportunity that was presented to them by growing
market of mortgage in US. Huge availability of credit enabled the Americans to purchase
their own homes by getting loans from the Mortgage Lenders (Rey 2015). As a result of huge
lending, a huge demand for the new houses in America was created with more number of
Americans entered into the mortgage market. The real estate industry of America witnessed a
boom from the period 2002-06 and the prices of houses increased to three-fold in this period.
The mortgage companies began packing the loans and selling it to the financial
derivatives on the basis of different names and returning it to the investors across the world.
In principle, the risks began moving from moving from the mortgage lenders to the
Investment and finally to monetary investors (Lennartz, Arundel and Ronald 2016). The
arrangement appeared risky however everything appeared normal when the monthly
instalments were paid by the home owners. The mortgage lenders soon beginning running out
of the applicants that were worthy of credit and commenced the process of attracting the
applications that had poor history of credit.
The venture of Sub-Prime loans has placed itself in the market of mortgage for burst.
The assumption was such that in the event of defaulters their home would be sold some other
applicants for a higher price. However, the rate of defaulters for the Sub-Prime loans were
more in numbers than it was projected by the Investment Banks and they held several houses
but were unable to find any purchasers (Vazquez and Federico 2015). There was the
environment of higher supply over demand and led to the bursting of bubble. The price of
houses began falling and this influenced the Prime Loan owners to default as they noticed it
was not worthy of making payments for the lower cost houses. The mortgage lenders were