Introduction: Global Financial Crisis events
Each and every country shall be financially sound and shall install and place the proper financial system which can never affect other countries financial working. The financial condition of every country depends upon the financial system and the operations of the company operating in the industries which are operating in that particular country. In the year of 2007, there has been the major financial crisis since after the year of 1929, being the great depression. The financial crises have been flowed globally and have affected the financial condition of each and every country across the globe. The report will be the medium which will bridge the gap between the results of financial crisis and the reforms taken to erode the financial crisis impact and effect. The report has been prepared and presented for the purpose of analyzing the financial crisis and its effects. The report has been started with the meaning of the global financial crisis and the causes because of which the same has happened and has led the wave of shock across the globe. Thereafter, the focus has been laid on the subprime mortgage under housing sector which is considered as one of the major cause of the global financial crisis and how the same have been occurred and perpetrated for so many years and have been blasted with the negative effects across the globe. Then, the major question of the stakeholders have been answered whether the financial crisis will happen in the near future and if yes then what may be the possible reasons for occurrence of the event again. Then the scale and impact of the global financial crisis across the globe in different countries have been explained. Lastly the focus has been laid down on the reforms that the countries have adopted in order to stop the ways through which the financial crisis will happen again. Then the report has been ended with the appropriate conclusion and recommendation as to what shall be required to be done in the case of financial crisis.
World has suffered the financial crisis twice in the history. First financial crisis have occurred in the year of 1929 after the end of First World War. The financial crisis have existed for the consecutive period of five years from 1929 – 1933 and has been referred as the period of great depression. Similarly the second financial crisis have happened which has started from the year of 2007 and has persisted till the year of 2013 and till now it has after effects (Coenen, 2010).
Causes of the financial crisis
The global financial crisis of the year 2007 is simply described as the period when there has been the loss of confidence among the investors of the United States when the value of subprime mortgage has been decreased suddenly. It has occurred because of the sudden collapse of the major bank of the United States of America known by the name of Lehman Brothers.
The global financial crisis has been defined with the phrase of the liquidity crunch. It denotes that the bankers of then period does not have that much liquidity position which is required to pay the amount of the running expenditure and the obligations which are due on the short term basis, being payable on demand.
As the definition of the global financial crisis itself contains the detail of the subprime mortgage, it is very clear that the subprime mortgage has been the most important factor which has led the financial crisis.
In the process of granting the subprime mortgage to the customers, the customers belongs to that class which has very low rating and was not able to have loans easily from the banks. In these transactions, agreements are entered into between the banks and the customers where by the house property is mortgaged by the customer with the bank and in lieu of that obtains the loan at the higher rate of interest. The higher rate of interest is charged because of the low rating of the profile of the customer in terms of the credit worthiness of that particular customer. This rating checks the ability of the customer to pay the installment of the loan in time after meeting its personal expenses (HBS, 2014).
One of the major banks of the United States of America of that period, Lehman Brothers, has entered into the large number of subprime mortgage agreements with the view of earning of the interest income on the higher rate. But it has been later reversed with the sudden fall in the value of the properties which are under the hypothecation of the bank. The customers as they have low rating were unable to pay the amount of the loan to the bank. These two situations simultaneously have led to the bank in losses in real terms. In the year of 2007 and the first two quarters of 2008, the company has shown the profits and after the end of the second quarter in the month of September 2018 has filed the application of the bankruptcy before the court. Through this step, the financial and the banking industry of the country has been suddenly deteriorated and has led to the financial crisis across the globe (Azadinamin, 2013)
Possibility of GFC repetition
The subprime crisis has been referred to as the credit crunch for the period from 2007-08. It is because, the value of the houses was higher when it was loaned originally and as of in the year of 2007-08, it has been decreased with the higher value.
Following are the other possible causes which have led to the global financial crisis:
- Frauds in Accounting – Along with the risky transaction that has entered into by the banks, the banks have entered into the transactions which have been finalized as the accounting fraud. They have been misusing the accounting transaction of Repo 105 in the incorrect manner. It’s only to show the profits at the quarter end so as to attract more and more investors (Chatterjee, 2014). Along with the increase in the profit, the banks have decreased their liabilities and accounting for each transaction in a hay way manner and thus leading to the misappropriation of the accounts and understatement of liabilities.
- Proportion of funds of Investors – Higher portion of the funds available with the company is basically from the investor who has invested in the better manner. In this bank there have been 3000 investors who have invested (Masytoh, 2010).
- No consideration of the Federal Reserve Opinion – Before the year of the financial crisis, the Federal Reserve Bank has informed the investors and all stakeholders that the financial condition of the country will soon face the liquidity position and the major banks will bring the financial industry in a position of the collapse (Mc, 2010). Neither the companies operating in the industry nor the stakeholders have considered it as the alarm and rather have entered into more risky agreements and transactions (Johnson, 2012).
- Non Reporting by the Auditor – The auditor has not reported the manipulative transactions being entered into by the banks in their auditor report and has rather covered all the accounting frauds of the banks which has been perpetrating for the last eight years.
The second financial crisis has happened after the period of 75 years. With the current regulatory framework and the policies that have developed over the years after the global financial crisis, it can be said that the financial crisis will not happen but as the future is uncertain and unpredictable, it may happen in the future any time (Dutta, 2010). It is because of the following reasons:
- Subprime mortgages are still being granted by the banks but after due professional skill and care. The rates of the property may fell down any time and is uncertain and no regulatory authority has the certainty as to whether it will decrease or increase in the near future (Maux and Morin, 2011).
- Accounting frauds that the company has been earlier adopting are still in practices but on a small scale and when it will become large then again there will be the chances of having the collapse as the fraud takes time to perpetrate and takes second to do blast like subprime mortgage blasé made in the year of 2007 (Chadha, 2016).
Different effects have been encountered and faced by different countries. The major impact has been faced by the countries which are under the phase of the under developed country or are least developed than the developed countries. It is because the developed countries has been able to counter effect the results of the global financial crisis with their decision and the operation which otherwise the under developed country will take years to overcome (Goldstien, 2014).
Economies of trade and services have been largely affected. The least developed countries of the Africa and Asia has faced the greater impact. From the year of 1980 and 2007, there has been the increase in the export from 10% to 30% and that too in different sectors but after the financial crisis it has been severely declined. It includes the oil exporters, manufacturing exporters, mineral, agricultural, services and diversifies exporters. All of them have faced the decline in their export (Karshenas, 2011).
Being the resident of Australia, it is inferred that the economy of Australia has performed better than the other countries. Australian Government has introduced several policies through which the impact of the global financial crisis is minimized. One of such policy has been the Deposit and Wholesale Funding Guarantees scheme under which the then Prime Minster of Australia has guaranteed the customers that their deposits are in custody of the government and is safe and thus have the complete confidence in Australian Financial System (Bollen, 2014).
One of the most important reforms that have been taken by the Government is the introduction of the new auditing standard number 701 on communicating the key audit matters. This new standard requires that the auditor is required to report the key audit matter if any found during the course of the audit (Inman, 2010). The key matters are the matters which are of the significant risk and complexities and which have the material impact on the financial results of the company for that period (AASB, 2015). If it would have been incorporate earlier, then the financial crisis would not have happened.
Scale and impact of GFC in different countries
The other proposed reforms are:
- Control of the real spending per user in education, health and different sector,
- Planning the investment for future years as counter measure and etc.
Conclusion And Recommendation
The global financial crisis of the year 2007 has been regarded as one of the most significant event which has occurred after the year of great depression of 1929. Both were the financial crisis but the major impact that the developed world have suffered is from the global financial crisis of the year of 2007. The major cause of the financial crisis as subprime mortgage loans under the housing sector has been detailed and discussed and that too with the reference of one of the best banker of United States of that time who is known as Lehman Brothers. Other causes including the accounting frauds, non reporting by the auditor and etc. has been detailed. In order to conclude the report, the financial crisis have been described in detail and all the causes, after effects and the reforms have been discussed and thus the report has been found detailed.
It is recommended to have the sound financial policies and system with in the country and also the regular check of the regulatory authorities shall be made on each company operating in the industry.
References
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Azadinamin A, (2013), “The bankruptcy of Lehman Brothers: Causes of Failure and Recommendations Going Forward” available through https://www.researchgate.net/publication/230687440_The_Bankruptcy_of_Lehman_Brothers_Causes_of_Failure_Recommendations_Going_Forward (22/01/2019).
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HBS, (2014), “History of Lehman Brothers”, available on https://www.library.hbs.edu/hc/lehman/history.html (accessed at 22/01/2019).
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Masytoh O, (2010), “The analysis of determinants of Going Concern Audit Report”, Journal of Modern Accounting and Auditing, Vol 6(4), pp 27-36.
Maux J and Morin D,(2011), “ Black and White Red All over : Lehman Brother’s inevitable bankruptcy splashed across its financial statements” , International Journal of Business and Social Science, Vol 2(20), pp 42-61
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