Financial markets after Enron and WorldCom collapse
The 1990s saw a tremendous stock market expansion in what was dubbed a tech bubble. However, by 2000 air began and then continued to leak out of this bubble the biggest of which was December 2001 fall of the seventh largest US Company, Enron. This was followed closely by WorldCom, one of the largest telecom companies in July 2002, (Roy and Walter, 53).
Several changes have taken place since. First off, the ensuing public outrage revealed a questionable investor confidence in corporate management, regulatory bodies such as the Securities Exchange Commission, accounting and reporting practices for corporations, independence of auditors, pension and mutual fund administration, Wall Street analysts and most importantly the government. This necessitated legal, social and financial reforms. One such legislation, The Sarbanes-Oxley Act of 2002 has meant that public companies spend additional millions for compliance, (Roy and Walter, 56). The NYSE also proposed a new governance proposal, which focused on eliminating conflicts of interest. The financial markets with time recovered with fears of the costs of regulation and financial intermediation being passed on to consumers.
Government efforts to clean up the mess began with the state of the Union address on 29th January 2002 by then President George Bush on the impact of corporate failures on markets and society. Enforcement agencies were formed by the SEC, Justice Department and Congress in an effort to punish offenders. Several were indicted and jailed. Billions of out of court settlements were reached compensating investors albeit minimally.
2008 Economic and Financial Crisis
The financial crisis of 2008 emanated from a mix of bad political, financial, corporate and economic decisions. Though it may take time for effects of decisions to manifest, the private sector greed for short term profit is responsible for escalating the financial crisis. The ensuing events were set in motion by three related factors.
First off, there were large inflows of foreign funds into the United States following the Asian financial crisis of the late 90s and the debt crisis in Russia. Availability of credit led to a boom in the construction industry, most of which were debt financed. Further, a noble liberal political idea that encouraged and pressured banks to help poor people transform into homeowners began during the Clinton administration. This led to the creation of numerous sub-prime loans to borrowers with poor credit ability, with no down payments, and no verification of assets and liabilities setting them up for defaults, (Michael, 253). This was fuelled in part by greed of lenders, bankers and related financial institutions.
Even as the credit and housing bubbles continued to build, other numerous factors led to rapid expansion and ultimate overheating of the financial crisis, a process called financialization. The banks had got the green light to gamble way back in 1998 with the repeal of Glass-Steagall legislation. The Federal Reserve having further kept interest rates low at 1 percent for a long time, causing a price upsurge in oil, gold, housing, stocks and anything else primarily dollar priced. In effect, asset managers unable to obtain decent yields from government bonds turned to the risky mortgaged backed securities.
As evident, several culprits played a strong hand in the economic downturn. The US government paved the way for most of the events its role being more of a failure to perform its regulatory mandate than what it actually did afterwards. The government’s corrective actions were a tad late, especially the Troubled Asset Relief Program, TARP to rescue financial institutions trapped in the subprime mortgage crisis. Banks and their greed, asset managers, Credit rating agencies such as Samp.P, Moody’s and Fitch with their misleading credit ratings and SEC for relaxing capital requirements are among the major culprits.
Although several institutions were trapped in the financial crisis of 2008, only a few ended up shouldering the burden of the economic downtown. Most were depository banks that also served as investment bankers. Lehman Brothers went bankrupt. Other troubled companies include Goldman Sachs, Morgan Stanley, AIG, Citigroup, Bear Stearns, Chrysler, General Motors, Freddie Mac and Fannie Mae. Most of these went under or survived merely via federal bailout or takeovers.
The US and world financial markets at large has had a rich history of financial meltdowns. For example, during the post 1929 stock market crash the government response led to restricted fiscal spending, a tightening of the monetary policy and waning public confidence in the financial system. However, these harsh lessons were put to good use after 2008 crisis when the government heavily enhanced liquidity of the financial system through the TARP, bail out, prosecutions and other subsequent legislations. These actions were not implemented in time and were more of geared towards cleaning the mess. Further, several factors led to the overheating of the financial mess and existing government policies before then either accelerated the process or were not duly applied. Indeed, government policies in the early 2000s encouraged economic growth that in itself fueled the build up to the 2008 crisis.
In the wake of the reality that some of the actions taken by the government were not effective in preventing or halting the financial crisis, several recommendations have been put forward to prevent another crisis in the foreseeable future. These include increased regulations, especially for shadow banking institutions that also operate as banks. Clear cut procedures should be laid out for closing institutions in financial limbo as well as placing reasonable restrictions on leverage for these financial institutions. Also, commitments taken by any institution should be backed by capital, income verification and credit evaluation of mortgage and other borrowers.
Roy C. Smith and Walter Ingo. Four Years after Enron Assessing the Financial-Market Regulatory Cleanup. The Independent Review, v. XI, n. 1, ISSN 1086–1653. (2006): p. 53–66
Michael Simkovic. Secret Liens and the Financial Crisis of 2008 American Bankruptcy Law Journal, Vol. 83. (2009): p.
Financial markets after Enron and WorldCom collapse