Essay Analysis: The Impact of Banker Bonuses on the 2008 Crisis

This essay examines the 2008 financial crisis, focusing on the controversial role of banker bonuses in exacerbating the economic downturn. The essay begins by highlighting the importance of banks in managing financial flows and then delves into the specific case of the 2008 crisis, presenting arguments that excessive bonuses and inadequate incentive structures within banking institutions were major contributing factors. The analysis covers the causes of the crisis, including deregulation, the rise of subprime mortgages, and the bursting of the housing bubble. The essay also explores the effects of the crisis on the United Kingdom, including the decline in retail sales, rising unemployment, and a significant drop in the GDP. The conclusion reiterates the importance of financial regulation and the need for responsible banking practices to prevent future crises. The essay also references several academic sources to support its claims, providing a comprehensive overview of the topic.

Essay

Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
In this present world, banks have an important role in managing cash inflow and outflow
in economy. Banks are those financial institutions, which are established for the purpose of
acceptance deposits and lending money to public. In this light, there are various functions which
are performed by bank (Caputo, 2010). It includes accepting money and deposits from public or
companies and lend them credit by way of loan and another advances. In this report, the case of
“Bankers bonuses were to blame for crisis in 2008” will be given effect. Moreover, its impacts,
reasons and causes will also be demonstrated in this present report.
MAIN BODY
Banks are one of the significant financial institutions which are liable to lend money and
accepts deposits from public and business corporations. It can be said that, banks were
established in UK, with main objective to conduct current accounts for its respective customers
and companies. Also, it involves to pay cheques and demand drafts on a person on behalf of
another person. In this light, it can be considered as most important part which regulates
financial aspects of a country. In this light, sometimes financial crises can also occur due to mis -
operations of the company (Field, Jayachandran and Pande, 2010). In this light, the banking
companies to handle its operations in an effective manner, so that they cannot hinder economic
performance of a country.
With reference to the case of Financial crisis of 2008, which was a result of bonuses
given by Banking institutions and companies. In this light, recent crisis and issues in terms of
finance had been occurred in 2008. It has been evaluated that during the period of fall out in
2007 -2008, there are number of policies and documents which are reported with several causes
and other reasons responsible for crisis. In addition to this, the chairman of Financial services
authority just has reclaimed that the main reason behind financial crisis and issue in the year
2008 is inadequate and inappropriate structure of incentives (Groebner and et. al., 2011). On the
other hand, in accordance with the view point of US Financial Enquiry commission, it can be
held that there are several issues of Financial calamity, which involves non effective corporate
governance and short term profits and gains.
Brief summary of Financial crisis, 2008
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This issue is also considered and famous as a financial crisis at a global level. In UK,
earlier, almost all banks and financial institutions were entering into partnership form, owned
and regulated by senior managerial personnel. Balance sheet was also consisting of huge risks
because of the transaction. In case of rising of international agreement in aspects of trades and
business, the said partnership came under pressure which leads to create initial of crisis. The
results are that the bankers and employees began to make sale of their shares in stock market,
which increased their stock (Fleckenstein and Seeleib-Kaiser, 2011). In this present case, in
further direction, some of the partners or employees of cited partnership were of the opinion that
if public could have been invited, then it will result in increased persons desirous of wages. In
addition to this, bank persons also started to render bargains in respect of profit sharing with their
new stock holders. In this regard, it can also be said this was performed with a view that after
this they will started earning better rewards, mostly in the situation, when banking company earn
huge profits. This was the main reason due to which bonus has been arisen.
Furthermore, bankers were only anxious in regard to obtain their own bonus and rewards
which were proposed to be given on annual basis. This was recognised as a main issue. They did
not emphasis on creation and sustain long term prosperity for bank on its own. It can also be
noted that financial crisis in 2008 happened due to the reason of behaviour and attitude of
bankers, not to focus on building long-term benefits for banks. It can be noted that after analysis
being enabled by UK government, main issue revealed some variations and changes in terms of
arrangement and its complexity. It also gave rise to a fact that if any senior management is of
opinion to offer rewards and other benefits to its employees and workers, all potential risks and
return on assets.
Main reasons for Financial Crisis, 2008
The main reasons for Financial crisis 2008, can be considered as deregulation in the
financial industry due to which banks had permission to make sure that effective involvement
has been done in hedging funds trading with derivatives (Karlan and Valdivia, 2011). It has also
been evaluated that demand of mortgages also get increased as it will only assist in increased
sales of those specified things. In addition to this, it has also been evaluated that in the year of
2004, federal reserve has also increased their rates with a main objective to provide effective
mechanism. In furthermore, it also includes hike on the rate of mortgages has set their prices due
to their actions as house of rates started to fall and demand was less than supply.
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In addition to this it has been assessed that house owner was not in a situation to make
sale of their house along with they were also not able to afford the payment. In this case, when
derivative values were smashed, financial institutions and banking companies did not lend
money to each other as they initiated financial crisis, which was considered as the worst time
period of that time.
In addition to this, there are various causes present behind this issue or problem which
can be demonstrated. In late 1990S, Securities Exchange Commission and Financial Accounting
Standards Board has declared that each and every public business corporation instituted in this
context are required to present their assets at the market price which is opposed to its historical
costs. Also, in this case, it has been evaluated that all these practices have been abolished and
banned during the period of recession. So, this result in starting of the insolvency during an
accounting period.
So, considering this, there are three biggest agencies which are required to be present for
the purpose of playing a crucial role at global level. This is due to reason that classification has
not been done on the basis of investment grade (Lee and Mirchandani, 2010). It can also be
considered that one of the part of the concept was incompetence and remaining portion was a
conflict of interest. It has also been assessed that issuers have also paid to those agencies to
provide hiked ratings to specified strategies and securities.
Furthermore, Bursting of house bubbler is another concept which is the main reason of
financial crisis and due to this time period of 2007 /07, housing bubble had erupted. After this
incident, all rates of default of subprime and rates of mortgages which are adjustable started to
rise.
Before this problem evolved, assumption was being made in respect of home prices,
which were assumed to be declined on a simultaneous basis in nationwide. However, it was
considered as wrong activity as it allows most people to invest their money and funds to
purchase house. It also enabled people to assume that it is a risk free investment.
Legislation gave permission Lehman Brothers which was considered to be the biggest
blunder or mistake. Money was misused and also unnecessarily loan was given to people, who
initiated this issue.
Effect of crisis in United Kingdom
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Due to this crisis, it created a bad impact on sale of retailers. In this light, it can be
evaluated that the sales of retailers were begin to lower down. Moreover, they were bound to
shut down their stores and outlets which created a huge rate of unemployment in this era.
Ultimately this eventually became a reason to make decline in revenue of government (Mbogo,
2011). It can also be evaluated that during the period of 2008, Gross domestic product of UK,
was also begin to fall by 1.5 percent.
CONCLUSION
From the above report, it can be determined that, crisis in terms of financial aspects in the
year of 2008, had been enabled due to bank which has started giving loan to people without com
plying by formalities required. These requirements are important as it leads to monitor financial
control for any crisis in entire world. This financial crisis involves a reason that this issue arisen
due to investment of people in construction of house. Along with this report, there are other
several reasons of such issue which can be considered as credit agencies did not render accurate
and adequate rating to securities.
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REFERENCES
Books and journals
Caputo, D., 2010. Gender differences in assessing essential business information systems
technology skills. International Journal of Management and Information Systems.
14(2). p.31.
Field, E., Jayachandran, S. and Pande, R., 2010. Do traditional institutions constrain female
entrepreneurship? A field experiment on business training in India. The American
Economic Review. 100(2). pp.125-129.
Fleckenstein, T. and Seeleib-Kaiser, M., 2011. Business, skills and the welfare state: the political
economy of employment-oriented family policy in Britain and Germany. Journal of
European Social Policy. 21(2). pp.136-149.
Groebner, D. F and et. al., 2011. Business statistics: A decision making approach. Prentice
Hall/Pearson.
Karlan, D. and Valdivia, M., 2011. Teaching entrepreneurship: Impact of business training on
microfinance clients and institutions. Review of Economics and statistics. 93(2).
pp.510-527.
Lee, K. and Mirchandani, D., 2010. Dynamics of the importance of IS/IT skills. Journal of
Computer Information Systems. 50(4). pp.67-78.
Mbogo, M., 2011. Influence of Managerial Accounting Skills on SME’s on the Success and
Growth of Small and Medium Enterprises in Kenya. Journal of Language, Technology
& Entrepreneurship in Africa. 3(1). pp.109-132.
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