Company and Situation
According to Cadieux (2010) the worst recession since the 1930s started at the end of 2007 and was at its peak by the fall of 2008. Several businesses were shattered are some were facing serious economic challenges because of the financial crisis. Government offered various bailed out packages to save financial institutions from huge loss. The packages were offered by providing loans, equity, and guarantees. Goldman Sachs was one of the companies that suffered a great loss. Goldman Sachs is an American financial institution that provides financial services to its clients globally. Goldman Sachs took part in cheap credit boom to attract more customers and increase its share in the market but this act of the company ignited the pre-crisis bubble. Goldman Sachs failed to prepare effective strategy to reduce the effect of recession that put adverse impact on the business and market position of the company (Biegelman, & Bartow, 2012, p.277). The action resulted in new challenges for the company due to the environment and unfavorable economic conditions. Moreover, the interest rate increased over time, and the company became a part of committing legal “Fraud” that seems to be unethical in the capital market. The manipulations were done to overcome the challenges and proved to be effective for the current situation of the company (Kassem, 2012, p.31).
The term legal fraud made the financial crisis and recession became severe as the mortgages were provided to such individuals and groups that were unable to afford it. The mortgage lenders sold the mortgages to the banks that after scrutinizing resold it other investor making it a new and safe financial investment. The role of the rating agency is also contributed towards the great recession by giving high ratings to such new instruments .
Strengths, Weaknesses and Alternatives
The response of government towards the bailout packages helped in saving the financial system in several countries, which lead to protection of economies in several countries .
Make investments in potential projects that can provide a high return in the long run. However, it may result in a decline in revenues in short-run that is also a big issue for the company.
Improving mortgaging function that can contribute substantially to the revenues. However, there is a risk of declining business due to the strict policy for mortgaging, but it is a viable solution to reduce the effects of challenges and issues as noticed in the outcome of the effort of the company .
Strict management policy to increase the efficiency of workers and to appoint some skillful employees to minimize the effect of the threat caused due to the external environment as noticed in the case. The leadership should ensure potential control over the actions of those skillful employees as they may have their personal interest in investments.
Implementations
The financial institutions have different types of employees working in various departments and premises of the company. The main motive of these workers is to satisfy the client for which they work. Several steps have been taken to protect the innocent people from being affected from future financial crisis. To avoid such acts, regulatory reforms are implemented that increases the cost of financial institutions and also reduce the economic pace, but will surely be beneficial in the long run . There should be flexibility and collaboration among financial institutions and stakeholders to get efficient and reliable outcomes that are helpful in reducing the impact of external factors such as the great recession. The employees should have a target, and the company should provide incentives on achieving them (Office of Mental Health, 2015, p. 7).
Recommendations
There are some suggestions that can increase the performance of financial institution and help them in making better investments to avoid financial crisis in the future.
The financial institution should focus on improving mortgage debt instruments and minimize the various investments risks .
The company should keep potential control over its operations especially on employees’ training and reward system to ensure efficiency in their performance.
It has to move on long-term investments that ensure high profitability in future (Office of Mental Health, 2015, p.6).
Additional Questions
Question One
Financial institutions should be prevented from becoming too big as many small and large firms are associated with it may also face a decline due to declining performance of giants. The authorities should make strict policy such as limiting the portion of the loan that is to be offered to the borrower or prepare effective strategies to control credit and market risks. Also, there should be strict checks and balances over the operations of such financial institutions as it put direct impact on the overall economy of the country .
Question Two
Analyzing the loan-to-value ratio should regulate the consumer decisions concerning loans. The amortization period should also be reduced to some extent so that borrowers should have knowledge regarding their commitment to pay off their obligations. The regulation will be beneficial to the borrowers as well as lenders .
Question Three
The government should bail out failing institutions through public money as they contribute substantially in the overall GDP of the country. It is essential to provide a supported resource to get rid of the challenges faced by the institutions in improving their financial conditions that may be disturbed during recession. However, it is also mandatory that the government should analyze all internal and external factors that are helpful in decision making for bailouts. It is possible that the institution may not perform according to the expectations after bailed out, so it is the responsibility of the government to assess the performance of the operational activities of institution on amount of public interest (MClam, 2005, p.12).
References
Biegelman, M., & Bartow, J. (2012). Executive roadmap to fraud prevention and internal control creating a culture of compliance (2nd ed.). Hoboken, NJ: John Wiley & Sons.
Cadieux, D. (2010). The Great Recession, 2007-2010: Causes and Consequences. Ontario: Ivey Management Services.
Kassem, R. (2012). Earnings Management and Financial Reporting Fraud: Can External Auditors Spot the Difference? Retrieved from http://wscholars.com/index.php/ajbm/article/viewFile/46/20
MClam, E. (2005). USATODAY.com - Ex-WorldCom exec Vinson gets prison, house arrest. Retrieved from http://usatoday30.usatoday.com/money/industries/telecom/2005-08-05- vinson_x.htm
Office of Mental Health. (2015). Top Ten Internal Controls to Prevent And Detect Fraud! Retrieved from https://www.omh.ny.gov/omhweb/resources/internal_control_top_ten.html
