The financial crisis of 2008 became one of the most severe economic challenges faced by the United States in its history and brought immense political and economic hardship. At that time, key figures such as then-Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and President George W. Bush were called upon to make difficult decisions under intense pressure to prevent a complete collapse of the American economy. As a result, they implemented an aggressive bailout program through TARP, which infused capital into struggling banks and financial institutions – sparking wide criticism from public protesters despite later being credited with averting disaster. This documentary snippet highlights the personal accounts of participants engaging in this pivotal moment for our nation’s medical system while understanding how their actions set into motion long-lasting implications that continue to shape today’s discourse on finance within our society’s framework. The 2008 Financial Crisis was caused by a failure in strategic management of Investment Banks due to poor risk management, inadequate capital requirements, deregulation and lack of transparency, poor corporate governance practices, over-leveraging, and lack of loan quality standards and regulatory oversight.
Poor Risk Management
One of investment banks’ key failures in strategic management was poor risk management. According to the Council (2019), banks took on more risk than they could manage with inadequate assessments and oversight systems to identify and mitigate potential losses from risky investments and activities, including high-risk loans to borrowers with little or no credit history, securitization of subprime mortgages, excessive leverage ratios (borrowing beyond what was prudent), offering higher yields on short term debt without understanding the risks involved. This lack of oversight resulted in high levels of financial exposure that proved unsustainable during a financial crisis.
Inadequate Capital Requirements
Another failure by investment banks leading up to the 2008 Financial Crisis was inadequate capital requirements set by regulators for individual institutions and systemically important firms that are “too big to fail” (TBTF). Regulatory bodies such as The SEC required commercial banks to maintain only minimal funds reserved against future losses, ignoring potential liabilities like off-balance sheet derivatives contracts not recorded in their official books. This heightened the vulnerability of these institutions when external factors changed significantly around 2007-2008, leading to a wave of bankruptcies resulting from underperforming loans. To prevent similar problems in the future, financial institutions need to ensure that they have sufficient assets available should an institution need them for liquidity purposes or during times of economic volatility such as recessions.
Deregulation and Lack of Transparency
A notable contributing factor to the financial crisis of 2008 was deregulation, especially in how investment banks could prioritize investments and make profits without oversight, adequate supervision, or accountability from regulatory bodies such as The Securities and Exchange Commission (SEC). According to Council (2019), the lack of transparency in opaque derivatives contracts–often issued outside official books with low disclosure–arguably set the stage for subsequent crises by denying investors the ability to know the full scale at which they had exposed themselves before it became too late. This situation was exemplified when markets became volatile due to global events such as subprime mortgage bubbles popping and bursting all over America, resulting in huge losses for those who had recklessly invested in them.
Poor Corporate Governance Practices
Investment banks failed due to a lack of sound corporate governance practices, leading to the 2008 financial crash. Key decisions made by top executives should have considered changes in market conditions, which resulted in dramatic drops in demand across various sectors and industries, including real estate and automotive manufacturing. This caused ripples throughout the supply chain, hurting businesses directly and indirectly, ultimately causing massive job losses with long-term knock-on effects on the US economy. To make matters worse, there was not enough liquidity available through Eurodollars or bailouts for affected companies during deep recessions experienced since the collapse of credit markets.
Over-leveraging
Another critical factor that led to the financial collapse was an investment bank’s excessive reliance on leveraging its assets to purchase investments with large returns. In other words, During the 2008 financial crisis, banks took on too much risk and debt by not having enough reserves in case markets suddenly turned against them. This problem was further compounded as access to new credit lines within a global economy dried up, leading to bankruptcy filings everywhere. Those who had leveraged their assets beyond acceptable limits were particularly vulnerable and faced dire straits as conditions worsened throughout affected sectors of businesses worldwide. Unable to meet their obligations, share prices dropped dramatically. At the same time, the overall market indices signaled real danger ahead for many countries around the world, including the US, where it felt maximum impact due to declining housing sector coat‐tailed stock declines in nearly every major index Dow Jones Industrial Average (DJIA) being examples this abrupt shift fortunes investor small consumers alike (Council, 2019). The government was then urged to step in with intervention measures, such as the Troubled Asset Relief Program (TARP), to save failing companies and people’s jobs from oblivion.
Lack of Loan Quality Standards
Another failure in strategic management by investment banks was a lack of loan quality standards for both home mortgages and corporate loans underwritten by large institutions such as Goldman Sachs, Lehman Brothers, and Bear Stearns, which often resulted exhibited loose lending terms well lower than qualified requirements (that is, “liar loans,” subprime mortgages fraud among others) (Council, 2019). The direct result was that lenders dealing with the public were issuing risky credit under the assumption that the housing market would remain strong forever, without considering that such high-risk activities eventually lead to catastrophic consequences once a bubble burst, as happened in 2008. It quickly became painfully obvious afterward that there was no way to escape from the severe economic decline caused by irresponsible banking practices until suitable penalties had been put in place to ensure proper financial stability and prevent any similar episode of comparable magnitude from occurring again soon.
Poor Risk Mitigation
Investment banks needed better risk mitigation capabilities, which meant they could not effectively manage and reduce risks from their investments and loan portfolios. Rather than spreading the risks of losses across various vehicles for diversification, many institutions acted as “one-stop shops,” investing heavily in one type of market or security, which could be easily exposed to significant volatility due to external factors. This increased the likelihood of compromising a bank’s sustainability in the long run if bets did not pay off every time – even though particular strategies have proven profitable in past times. This was demonstrated by what happened during the early 2000s when subprime bubbles began forming, leading to greater fears and producing crashing stock prices within less than a few months, consequently bankrupting giant firms such as Bear Stearns and Lehman Brothers, further aggravating world economic problems which were only just beginning at that time.
Lack of Regulatory Oversight
A significant failure by investment banks was the lack of sufficient oversight and regulation that allowed large financial institutions to take on excessive risk with little accountability for possible losses. Banks could conduct activities without proper disclosure or transparency, such as through off-balance sheet derivatives contracts. This eventually caused massive losses when markets became volatile due to global events such as a subprime mortgage crisis. Before the 2008 event horizon, inadequate oversight made it difficult for regulators and investors alike to assess the potential risks that could lead to significant losses. This was caused by Wall Street firms making highly speculative investments and taking on excessive leverage without full knowledge of what would happen if their underlying assets began declining sharply over a long period. As everyone knows, this ultimately led to what is now called ‘The Great Recession.’
Poor Investor Protection
Investment banks failed to protect investors’ interests concerning various securities instruments bought and sold on the market; this is seen in the trends leading up even before the collapse. It has become increasingly evident that many fundraisers held by publicly traded companies needed to offer more disclosures and details of terms, leaving investors only realizing too late once trading affecting these vehicles was already underway. Often, they found themselves losing value almost immediately after launch, pushing them close to bankruptcy due to the volatility of nature in a high‐stakes trading environment without protective measures.
The 2008 financial crisis was caused by a combination of investment banks’ strategic management mistakes. These included poor risk management, inadequate capital requirements, deregulation and lack of transparency in derivatives contracts, poor corporate governance practices, over-leveraging, lack of loan quality standards, and regulatory oversight. All these have led to significant losses for investors and institutions alike – including even giant firms such as Bear Stearns or Lehman Brothers going bankrupt under the massive pressure due to volatile market conditions mentioned earlier. Although steps have been taken to address each issue listed here since then, with increased regulation from federal government agents such as the SEC, it is important to remember what happened during these extremely difficult times so potentially disastrous scenarios can be avoided.
Reference
Council. (2019). Panic: The Untold Story of the 2008 Financial Crisis | Full VICE Special Report | HBO [YouTube Video]. In YouTube. https://www.youtube.com/watch?v=QozGSS7QY_U
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