What Were The Principal Causes Of The Recent Financial Crisi

Awhat Were The Principal Causes Of The Recent Financial Crisis And Gr

A. W hat were the principal causes of the recent financial crisis and Great Recession? Would you include Government policies that encouraged housing purchases for those who could not afford them, artificially low interest rates implemented by the Federal Reserve, banks and mortgage brokers who were greedy, the failure of Government regulators to provide proper oversight to the banks and other financial institutions, individuals who borrowed and spent more than they should have, or some other causes? . B. From the e-Activity, examine ethical behavior within firms in relation to financial management.

Provide at least two (2) recent (in the last 5 years) examples (other than Enron, WorldCom, and Bernie Madoff) of companies that have been guilty of ethics-based malfeasance related to financial management. What were the specific sanctions that were imposed and explain why the sanctions and penalties were appropriate? . C. From the scenario (Scenario Topic: The primary objective of the corporation is value maximization), what are at least two (2) actions that Trevose Fitness Center (TFC) could take in order to raise capital that will, in turn, enable it to achieve its expansion goals? How can you defend your response? Support your observations with at least two (2) recent and real-world examples of implementations of these same actions?

Paper For Above instruction

Introduction

The global financial crisis of 2007-2008, often termed the Great Recession, triggered widespread economic turmoil and revealed significant flaws within financial systems and regulatory frameworks. Analyzing these causes is crucial to understanding the crisis's origins and preventing future occurrences. This paper explores the principal causes of the recent financial crisis, examines recent ethical malfeasance in corporate financial management, and proposes strategic actions to support Trevose Fitness Center's growth ambitions through capital raising, supported by recent real-world examples.

Principal Causes of the Financial Crisis

The financial crisis was the culmination of multiple interconnected factors, each contributing to systemic instability. One prominent cause was governmental policies aimed at expanding homeownership. During the early 2000s, policies encouraged lending to subprime borrowers—individuals with poor credit histories—underscoring efforts to promote homeownership (Mian & Sufi, 2014). These policies lowered lending standards and increased mortgage issuance beyond sustainable levels.

Simultaneously, the Federal Reserve maintained artificially low interest rates, which made borrowing inexpensive (Bernanke, 2010). Low interest rates spurred individuals and institutions to borrow excessively, inflating asset bubbles—particularly in housing markets. Banks and mortgage brokers, driven by greed and profit motives, engaged in risky lending practices, offering mortgage products such as adjustable-rate and interest-only loans with little regard for borrowers' ability to repay (Acharya et al., 2011).

Furthermore, regulatory agencies failed in their oversight responsibilities. Their inability or unwillingness to enforce prudent lending standards or to adequately monitor financial institutions allowed risky behaviors to proliferate (Barth et al., 2012). The proliferation of financial derivatives, such as mortgage-backed securities (MBS) and collateralized debt obligations (CDOs), redistributed and obscured risk across the system, increasing interconnectedness and systemic vulnerability (Gennaioli et al., 2013).

On the individual level, excessive borrowing and spending fueled demand and reinforced risky lending, culminating in a housing bubble. When housing prices declined, mortgage defaults soared, leading to a cascade of financial institution failures and massive losses across financial markets (Brunnermeier, 2009). The crisis underscored how a convergence of policy missteps, deregulation, greed, and behavioral factors contributed to the collapse.

Ethics in Financial Management and Recent Corporate Malfeasance

Ethical behavior within firms directly impacts financial management and organizational integrity. Recent examples in the last five years illustrate how unethical practices continue to pose risks to financial systems. One example involves Wells Fargo’s unauthorized account opening scandal in 2016 and its repercussions. The bank faced fines exceeding $3 billion for creating millions of fake accounts to meet sales targets (U.S. Department of Justice, 2020). The sanctions included hefty fines and restitution payments, justified by the breach of trust, fraudulent conduct, and violation of consumer rights.

Another case is the Wirecard scandal in 2020, where the German payment processor overstated its assets by nearly €1.9 billion. The company’s executives engaged in financial misreporting, leading to the company’s insolvency and criminal investigations (Financial Times, 2020). The sanctions involved regulatory investigations, potential criminal charges, and severe reputational damage. These sanctions were appropriate because they serve to uphold market integrity, deter unethical behavior, and protect investors.

Both cases highlight the importance of corporate ethical standards aligned with regulatory compliance. When firms neglect ethical considerations for short-term gains, they risk severe penalties, legal actions, and loss of stakeholder trust.

Actions for Capital Raising to Support Growth

Trevose Fitness Center (TFC), aiming to expand, must adopt effective capital-raising strategies aligned with its objective of maximizing value. Two viable options are issuing equity and obtaining bank loans.

Equity Financing: TFC can issue new shares to investors, raising funds without incurring debt obligations. Equity infusion can be through private placements or a public offering, depending on TFC’s size and market presence (Ross et al., 2016). This method spreads risk among shareholders and enhances financial stability, albeit diluting existing ownership.

Bank Loans or Credit Lines: Alternatively, TFC can secure financing through bank loans or lines of credit. This approach involves borrowing a fixed amount with agreed repayment terms. It provides immediate access to capital while maintaining ownership integrity (Brealey et al., 2019). Properly structured loans can support expansion initiatives without diluting ownership.

Recent real-world examples include Planet Fitness' IPO in 2015, which provided significant capital for expansion, and companies like Peloton acquiring credit lines to bankroll rapid growth (Nasdaq, 2019). These approaches demonstrate the viability of equity issuance and debt financing in facilitating business expansion while managing risks.

Defense of Actions: Combining equity and debt allows TFC to balance financial leverage and ownership control. The choice depends on factors like prevailing interest rates, market conditions, and the company’s growth prospects. Using equity reduces financial risk during uncertain periods, while debt can be cheaper when interest rates are low, thus optimizing capital structure (Modigliani & Miller, 1958).

Conclusion

The causes of the recent financial crisis were multifaceted, involving risky government policies, deregulation, greed, and behavioral factors leading to excessive risk-taking and systemic failure. Recent corporate malfeasance underscores the importance of ethical standards in financial management. For TFC to achieve expansion goals, issuing equity and securing bank loans are pragmatic, real-world strategies embraced by successful companies. Effective application of these strategies, backed by ethical corporate conduct, can significantly contribute to sustainable growth and value maximization.

References

• Acharya, V. V., Philippon, T., & Richardson, M. P. (2011). Restoring Financial Stability: How to Repair a Failed System. Wiley.
• Barth, J. R., Caprio, G., & Levine, R. (2012). Guardians of Financial Stability? Evidence from Banking Crisis Management. Journal of Financial Intermediation, 21(3), 418-445.
• Bernanke, B. S. (2010). The Financial Crisis and the Policy Responses: An Empirical Analysis. Journal of Economic Perspectives, 24(4), 3-30.
• Brunnermeier, M. K. (2009). Deciphering the Liquidity and Credit Crunch 2007–2008. Journal of Economic Perspectives, 23(1), 77-100.
• Financial Times. (2020). Wirecard Scandal: What You Need to Know. Retrieved from https://www.ft.com/content/wirecard-scandal
• Gennaioli, N., Shleifer, A., & Vishny, R. (2013). Law and Finance. Journal of Economic Literature, 51(3), 1076-1119.
• Mian, A., & Sufi, A. (2014). House of Cards: Credit Liquidity and the Great Recession. Princeton University Press.
• Modigliani, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review, 48(3), 261-297.
• Nasdaq. (2019). Peloton’s Rapid Growth and Financing Strategies. Retrieved from https://www.nasdaq.com/articles/peloton-growth-strategies
• U.S. Department of Justice. (2020). Wells Fargo Civil Penalty: Justice Department Press Release. Retrieved from https://www.justice.gov/opa/pr/wells-fargo-admits-massive-fraudulent-accounts-scandal