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FNCE100 Corporate Finance

Published : 31-Aug,2021  |  Views : 10

Questions:

Introduction of United States Financial Crisis and recession 2001-2008 and bankruptcy crisis .

1. Federal reserve-> What Role play in the financial crisis.

2. What happens with The bear Stearns companies during the big financial crisis and major reason to fail.

3. Why the mortgages and taxes when down during the crisis.

4. Lehman Brothers crisis (high risk in the Market.

5. How to apply Porters five forces Model in this case.

How to restore confidence in a crisis, What to do?

6. What we learn in Strategic management and How to apply to this big disaster.

Answers:

Introduction

United States Financial Crisis and recession 2001- 2008 and bankruptcy crisis 

The current financial crisis took place in United States market in the year 2007 when the crisis spread in and across the world, damaged the economies as well as most of the countries such as United States, and reached a new level by the year 2008. There was permanent US based financial institutions that includes AIG as well as Lehman Brothers that collapsed due to bankruptcy crisis. In order to keep recession away, the Federal Reserve had lowered the Federal fund rates by 11 times from 6.5% to 1.75% that helped in creating flood of liquidity in the market economic. The subprime meltdown was noted at many unusual times when in the year 2001, US economy experienced a short-lived recession. There was sense of fear in everyone’s mind on matters relating to terrorist attacks, accounting scandals and recession time.

1.What role Federal Reserve plays in the financial crisis 

During the Financial Crisis that took place in the year 2008, the Federal Reserve range of power have expanded as they have several financial institutions that monitors and regulates in an effective way (Vazquez & Federico, 2015). The Chairman of Federal Reserve had argued that oversight of the reserve had expanded beyond strictly financial institutions for wide swaths of the economy that provides evidence of emerging vulnerabilities. The role of Federal Reserve is to have its own policy choices and central to the housing boom as well as bust in association with the financial crisis. During that recession, Federal Reserve had expanded the money supply that dropped interest rates to unsustainably lower levels. Federal Reserve was established to be a lender to the last resort as it could lend against high quality collateral as well as provide reliable and elastic currency.

2.What happens with the bear Stearns companies during the big financial crisis and major reason to fail?

The Bear Stearns Companies Inc was a New York based worldwide investment bank, brokering firm as well as securities trading that failed during global financial crisis and recession 2008. This company was then sold to JP Morgan Chase. After the failure, the company got involved in securitization as well as issued large amounts of asset-backed securities that in case of mortgages as it was pioneered by the father of mortgage securities named as Lewis Ranieri

The fall down of the business was considered as the overture to the risk administration condense of the speculation banking business in countries like United States and other places that culminated in the year 2008. In the year 2008, the Federal Reserve Bank of New York had provided with an emergency loan for trying out ways for averting a collapse of the business (Serricchio, Tsakatika & Quaglia, 2013).

3.Why the mortgages and taxes went down during the crisis 

The subprime mortgage crisis during the comprehensive financial crisis stemmed from an early expansion of mortgage credit that includes borrowers who previously had difficulty in getting mortgages. It is difficult for the potential homebuyers for obtaining mortgages if they had below average credit as well as provide small down payments or high payment loans at the same time. The housing crisis provided with a major impetus during the global financial crisis by hurting the overall economy in different ways (Hausman & Johnston, 2014). It mainly lowered the construction, reduced wealth as well as decreased consumer spending and reduced the ability of the business firms for raising funds especially from securities markets.

4.Lehman Brothers crisis (high risk in the market)

The sudden failure of Lehman Brothers Holdings Limited during the global financial crisis was looked as the watershed moment. Till date, the Lehman Brothers bankruptcy is the highest in the United States history as the company had more than $639 billion assts as well as $613 billion liabilities (Haas & Lelyveld, 2014). The assets of the company was surpassed from those of past bankruptcy giants like WorldCom and Enron. Therefore, Lehman Brothers was among the fourth largest investment bank when the company collapsed and they had more than 25000 employees in and across the world.

5.How to apply Porter five apply forces model in this case 

There are five components in Porter’s five forces model that include threat of new entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers and competitive rivalry (Dias et al., 2016). The above study discuss about the Global Financial Crisis that took place in the year 2008. Applying Porter Five Forces model can be seen as a powerful idea that will help in identifying the participants who was involved in the case and then coming out with appropriate solutions at the same time.

How to restore confidence in a crisis and what to do

After application of Porter Five forces model, it will be easy to proper insights of information on matters relating to cause behind the Global Financial crisis and people who got harmed during that phase of time.

6.What is learned in strategic management and how to apply to this big disaster?

Strategic management takes into account the formulation as well as implementation of main goals and initiatives that had been undertaken by the top management of the company so that they can handle any kind of disaster (Claessens & Van Horen, 2015).

Conclusion 

From the above analysis, it is now understood that how Global Financial Crisis in the United States had impact different business operations and changed daily lives of human beings negatively. This financial crisis was a reason to number of problems. The current segment gives brief overview of how Federal Reserve had acted after there was Global Financial Crisis. Their role was important as they are told to be Lender to the Last resort. The reason of fall of a highly reputed investment firm named as Bear Stearns was due to Global Financial Crisis and recession. The next popular incident that had been explained in the study is collapse of Lehman Brothers with proper justification. Porter’s Five Forces Model can be implemented to conduct an external environmental analysis to the situation after Global Financial Crisis. Strategic management tool need to be implemented by the company where they can solve different issues pertaining to their daily operations.

References

Claessens, S., & Van Horen, N. (2015). The impact of the global financial crisis on banking globalization. IMF Economic Review, 63(4), 868-918.

Dias, A., Dias, A., Rodrigues, L. L., Rodrigues, L. L., Craig, R., & Craig, R. (2016). Global financial crisis and corporate social responsibility disclosure. Social Responsibility Journal, 12(4), 654-671.

Haas, R., & Lelyveld, I. (2014). Multinational banks and the global financial crisis: Weathering the perfect storm?. Journal of Money, Credit and Banking, 46(s1), 333-364.

Hausman, A., & Johnston, W. J. (2014). The role of innovation in driving the economy: Lessons from the global financial crisis. Journal of Business Research, 67(1), 2720-2726.

Serricchio, F., Tsakatika, M., & Quaglia, L. (2013). Euroscepticism and the global financial crisis. JCMS: Journal of Common Market Studies, 51(1), 51-64.

Vazquez, F., & Federico, P. (2015). Bank funding structures and risk: Evidence from the global financial crisis. Journal of banking & finance, 61, 1-14.

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