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The Situation
The video focused on the series of events that lead to the start of the 2007 financial crisis and the various actors, policies, and directives that influenced how the crisis was initially perceived and the means by which it was partially resolved in the end. The importance of what was shown is due to the necessity of understanding the potential impact of systemic risk on the global financial system and the extent of the actions that were necessary to help abate it. In essence, the film acts as a warning to people regarding the dangers surrounding the creation of reckless financial instruments (i.e. collateralized debt obligations) and the need for greater oversight when it comes to how investment firms do business. Without this level of supervision in place, it is likely that the same mistakes could be repeated in the future due to human greed (ex: the current car loan bubble).[Click Essay Writer to order your essay]
Major Influences
The source of the issue presented in the video was the toxic subprime debt that was accumulated by numerous investment firms and banks. On the surface, everything seemed to be fine since the mortgage-backed securities that they had invested in appeared to grow more valuable as the housing market in the U.S. expanded and home prices skyrocketed. Home buyers were influenced by mortgage lenders to take out loans on homes they could not afford on the premise that the eventual value of the home would more than make up for the payments. Unfortunately, as the banks and investment firms quickly found out, if people could not afford the households in the first place then it is likely that they will default on the loans they were given. The sheer amount of mortgages issued to home buyers that could not afford what they were buying created a systemic problem that led to the financial crisis. The major influence that started all this were the mortgage sellers who were convincing people to buy something that they could not afford. Stricter policies should have been implemented at the onset wherein borrowers could only take out loans on properties they could afford to pay for.[Need an essay writing service? Find help here.]
Major Players and their Behavior
Henry Paulson and the various CEOs of the major investment firms and banks in the U.S. at the time of the financial crisis were the major players depicted in the video. The problem with the major players was that there a lack of sufficient consensus on what strategy they should implement to the prevent the systemic problem from getting worse. The CEOs of the major companies were unwilling to absorb, at cost, a failing business given the adverse impact this would have on their profits. Paulson, on the other hand, focused too much on his ideology surrounding moral hazard and the need to implement a “laissez-faire” approach when it comes to the presence of the government in the financial system. Their behavior could have been more productive if they had realized early on the sheer impact of the systemic risk that plagued the U.S. financial system and how various banks and investment firms were culpable in bringing this situation about. As such, they should have accepted some responsibility for the crisis and taken more immediate steps to resolve it.
Risk Considerations
The situation involving large entities such as Fannie Mae, Freddie Mac, Lehman Brothers and AIG showed that overly large private entities could have a devastating impact on the financial system if they make the wrong decision. Large corporations are often so interconnected with financial markets that this creates the threat of systemic risk should they fall. The 2007 financial crisis showed just how vulnerable the current financial system is to systemic risk given the interconnected nature of many major corporations and demonstrates the necessity of imposing limits on the size of companies so as to mitigate their effect on the economy should they fail. Aside from this, the situation also affected how companies now perceive the inherent risks connected to the creation of financial instruments that are so complex that few people truly understand them. Creating these types of securities and then selling them increases the risk not only for the investment house that created them but for the investor that buys them as seen in the case of Lehman Brothers and Bear Stearns.
Concerns for Financial Markets
The primary concern is if such a situation could potentially happen again in the future since government oversight over the financial system has only marginally improved since the start of the financial crisis. In fact, there is already a new “bubble” occurring involving car loans wherein people that obviously cannot afford to purchase a particular car are being provided loans for them with high-interest rates due to the increased risk. These loans are also bundled as collateralized debt securities and sold on the market. The familiarity of this situation to the housing bubble is worrying given the potential impact it would also have on the financial market.
How Would I Have Handled the Situation
The problem with hindsight is that it is not as effective if you are in a situation where you do not know the immediate outcome. In this case, I would have focused on preventing Lehman Brothers from failing since this would have helped to at least stabilized the markets in the short term.[“Write my essay for me?” Get help here.]
