Question

The goal of maximizing shareholder wealth cannot ignore corporate responsibility to social issues and cannot operate without ethical standards. Eventually, long-term abuse and irresponsible corporate social behavior will negatively impact the overall value of the firm. The financial crisis of 2008 saw the end of many financial institutions such as Bear Stearns, Lehman Brothers and Washington Mutual.

What was the main cause of this financial meltdown and how could have it been avoided?

Answer 1

                        The financial crisis of 2008 and many other financial crisis that have occurred across the globe have some similarities that have caused the meltdown in the economy. The share market always works on the principle of giving importance to the shareholders in the market and this would have many impacts on the market trading at different circumstances. The financial crisis of 2008 was caused primarily by the deregulation of the financial industry that permitted the banks to engage in hedge fund trading with the derivatives. Thus, more mortgages were demanded to support the profitable sale of these derivatives in the market. The fed rate was increased in 2004 and the housing prices started falling in 2007 as the supply began to outpower the demand in the market. Thus, may homeowners were trapped as they could not afford the payments and the values of the derivatives crumbled in the process. Thus, banks stopped lending and this lead to the depression of 2008.

                        In the light of above reasons for the cause of the financial crisis of 2008, we can see that the deregulation of the market and the factors that followed due to uncontrolled market structure lead to the depression. It is in the light of this that we should analyse the concept of Corporate Social Responsibility [CSR] and the concept of ethical trading in the financial market. As it is known, the financial instruments have to be traded in an ethical manner so as to provide the required benefit for all the trading partners. Unethical trading and similar practices would lead to the fall of the firm in the longer run and thus such an instance must be avoided.