Report on the Impact of Bankers Bonuses on the 2008 Crisis

This report investigates the claim that bankers' bonuses were a significant factor in the 2008 financial crisis, particularly within the United Kingdom. It explores the historical context, including deregulation, the rise of subprime mortgages, and the incentive structures that prioritized short-term gains over long-term stability. The analysis covers key events, such as the actions of the Financial Services Authority and the US Financial Inquiry Commission, and the impact of various factors like mark-to-market accounting and the role of credit rating agencies. The report concludes that the focus on bonuses created incentives for excessive risk-taking, contributing to the crisis. It also looks at the effects of the crisis on the UK economy, including recession and unemployment, referencing a range of academic sources and online resources to support its findings. The report underscores the complex interplay of factors that led to the crisis and highlights the importance of regulatory oversight and responsible financial practices.

Business Skills - Final

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
Bankers bonuses were to blame for the 2008 financial crisis.....................................................1
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Business includes set of activities that are carried out by the human beings for earning
large amount of profit. For running a company, there is requirement of employees who will
contribute in success of the organisation (Erkens, Hung and Matos, 2012). Employees tend to
contribute significantly when they are motivated through various awards & recognitions.
Enterprise should make strategy regarding payment of bonus or incentive after analysing
business growth in future. This project is based on “Bankers bonuses were to blame for the 2008
financial crisis”; which emphasizes on losses bearing capacity of bankers in the United
Kingdom.
Bankers bonuses were to blame for the 2008 financial crisis
In United Kingdom, chairman of the Financial Services Authority claimed that financial
crisis happened just because of having inappropriate incentive structure while US Financial
inquiry commission stated that this issue arose because corporate governance was not good and
based on short term profits.
A brief history about crisis 2008
This issue can also be known as a global financial crisis which is the worst scenario
faced at international level. . In the UK, mostly banks have started to do partnership which was
owned by senior staff and with the lending risk held on balance sheet.. With increasing
international relations; banking units had started selling loans to foreign countries. Some partners
thought that if it is going to invite public then it has to hire more wage slaves; but bankers started
profit sharing bargains with their new stockholders with ensuring them they will get better
rewards in future (Marazzi, 2011).
In this commitment, main problem was that bankers were only concerned about attaining
their own annual bonus rather than focusing on building long term prosperity for the bank itself.
Because of this behaviour, financial crisis 2008/09 has occurred in the United Kingdom.
After conducting analysis by UK financial sector, this problem reveals some important
changes in their structure and complexity. If any company wants to give rewards to their
employees then it should analyse all potential risks as well as return on assets. In this context,
government has made some rules and regulations which should be followed by every enterprise
while giving bonus. From the report, it can be said that Global Investment bank was criticized
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by people as the main reason of crisis was that it increased its pay by 35% due to which economy
of country went to depression. Basic facts about this problem was that in 1998, banks got green
light to gamble. According to Glass-Steagall legislation, all regular and investment banks are
separated from each other. This gives permission to those financial institutes whose loans are
guaranteed by FDIC [Governmental body] so as to engage into highly risky business.
Further, in the year 2000, Federal Reserve decreased their interest rates by 1% and also
extended time period for keeping them (Chodorow-Reich, 2013). This caused a spiral in
anything priced in dollars or credit. Additionally, asset manager finds a new way to make money.
When interest rates were minimized then manager turned to high yield mortgage backed
securities. Derivatives became a uniquely unregulated financial document which are exempt
from all regulations such as disclosure, exchange listing requirements, etc.
In 2004, office comptroller of the Currency federally has said that there is no need to show
their mortgage credit and anti-predatory lending in their books. Because of this change, national
lenders sold those products which seems to be riskier in those states. After this, its rates were
increased. At this period of time, people were getting compensation on their short-term
performance basis. It creates incentives to take excessive risk and so, it motivated the people to
involve in gambling process. Also, traditional banks compensated their employees on the basis
of loan volume, not quality.
After discussing about the basic facts of global financial crisis, it can be concluded that
private people played an important role as they said or forced everyone to give more mortgages
to people (Munir, 2011). So, it is clear that because of financial institutions, whole world has to
face this worst crisis whereby global economy has slowed down due to lack of liquidity. Main
reasons of financial crisis 2008-
Its main cause was deregulation in the financial industry in which banks had permission
to involve in hedge funds trading with derivatives. It increased the demand of mortgages so that
it will support in increasing sale of these things. They have created interest bearingloan so that
subprime borrowers can afford to borrow. In 2004, federal reserve increased their fed rates just
like interest price on these new mortgages reset because of this action, rates of houses started to
fall and demand of home was less than supply (Goh and et.al., 2015). After that, it is analysed
that owner of house was neither able to sell their house nor was able to afford the payments.
When derivative values were crumbled, financial institutions were not lending to each other
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which created financial crisis that was the worst period of time as it influenced the economy of
whole world.
Apart from this, there are many other reasons of this problem. In this context, concept of
mark to market accounting arises as one of the issues. In the early 1990s, Securities and
Exchange Commission and Financial Accounting Standards Board stated that every public
company needs to show their assets at market price as opposed to its historical cost. But this
practise is abandoned during recession period and from this, every bank announced insolvent
from an accounting standpoint (What Caused the 2008 Global Financial Crisis? 2017).
There are three biggest agencies [Standard and Poor, Fitch and Moody's] who played an
important role in the global crisis; since they did not classify subprime securities as an
investment grade. Part of this was incompetence and remaining portion was a conflict of interest.
From a survey, it came to know that issuers had paid to these agencies to give high ratings to the
securities. Further, securitization of loans occurred when traditional banks do re-sell security
documents to other banking units. . For giving more incentive to the brokers, institute
underwrites loans which had less chances of defaulting. The securities for housing loans were
traded among banking units which resulted in crunching liquidity (Frankel and Saravelos, 2012).
Bursting of house bubble is the main cause of crisis during 2007 & 2008. b . Just after
this incident, default rates of subprime and adjustable rate mortgages began to increase. When
loan is easily available from banks and foreign funds inflow increased then it enhanced the
housing construction activities and facilitated debt financed consumer’s spending. When banks
were providing loan easily for home then it increased the rates of house. As a part of housing and
credit booms, financial agreements among banks increased which can be called as mortgage
backed securities and collateral debt obligations. From this step, mostly people were investing in
constructing house for which loans were procured highly. This in turn resulted in subprime
collapse or financial crisis into the industry (Rose and Spiegel, 2012).
Before this problem, it was assumed that home prices will never be declined
simultaneously on a nationwide basis. But it was wrong because mostly people began to invest
their money in purchasing house as they were assuming that it is a risk-free investment.
Legislation allowed to Lehman Brothers' which was the biggest mistake. They misused the
money and provided unnecessarily loan to the people which created problems in front of entire
world. Moreover, if a person needed loan then he could take loan easily from banks. During
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recession, financial institution created new money in the market by providing loan to the people.
In just 7 years, amount of money as well as debt of economy increased and became just doubled.
Effect of this crisis in UK
Due to liquidity crunch, revenue earned by businesses slowdown in furnishing and DIY
sectors. Well-known brands have to shut down their outlets which increased unemployment in
the entire world. This is the reason; government's revenue also fell down. In the quarter of 2008,
Gross Domestic Product of United Kingdom also fell down by 1.5% and country entered in a
period of recession (Karanikolos and et.al., 2013).
CONCLUSION
From the above discussion, it can be concluded that financial crisis 2008 occurred
because banks started to give loan for home to every person without any formality which
increased the amount of money in market that produced crisis in front of entire world. It is
because; people began to invest their amount in constructing house because of which prices of
home fell down. Apart from this, there are many other reasons of this issue like credit agencies
did not give correct rating to the securities.
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REFERENCES
Books and Journals
Chodorow-Reich, G., 2013. The employment effects of credit market disruptions: Firm-level
evidence from the 2008–9 financial crisis. The Quarterly Journal of Economics. 129(1).
pp.1-59.
Erkens, D. H., Hung, M. and Matos, P., 2012. Corporate governance in the 2007–2008 financial
crisis: Evidence from financial institutions worldwide. Journal of Corporate Finance.
18(2). pp.389-411.
Frankel, J. and Saravelos, G., 2012. Can leading indicators assess country vulnerability?
Evidence from the 2008–09 global financial crisis. Journal of International Economics.
87(2). pp.216-231.
Goh, B. W. and et.al., 2015. Market pricing of banks’ fair value assets reported under SFAS 157
since the 2008 financial crisis. Journal of Accounting and Public Policy. 34(2). pp.129-
145.
Karanikolos, M. and et.al., 2013. Financial crisis, austerity, and health in Europe. The Lancet.
381(9874). pp.1323-1331.
Marazzi, C., 2011. The violence of financial capitalism. MIT Press Books. 1.
Munir, K. A., 2011. Financial crisis 2008-2009: What does the silence of institutional theorists
tell us?. Journal of Management inquiry. 20(2). pp.114-117.
Rose, A. K. and Spiegel, M. M., 2012. Cross-country causes and consequences of the 2008
crisis: early warning. Japan and the World Economy. 24(1). pp.1-16.
Online
What Caused the 2008 Global Financial Crisis?. 2017. [Online]. Available through:
<https://www.thebalance.com/what-caused-2008-global-financial-crisis-3306176>.
[Accessed on 29th July 2017].
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