Example Of Thoughts About Financial Crisis In 2008 Essay

Financial crisis of 2008 was caused by one of the biggest managerial mistakes, and some people think that the crisis is not over yet. The financial crisis of 2007-08 was caused because many wrong decisions were made by the top managers of Wall Street banks and institutions, and government officials that tried to support the shadow banking system.
Before the crisis, Wall Street banks and funds were trying to maximize their revenues, and they found some gaps in the existing regulations, which helped them trade high-risk securities with almost no limitations. Some banks and funds have invested billions into the risky assets, such as collateralized debt obligations and mortgage-based securities. However, these banks have received the highest ratings, and it has resulted in the financial collapse. At the same time, banks masked their financial weakness by moving their assets and liabilities to the structured investment vehicles, and this way they increased the uncertainty during the financial crisis.
At the times of the financial crisis, the companies changed their strategies and got rid of all their toxic assets, which was a good managerial decision. Top managers decided to change the strategy from the risky one to the one with mild risks. Business practices and standards have been reviewed with the beginning of the financial crisis, and Wall Street institutions pledged to conduct their business activities in a different way. For example, they ensured that qualified mortgages of the banks are low-risk. Also, banks avoided selling high-risk products and created greater reserves to guarantee stable functioning.
Other actors of the market were impacted as well, and they have chosen their management strategies. One of the examples is that they stopped giving the best ratings to the banks with the toxic assets having the largest share in the banks’ portfolios.
Government has also been the major player at the securities market, as it failed to impose the regulations necessary to ensure that banks operate in a regular way and do not perform risky activities. The government was involved in the process of banking deregulation and enabled the banks own financial companies. Also, it should be mentioned that shadow banking system was to some extent supported by the government. In general, government preferred to remove all limitations and enable banks do what they wanted to maximize their profits.
However, during the financial crisis, government changed its strategy and ways it influenced the securities market in the United States. When Lehman Brothers was liquidated because of bankruptcy, government realized that it was a must to prevent other banks from failing. If these banks went bankrupt as well, there was a great chance that the country’s economy would fail, and no banks would remain in the business. For example, AIG, a large insurance company that insured obligations of many banks using the CDS tool, or the so-called credit default swaps, would also go bankrupt if the government did not step in and provided billions of dollars to support the company. The same way the U.S. government supported other large banks to prevent the failure of the country’s economy. To do this, the government used the money it has collected from the taxpayers to buy off the toxic assets of the banks, and it has decreased the risk of the global banks’ bankruptcy in the United States.