Project #83162 - Financial Crisis Discussion

Write a small paragraph discussing the following (whether you agree or disagree)(8-10 sentences long, it can be longer if you want):

 

The primary goal of Financial Management is shareholder wealth maximization because the firm is owned by the shareholders. As you have read on the textbook, Agency theory is about the potential conflict between shareholders and managers. The goal of maximizing shareholder wealth may conflict with interests of management, particularly with their compensation. Let’s have discussion whether you agree with the following articles in light of the recent financial turmoil. For those who post after the initial poster, please feel free to comment on your peers’ comments as well.

 

To Avoid Next Financial Crisis, Let's Regulate Bankers' Pay Date: 2009-09-22 By Peter Morici Wall Street greed and irresponsibility have nearly destroyed the U.S. economy. Big bonuses for bankers encourage reckless risk taking and were a principal cause of the credit crisis and Great Recession. Pay must be regulated to avoid another calamity. A generation ago, banks took deposits, made loans and collected payments. Bankers quickly felt the consequences of money loaned to folks unlikely to repay. During the 1980s, deregulation pushed up interest rates on deposits. Banks got caught with old mortgages on their books yielding less than they paid for deposits. The savings and loan crisis resulted, motivating banks to sell new loans to investors instead of holding those already in their portfolios. Banks wrote mortgages and sold those to Wall Street financial institutions, which bundled loans into bonds and sold those to investors, such as insurance companies and foreign governments. Often, separate mortgage service companies collect payments and foreclose on delinquent loans. From loan officers to the Wall Street bond salesmen, opportunities to exaggerate the quality of loans emerged. If local banks or Wall Street financial houses could pawn off high-risk, high-fee loans as reasonably safe, they enjoyed big paydays. Wall Street bankers wrote bogus insurance policies called "swaps" that were supposed to limit losses for investors when mortgages defaulted. AIG wrote many swaps without capital to back them up, and banks even wrote swaps on each other's mortgages - like two homeowners on a North Carolina beach promising to pay one another in the event of a hurricane. Well, the storm came, and AIG and several big banks became insolvent. Washington decided they were too big to fail and bailed them out. But if Wall Street banks are too big to fail, then they are too big to be allowed to continue such irresponsible behavior. Writing swaps and selling bad bonds to unwitting investors permitted bankers to earn huge profits and bonuses. When too many mortgages failed, investors and bank shareholders took enormous losses, and taxpayers bailed out the banks. The Federal Reserve and Federal Deposit Insurance Corp. permitted banks to borrow at rock-bottom interest rates and enjoy big profits to rebuild their capital. Consequently, seniors relying on certificates of deposit for income now receive much reduced interest rates. That's right: The Federal Reserve is taxing grandma to bail out Goldman Sachs. Flush with profits, the banks are up to their old tricks - again creating highly engineered financial products, selling swaps, setting aside massive profits for bonuses and manufacturing conditions for another crisis. French and German regulators advocate limits on bank compensation, and the Federal Reserve is considering prohibitions on compensation practices that encourage excessive risk taking. The latter is too complex to be realistic; the banks would run circles around such rules, much like lawyers creating tax shelters. The better option is to limit bonuses and salaries of bankers to a fixed percentage of net income that aligns financial sector salaries with those of other industries. That's harsh, but so is the pain bankers' recklessness has imposed. Bankers should not be allowed to pay themselves royally and in so doing put the nation at risk again. Peter Morici is a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission. His e-mail is pmorici@rhsmith.umd.edu. A service of YellowBrix, Inc.

DISCUSS STRENGTHS AND WEAKNESSES OF DIVIDEND DISCOUNT MODEL: (1 paragraph/same length as above, may be longer)

Chapter 10 uses one of the oldest, most conservative methods of valuing stocks - the dividend discount model. It's one of the basic applications of a financial theory that students in any introductory finance class must learn. Please discuss strengths and weeknesses of the dividend discount model. 

Please click on the link below for Chapter 10 solutions. Please not that there will be no questions from Chapter 9 as this is an introductory chapter to "time value of money".  The first test will be based on Chapter 10 and Chapter 11.]=-.

Subject English
Due By (Pacific Time) 09/25/2015 12:00 am
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