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Estimation Techniques Of The U S Financial Crisis Case Study

Estimation Techniques of Financial Crisis The unquestionable ethical conducts within the corporate circle had been the major factor that led to 2008/2009 financial crisis. By studying the root causes of the crisis, it has been revealed that bad conducts among the CEOs of Bear Stearns, Lehman Brothers, Citigroup and Countrywide Financial have been the primary factors leading to 2008/2009 financial crisis.

Objective of this paper is to argue that the CEOs of Bear Stearns, Lehman Brothers, Citigroup and Countrywide Financial did not take the interest of the companies into a consideration leading to frictions between the CEO and the shareholders

In 2007, the financial markets were shaken by a serious financial crisis because of a dryness in liquidity associated with a subprime mortgage business where people with doubtful credit reports were offered mortgage loans leading to a rise of loan default. Moreover, lack of transparency, greediness and excessive desire for money have been the major factors that led to the financial crisis. (Gorton, 2008). The greediness was demonstrated among the CEOs of Bear Stearns, Lehman Brothers, Citigroup and Countrywide Financial where all of them increased their compensation packages without putting the companies' and shareholders' best interests into considerations. Traditionally, the Bear Stearns, Lehman Brothers, Citigroup and Countrywide Financial were publicly traded companies and raised largest percentages of their liquidity from shareholders' funds. Thus, their primary obligations are to protect the interests of the companies and shareholders. However, the CEOs of these companies did not respect these obligations rather they indulged in the risky businesses that consequently eroded the shareholders' wealth.

Between 2004 and 2007, Lehman Brother, Citigroup, Bear Stern and Countrywide Financial indulged in the high-risk subprime lending involving offering mortgage loans to people who did not qualify for the loans. The subprime lending is a type of loan where a financial institution offers loans to people who do not qualify for the loan or people...

However, Lehman Brothers, Bear Stearns, and other financial institutions immensely indulged in this type of financial practice because of greediness. Additionally, these loans were characterized with poor collateral, and high-interest rates to compensate for higher loan risks. Despite the higher risks associated with the subprime lending, the CEOs of these financial institutions invested largest percentages of the companies' financial assets in the business because of its associated high interests. For example, Lehman Brothers invested over $146 billion dollars in the subprime lending. Bear Stern also used approximately $13.40 trillion in the mortgaged-backed derivative financial instruments. All these companies recorded abnormal profits when between 2005 and 2007, however, the recorded profits were tied to the subprime hedge fund across the United States.
"These companies did so at the expense of millions of ordinary Americans and investors of all types -- including other financial institutions, universities and pension funds, cities and towns, and even hospitals and religious charities," Holder said at a news conference announcing the settlement." (Tucker, 2014 p 1).

Despite several warnings from financial experts about the associated risks of subprime lending, the CEOs of the companies were not pursuing the interest of the companies rather they went ahead to increase their compensations. An expert in stock trading had warned the Citigroup that "he would not be surprised if half of these loans went down it was amazing that some of these loans were closed at all." (Tucker, 2014 p 1). Despite this warning, the CEOs of the Citigroup and Countrywide Financial increased their compensations to $25 million and $43 million respectively. The CEO of Bear Sterns also increased his compensation package to $34 million in 2006. In the same year, CEO of Lehman Brothers increased his compensation to $27 million. (Larcker, & Brin, 2010). However, these executives did not compensate their companies with revenues increase despite an increase in their…

Sources used in this document:
Reference

Gorton, G. B. (2008). The Subprime Panic, National Board of Economic Review, Working Paper 14398,

Larcker, D. & Brin, T. (2010). Lehman Brothers: Peeking Under the Board FaAade, Stanford Closer Look Series.

Tucker, E. (2014). Citigroup to Pay $7 Billion to Settle Subprime Case. Associate Press.

Wiggins, R.Z. Piontek, T. & Metrick, A. (2014). The Lehman Brothers Bankruptcy: Overview. Yale Program on Financial Stability Case Study.
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