Significance of Financial Downturn on World Financial System
The report analyses the effect of financial crisis in 2007 and its effect on different economy based organization all over the world. The analysis discusses the significance of this great depression on the world financial system and demonstrate this financial downturn had influenced the response and actions of Morgan Stanley at the time. After 2008 there is again a revolutionary change introduced by the American Presidential Election (Knight 2017). The company has faced major changes during these decades and reshaped its structure depending upon the external factors like global politics, regulations of the countries in which the company operates and global as well as regional economy of those countries.
From the business point of view, globalisation has some major features. First of all, it involves development of interdependency among the countries and secondly, globalisation provides scope for various business aspects for development through its multi-facet nature. The political aspect of globalization contrast major democracies of the eastern countries with other administrative activities in the west (MacKenzie and Spears 2014). The difference in demography, education, health and other matters have full influence on the company’s policy and proved to be driving force for globalization. Beside these factors there are technological factors like introduction and popularization of internet and social medias like Google and Facebook in every country of the world. These are the mediums for which the distance and differences in the countries have been diminished and the matters happen in one country now have a deep impact on the other one. The wider spread of technology has influenced the companies internationally and altered the organizational culture. Beforehand, the national culture used to shape the company’s culture but now it has become less important (Ahmad et al. 2017). According to the researchers, there is no doubt that the global financial issues have a major impact on the organization’s international activities. It is not only about the currency fluctuations which once resulted in the rise and fall of the company’s sales and profits but a wide change in the negotiation practices as well as business strategies. Some companies now centralise international cash flow activities for the maximisation of their profit. On the other hand, the international bankers like Morgan Stanley are employed to negotiate the foreign purchases, cross-border loans, joint ventures along with other financial activities.
Morgan Stanley is one of the major integrated financial services firms operating in the sectors like-
- Asset management
- Financial advisory services
- Security trading
- Investment banking.
Impact of Financial Crisis on Morgan Stanley
Political factors:
The political factors play an essential role in the context of the financial sector. Prior to 2008, the financial organisations like Morgan Stanley was among the leading repositories of the savings of the public yet the importance of building a close connection between the government and financial institutions were neglected (Majdoub and Sassi 2017). The political parties of contemporary USA, argued that this financial crisis to be the cause of the economic deregulation of the government’s policy (Ásgeirsdóttir et al. 2014). The financial firms were allowed to borrow more than the expected level. To them, the stricter government policy would have prevented the situation becoming more critical.
Economic factors:
In 2008, the company faced a major shock due to the high default rate in the subprime mortgage bubble in the USA. The extraordinary delinquency rates headed to a quick devaluation of the financial instruments (mortgage-backed securities that included bundled loan portfolios, derivatives as well as credit default trades. After the value of such assets plummeted, the buyers for the securities fast evaporated therefore, the banks who invested heavily in the assets started to face a liquidity crisis. Consequently, Freddie Mac was taken over by the federal government and Lehman Brothers filed bankruptcy. Despite the US federal government paid trillions to balance the situation, it became more difficult to borrow cash.
Morgan Stanley in December 2008 reported to face a massive $2.5 billion loss during the fourth quarter that surpassed all the predictions by the financial analysis. The collapse of Lehman Brothers added fuel to the unprecedented market disorder. During this time, the company lost $2 share for discontinued operations (Dagdeviren, 2014). The company had close connection with the US market and the government. In the annual meetings, the contemporary CEO faced the questions from the investors. This financial crisis led the company to announce that it would become traditional bank holding companies regulated by the Federal Reserve.
The approval by the Federal Reserve to the company’s bid for becoming banks finished the ascendancy of the securities firms thus covered weeks of chaos which sent the Lehman Brothers Holdings Inc. to bankruptcy and rushed sale of Merrill Lynch & Co. to Bank of America Corp. during this time, Mitsubishi UFJ Financial Group which is the largest bank in Japan, invested more than $8.5 billion in Morgan Stanley (Miller 2017). This represented one of the largest physical check signed, delivered as well as cashed. After the investment was made the concerns over the Mitsubishi deal’s completion during the October of 2008, the stock market instability produced a histrionic fall in the stock price of Morgan Stanley below the levels than that was recorded in 1994. However, the stock price recovered once 21% stake of Mitsubishi UFJ in Morgan Stanley had been completed. During the financial crisis of 2008, Morgan Stanley borrowed more than $100 billion from the Federal Reserve. According to the data, the amount was the most compared to any bank.
Factors Affecting Global Business
Sociocultural factors:
This social factors have a deeper impact on the financial activities of the company. Due to the financial change the social trend also altered as the preferences of the people changed (Morlino and Raniolo 2017). This affected the company’s brand value. During this time, the Consumer demographics as well as people’s attitudes to its financial services also changed a lot. The attitude to the immigrants in increasing diversification in the USA play major role in changing sociocultural factors. The crisis affected the recruitment and Human resource sector of the company. The crisis resulted in the reduction of the services (Fecher et al. 2017). The recession affected Morgan Stanley took some cost cutting measures that the value of the services decreased in order to save the company from being bankrupt. It compromises with the service quality as well as desirability of its services. The political strategies to save the company was challenging as well as self-contradictory. The strategies diverted consumer spending, reduced the customer confidence along with killing the employee morale who are central for the survival of Morgan Stanley (Burnham, Gakidis and Wurgler 2017). The consumers became uncertain whether the financial crisis had ended or attack again. The consumers were being cautious in the lending as well as spending habits fearing that it was not over yet. This behaviour however did not help the company to recover fast.
Technological factors:
Technology now a day is virtual everywhere but it was not the case before 2008. However, Morgan Stanley had a dominant part in the technology investment banking. Its various sectors like Institutional Securities segment, wealth management and investment management all depended on technology and its innovation (Polletta and Callahan 2017). The company was contacted by the US treasury for advising to survive the situation by providing potential rescue strategies and the organization strategized it to be market controlled by confusion and fear that short-sellers had been driving their stock down. The organization had changed from a Wall Street dealer to a bank holding company due to crisis. The technology before 2008 had fewer technological advancement which had no option for robo advisors that now help the company for sustainable investment and banking.
The company is currently operating in the 42 countries and has more than 55,000 workers. The company has clientele like various governments, institutions, corporations and individuals. According to the CEO the company policies after 2008 financial crisis had taken measures for lowered borrowing as well as shutting down the company’s proprietary trading desk. The policies changed the Morgan from Wall Street dealer to an investment bank thus, more than tripled the organization’s deposit base that is a safe source of capital (Rajmil et al. 2014). It was a major change from its 70-year history the strategies de-emphasized investment banking as the driver of profits of Morgan Stanley. The company has completed the purchase of a majority stake in Salomon Smith Barney’s brokerage division, instantly turning Morgan Stanley, once an élite white-shoe institution, into the largest brokerage house in America.
Political Factors
The most important incident in 2016 was the presidential election in the USA and due to Trump’s election win made the banks of the USA enjoy sharpest recovery since 2008 and 2009 economic crisis (Chang et al. 2013). This is due to the fact that the investors were buying stocks with hope that the Trump effect will be changing regulations which will help in having the bank more profits. The idea of the traders was that Trump would bring a huge infrastructural change with investment in order to raise inflation. With accordance to this, the Federal Reserve will lift the interest rates which will help the investment banks to earn more money.
Political factors:
There are two different aspect influencing the business development of Morgan Stanley. One is the new Trump administration and another is Brexit. The political upheaval in last few years between Donald Trump and Hilary Clinton affected the banking industry in every aspect. Stock price of this investment bank faced major ups and downs but after Trump’s victory the stocks of Morgan Stanley shoot up. According to the economic analysts, the shares of the USA investment banks can be a bargain at present prices because Trump’s meticulous stance on the regulations like the Dodd-Frank act by the former presidents has become clear. The new USA president has disapproved Obama’s regulatory reform in 2010 focusing to the banking sector.
The new policies have designed to try as well as help prevent a new financial crisis in the US economy. As his political campaigns planned, Trump dismantled and strategized to replace the former Dodd-Frank act. It aimed to increase the credit availability on the one hand and reducing regulatory burden on the financial service providers (Feldkircher 2014). The investment banks like Morgan Stanley are mostly active globally were dealing with pressure from regulations, non-transparent or corrupt interpretation of the complex provisions. Therefore, these companies were finding these regulations environment costly, intrusive as well as inconsistent. However, the new administration under Trump has started focus on mitigating the regulatory burden of the economic services by bringing some changes or revising to the previous rules.
Brexit is another political issue that affected the international business of Morgan Stanley. In the same year there was again a huge change brought about by the UK and EU government. Despite the fact that the Brexit has spent more than a year, the economy of the region is still facing uncertainty. This major change has also affected the investment banking where the firms were confused regarding the complexity of the passing of article 50 (Goh et al. 2015). The company was fearing of asset management for which the managers were not certain that they will be able to sell the EU registered stocks to the investors from the UK and vice versa. After that there was the complexity of Midfid which was the European regulation for the investment services. Under this regulation the investment banks operating in the UK as well as in Europe, need to cope up with the new rules and endure the changed regulations. These regulations also influenced the recruitment policies in the respective regions. The policies for foreign investments are solely controlled by the US government and after Trump’s victory, the policies fluctuated therefore, the company has to bring some changes to maintain sustainable growth (Grullon, Underwood and Weston 2014). The USA’s regulations associated with consumer rights and laws along with the customer privacy has a close surveillance of the government.
Economic Factors
Economic factors:
Despite the fact that the economy of the US is the largest economic supergiant but recent investment landscape of the USA is very difficult to navigate. Continuously changing inflation as well as exchange rate has been effecting the business of Morgan Stanley. Inflation is affecting the currency value therefore, causing instability (Igli?, 2014). The currency of the USA influences the value of the currencies worldwide therefore the exchange rates also alters and affects the banks globally. It is influencing the spending rates a s well as infection in other nations. Even after various changes in the financial policies, the interest rates could not withstand the current market rally, therefore, touched dramatic lows. This affected the global equity market so much that the market faced downturn by double digits. The recent macro-environment that includes Brexit and the presidential election of the USA have yield negative effects that drove people to search fixed income assets by shifting from equity. The markets in Asia and Europe went down as 14.65% and the debt markets are under pressure as well as the investor sentiments are fragile.
Social factors:
The changing investor and their buying behaviour are important issues that influenced the business of Morgan Stanley. Institutional and retail customers are now concerned about the fee sensitivity as well as transparency. Therefore, the company has to increase the customer experience as well as client engagement (Jacobsen and Alexander 2017). The new generation of investor which are basically millennials see the investing quite differently for their experience with the institutions and the social media. Additionally, this generation of investors has a general feeling of disbelief in the financial services since they know consequence of the sub-prime financial crisis of 2008 as well as the stock market volatility. Instead of this, they prefer socially aware and sustainable investment choices.
Technological factors:
Technology is now changing every day and so also the methods of handling of funds by the customers (Chodorow-Reich 2013). The Global banking is having a makeover in response to disruptive innovations from financial technologies and a new industry is developing to support digital delivery of financial services as well as insurance. Investment banks like Morgan Stanley has alone generated annual revenues globally by using technologies like Robo-advisors, big data and block chain in order to serve its customers in the emerging economies. These technologies though have high investment but these have helped the company to increaser security and as the various government organizations have connection with Morgan Stanley, it increases loyalty and trust (Rose-Redwood and Rose-Redwood 2017).
Sociocultural Factors
The economic crisis and the later period have drastically changed the perceptions of the investors particularly in relation to the soundness of the financial system of the USA. Therefore, large financial firms are fast changing so also the systems of Morgan Stanley. It changed its operation style as well as management (Shin 2014). The financial crisis of 2008 had compelled the contemporary authorities to maintain the firm in a safer ground therefore, they changed the company from a Wall Street dealer to a bank holding company. thus tripled its deposit base. This helped a lot to secure a safer source for the bank’s capital. John Mack de-emphasised investment banking to ignite the company’s profit. In June 2009, company brought change in the management where the ex-CEO John Mack was replaced by James Gorman a completely unknown to investment banking.
The new CEO was never being an investment banker rather he had knowledge of brokerage force in the McKinsey. In this transformation process Gorman was responsible for revamping the brokerage division of the company. Morgan purchased the majority of stake in Smith Barney’s brokerage division that immediately turned the company from an elite and prestigious firm to the largest brokerage house in the USA (Veeman 2017). According to the observers, this changed management and shifted focus had finally changed the company’s shape and took it ways far from its roots. According to the Wall Street historians, it was this large brokerage force has transformed the company where the people started considering it to be a distribution business rather than merely an investment bank. However, Gorman had no intention to exit the investment banking sector and wanted to advise the clients on managing stock, mergers as well as bond offerings. It also competes trade for other companies. To him the company’s focus had always been institutional securities business and it will remain same on the future also.
According to Chacko and Jayasuriya (2017), it was clear that the company had taken diverse route to overcome the financial crisis that its closest competitor Goldman Sachs. This particularly company dramatically walked up its trading desk. Therefore, Goldman led to profits initially but also opened itself to the bigger losses and though it became an investment bank had done little to attract more deposits. Morgan on the other hand was in the process of eliminating all the trading that it used to do for its own account which assured that the risks it was taking per day had continued to drop. It became interested in building its deposit base for which it hired Cece Sutton the former Wachovia executive for running its retain banking section. Gradually the firm recruited more employees in its different offices in order to expand its operation. The most important change was the acquisition of Solomon Smith Barney that boosted a number of brokers in Morgan and increased its revenue (Jin, Liu and Austin 2014). After recent presidential election, the company had made a huge profit by selling and buying share options. According to Security and Exchange Commission, this election and victory of Trump helped the firm to sustain its position as the largest brokerage company in America.
Technological Factors
Conclusion:
Therefore, it can be concluded that globalisation has a huge effect on the large companies across the world. As globalisation has increased connectivity, it definitely increased the risks associated with it. The companies now a days are closely depended on each other so also on the clients. Therefore, minimal change n economy or politics can effect immediately on the operation. Here, Morgan Stanley operates globally and has a deep impact on the economy therefore, was affected greatly with the financial crisis of 2008. However, overcome the fall and got benefitted by the 2016 American presidential election.
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