Whew! I am done with my Financial Management class, which is a bittersweet feeling because it was extremely challenging and I learned a lot from my professor. I’m glad it’s over because it is allegedly the most difficult class in any MBA program but also kind of disappointed because this class was very interesting and had great insight into the financial operations of organizations. My final project was a lengthy paper entitled ‘Past the Precipice- How Greed Fueled America’s Financial Collapse’ outlining managerial recommendations that could be utilized by regulatory agencies to avoid financial collapses in the global economy.

I did a lot of research into the 2008 US financial collapse and I learned a lot. One of my brainstorming activities was to write out (rather, word puke) some of the information that I had learned so that I could organize it and grab small pieces to be used as foundation and support materials for my paper. Here is what I came up with…

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We are now in the midst of a global economic recession that was fueled by oversight within our financial system. There have been small crises prior to this meltdown, each of which growing and creating more damage; and this damage brought the industry more and more wealth. It seems that one of the connecting points to this drawn back to the days of Ronald Reagan and his initiation of deregulation. This gave banks more control, which allowed them to be riskier with their actions and investments.

Deregulation continued under President Clinton and he signed the Gramm-Leach-Bailey Act, essentially repealing the Glass-Steagall Act. With the Gramm-Leach-Bailey Act in place, investment and commercial banks were allowed to merge with insurance companies and securities firms. Banks in our system had now merged many times and acquired smaller banks, which turned the banking system into a collection of a few very large banking titans. There is nothing wrong with mergers and acquisitions, but the banks thrived on this because they had tremendous power. The risk that is run with an oligopolistic industry is that when one of these titans stumbles and falls, the entire country and even the world hears and feels the impact.

A main factor in the build up of the financial crisis was due to the housing bubble. Banks were all too willing to offer mortgages to borrowers who applied for a loan. In past years the lenders were careful because they were responsible for collecting the payments from the homeowners. This all changed when banks began selling these loans to investment banks. The investment banks would create a collateralized debt obligation (CDO) by combining these mortgages with other loans. The concept of CDOs is harmless enough, as they were made to create cash flows from mortgages and other debt which made the cost of lending cheaper.

The problem became that this combined debt started to include riskier loans. The investment banks were making a lot of money off of these CDOs so they bought up all the mortgages they could and wanted the lenders to sell them more. The majority of the loans that were sold already were to those individuals with good credit, so they lowered their credit criteria to secure more loans. Banks engaged in predatory lending where they would offer subprime loans to people who couldn’t afford it. Although these loans are very risky, they are also very profitable. The lenders weren’t concerned if a borrower couldn’t pay, so they made riskier loans to those who couldn’t afford it. The investment banks weren’t concerned either because they earned higher profits as they sold more CDOs. The CDOs that were being sold were rated at an AAA rating, which means that it is investment grade even though they included these risky subprime loans.

With mortgages readily available many Americans were purchasing homes, which increased housing prices. It would soon be realized that many of these homeowners couldn’t afford their houses and they would enter into foreclosure. As these loans went bad, the lenders failed. The CDO market collapsed and left investment banks with billions of dollars in toxic loans and real estate that they couldn’t sell. This led to the collapse of the nation’s biggest banks and in 2008 George Bush signed the bailout bill. From there the unemployment rate in the US rose to double-digits. This wasn’t solely a United States issue because all economies are essentially linked together.

Several Senators and other key personnel that were involved with the financial regulation process went on to work for financial institutions that benefitted from the legislation and weakened regulation that was put in place. Although it seems that this isn’t necessary illegal, it is certainly unethical. It seems that these people had overlooked their due diligence to do the research necessary and levy regulations that ensured financial security. They weren’t fulfilling their fiduciary responsibility to their constituents, rather looking out for their own best interest. Many of these individuals accepted high positions and key offices within the financial firms that paid them handsomely. It can be speculated that these positions were offered because of the aide that they offered the institutions in relaxing laws, rules and regulations that allowed them to overstretch their lending and engage in risky investment behavior.

The SEC was not conducting investigations on the welfare and practices of the investment banks during the inflation of the housing bubble. The investment banks were loosely supervised by the SEC for their capital and liquidity requirements but did not press the firms to reduce their leverage. In fact, the SEC relaxed the leverage limits for these institutions. Since the banks were borrowing a lot of money to buy more loans and create CDOs they were leveraging an asinine amount of money.

The financial crisis has and will continue to affect all facets of our lives, including the way business is run. Small businesses don’t have the access to capital and credit in the current market. This is an issue because they may not be able to secure financing for future operations, expansion or even current expenditures. Many business rely on borrowing and financing, and if credit isn’t available it means businesses will have a harder time keeping their doors open. We have also seen a loss of confidence in the United States economy which places a burden on these firms, which includes, but isn’t limited to, the decline in stock price. Firms have also faced tough challenges with costs due to decreased revenues, including labor cost. They are searching for ways to cut costs and be more efficient in their operations, which has led many companies to lay off workers.

It is quite easy to see how the crisis has affected our lives both personally and professionally but there has to be a take-away. Hopefully we have learned from our mistakes and the oversight of corporate and federal leaders will not continue. More than anything this crisis has shown us the impact of overleveraging funds and the importance of having strong liquidity. Since cash flow is the lifeblood of an organization, much like the human body needs blood to survive, if a business runs out of cash… they’re dead. We are currently on the path to rebuild our nation’s economy but the road will be long and there is still much to do.

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