Firoze Kohli
Entr 3520
Reflection Paper
“Starting 2007, the United States market experienced a loss of confidence by the investors in the value of securitized mortgages that resulted in a major liquidity crisis. This prompted financial institutions, such as the Federal Reserve, Bank of England and the European Central Bank etc., to pump large amounts of capital into the free falling financial markets, to stabilize economy. By the end of 2008, with the collapse of the Lehman Brother’s the crisis spread and impacted economies worldwide. Further, institutions such as Lehman Brothers and numerous other large banks, took excessive and disproportionate risks, magnifying the impact, and ultimately resulting in plunging the world economy into biggest recession since The Great Depression of 1930s. The irresponsible actions for personal and corporate greed by a handful of elite and powerful individuals brought world’s largest economy on its knees. In the case of the Lehman Brothers and Barclays deal, in which the c-suite executives of Lehman provided Bob Diamond of Barclays with five billion dollars, without providing the stakeholders and investor any details of the transaction. Even though the matter was taken to the court, Barclays’ lawyers stated that Lehman had filed for bankruptcy, and thus were not able to guarantee any assets. The judge’s decision favored the defense in the end, even though the judge knew that not all the information was fully disclosed to the judiciary. In a contrasting case of Abacus Federal Savings Bank, a small bank in New York’s Chinatown, with the mission to provide banking services to immigrants and residents of lower Manhattan, which helped create, a two hundred-million-dollar surplus, was chosen to be scarified. The secret and opaque deal between Lehman Brothers and Barclays, coupled with the lack of adequate punishment, further highlight the differential treatment of the rich and the non-rich, thus supporting the statement, “The more money you have, less you owe, the more rights you have”, (2) More recently, Wells Fargo one of the biggest and oldest banks in the world with total assets over $1.7 Trillion, was fined $1 Billion to settle their recent law suit regarding mortgages and auto loan abuses, rather being punished for their crimes and being sentenced. This further exposes the bias that exists within judiciary.
Moreover, according to the US Department of Justice, one in each thirty-five adults are legal
offenders, either in the correctional facilities, or on a probation/parole or some likeness
thereof (1). As indicated by an examination directed in 2015, people who were
imprisoned, preceding their detainment, had 41% less salary when contrasted with non-
detainees of comparative ages. In the book “Finance and the Good Society”; Shiller utilizes a few delineations and occasions to show how the ward supports the well-off- a one-sided framework that dependably curves to the impulses and likes of the Wall Street.
Robert Shiller states “If we democratize, humanize and expand financial capitalism, then we can overcome the real barriers to achieving the good society for all people”. However, it seems easier said than done, as the system skews towards helping only a part of the “good society.” Shiller’s book represents the complex world in which the good society is a human invention, that is represented by the laws, customs procedures and organizations that follow a complex yet basic pattern, like actual humans. However, even though greed might not be the motivator for these individuals they often lose sight of that what is really happening around them.
The need for accountability in the capital markets is now more than ever. As we saw in the case of the 08-09 meltdown, parties in charge, such as Ben Bernanke and his colleague Alan Greenspan at the Federal Reserve, Policy Makers, regulators, banks, etc., were unable to act effectively, to prevent, or even mitigate the on-coming crisis. This concurs with Shiller’s sentiment, that time and again, the parliaments, legislatures and those in charge, have failed those, who put them in charge. (5)
In another instance, we consider a collateralized mortgage obligation (CMO), which is a monetary development that partitions money streams of home loans into tranches of different levels of hazard. Claire Hill and Gary Gorton saw CMO as an opportunity to transform a class of difficult to-assess unsafe resources into a subclass of apparently riskless securities, that were information – acquisition -insensitive, so that uninformed investors could rapidly judge as riskless. The institution would hold on the “toxic waste” rather than sell it to investor. As the complexity of these CMOs was, in opinion of Shiller- “unnecessary, and only introduced to confuse the rating agencies to obtain high ratings”. (5) These incorrect rating ultimately led to the subprime crisis. As Shiller opined CMOs and other derivatives were not inherently evil, however certain financial institution belied the trust of the small investor
To increase accountability in the financial industry, several changes are needed to be made to the current laws and regulations. The Dodd- Frank Act, for instance, states its purpose “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’ assumption, and to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.” While some basic changes were presented, for example, the Volcker Rule restricts the banks from exclusive exchanging and support stock investments. New controls have looked to characterize hazard-based norms for assigning capital and liquidity inside a firm, while other administrative apparatuses, for example, living wills and methodical liquidation have tried to end too-huge to-fizzle assumption.
I personally feel that with the introduction of CRA (Credit Regulation Agencies), which are the majoritarian controllers of universal capital markets, is a positive step in making the markets more accountable. By the standard they are setting, they can have a real impact on which kind of borrowers are gaining admittance to capital markets and under what conditions. The critical position of CRAs is reinforced by the way the markets work and the way CRAs are position to control. The CRAs however do raise several genuine accountability and responsibility challenges and issues. For example, the NMR, where no accountability exists, the rating agencies are not held accountable by the regulators or the participants of the capital markets. Rating agencies continue to present a challenge to the market regulators. Persistent requests exist however they are being tested—so far effectively—by the CRAs. Responsibility connections stay challenged. (3) However, even with the CRA’s in place, these corrupt and vile organizations would find a way around, just because of how broken the system truly is.
Through my journey starting as a freshman until right before I took this class, I felt that the financial institutions were rather helpless in the 2008 financial crisis however, the fact is the that they remained ignorant, and reacted rather late. Moreover, I have come out of this class learning about how important it is for business to be accountable for their actions and rather think about their how their decisions impact the stakeholders.”
Citation
1. Initiative, Prison Policy. “Prisons of Poverty: Uncovering the Pre-Incarceration Incomes of the Imprisoned.” Prisons of Poverty: Uncovering the Pre-Incarceration Incomes of the Imprisoned | Prison Policy Initiative, www.prisonpolicy.org/reports/income.html.
2. Taibbi, Matt. The Divide: American Injustice in the Age of the Wealth Gap. Spiegel & Grau, 2014.
3. Hüpkes, Eva, et al. The Accountability of Financial Sector Supervisors: Principles and Practice. International Monetary Fund, www.imf.org/external/pubs/ft/wp/2005/wp0551.pdf.
4. Kerwer, Dieter. Holding Global Regulators Accountable: The Case of Credit Rating Agencies. pdfs.semanticscholar.org/a9d7/4104d7d46090b8094017ed318b246042154a.pdf.
5. Shiller, Robert J. Finance and the Good Society. Princeton Univ. Press, 2013.”