Subprime Mortgage Crisis

Assessment task details and instructions

 

Task details:

 

“proponents of shareholder for empowerment, regularly occurring corporate scandals as well as the most recent 2007-8 financial crisis have further bolstered the case for stronger shareholder rights. From this perspective, directors and managers – particularly in financial institutions – and other gatekeepers are to blame for the crisis and its effects”.  (Moore & Petrin, Corporate Governance: Law, Regulation and Theory, Palgrave (2017) at page 93)

Critically analyse this statement in the context of the 2007-8 banking crisis specifically and the balance of power between shareholders and directors generally.

 

comment: check the attachment – chapter for of the book is attached, – page 93 is included for review.

 

Instructions:

 

In this essay-style assignment you are expected to:

 

1. in to analyse the statement in relation to the global banking crisis and shareholder-director relations more generally look beyond UK case law and legislation.
2. Review the materials on shareholders and directors and the role that each play within corporate governance. Consider the role of institutional shareholders when analysing the role of shareholders.
3. you should consider fully the political, technological, philosophical and economic implications of the debate over the balance of power within the corporate governance partnership.

 

comment: the above instructions are provided by the university

 

            Comment: This assignment must be written in Arial 12pt with 1.5 spacing.  Please put page numbers at the bottom of your script. OSCOLA citation

 

1. Introduction (300 words) – ready but please check and amend if you wish.

The ‘Subprime Mortgage Crisis’ in 2007, following the ‘fall’ of ‘Lenham Brothers’ in September 2008, led literally to a domino effect worldwide which consequently result to the – well know to all – Global Financial Crisis of 2007-2008 (‘GFC’). It’s been more than a decade and the GFC is still ‘haunting’ several countries (Europe mainly and specifically Italy, Spain, Portugal, Greece, Cyprus). The ‘UK report of the Committee on the Financial Aspects of Corporate Governance” correctly quoted that, ‘Corporate Governance is the system which companies are directed and controlled”, this is to say that, during the GFC the ‘people behind the wheel’, were not micromanaged for their actions. The years of deregulations and the lack of effective operational controls, the fundamental weakness of the corporate system justifies the comment made from the Finance world describing  the corporate governance as ‘a system badly designed’.  Acknowledging the impact, the GFC had, and still has, and the manipulation of Directors power and to satisfy  investors expectations for increased profits, this legal analysis, aims to examine; the development that result to the GFC from corporate perspective. Whether this was purely Directors fault,  driven by irrational decisions, failing  to comply with the regulations and to act in good faith and to the best interest of the organisation, or this was  Shareholders responsibility to monitor Director’s decision or this corporate governance regulations failure this appears to be a ‘grey area’.  Furthermore, we will explore and identify further other law case profile failures which led, from time to time, to the collapse of corporate governance around Europe, the United States and the United Kingdom. Furthermore we will  review, the role of Directors, the Shareholders and the institutional Shareholders,  their ethical behaviour and their relationship within multinational organisations, to further understand the importance of ‘Good Corporate Governance’ versus to ‘Bad Corporate Governance’ which can result to various consequences either from a political, technological, philosophical and economic perspective.

 

 

 

 

2. The Corporate Governance Prior to the Global Financial Crisis, (700-1000 words)

“ in to analyse the statement in relation to the global banking crisis and shareholder-director relations more generally look beyond UK case law and legislation”

Briefly discuss – the background of corporate governance and it development and the need to be monitored – discuss corporate collapse case law around the word (high leverage exposure can result to corporate failures)   – Case Law below – briefly discuss the cases and the impact they had in corporate governance

Long-Term Capital Portfolio L.P. (USA hedge fund – collapsed in 1990)

https://www.richmondfed.org/-/media/richmondfedorg/publications/research/econ_focus/2009/summer/pdf/economic_history.pdf

Baring bank  – well respected bank in London and globally, (UK downfall in 1995 – Nick Neelson (Singapore office)

http://ethicsunwrapped.utexas.edu/wp-content/uploads/2017/02/22-The-Collapse-of-Barings-Bank.pdf

HIH insurance (Australia- early 2000)

https://www.totalassignmenthelp.com/free-sample/hih-insurance-limited-case-study

Enron Case (US case- 2000) – see attachments

Parmalat (Italy 2003)

https://www.coursehero.com/file/32745050/pdf-2pdf/

 

 

 

 

 

 

 

 

 

 

 

 

What went wrong?

Seeing the above cases things can go dramatically wrong, and they keep happening . Why? what is the human fact behind this, how can we reduce that risk

 

Agency Theory – discuss

arises due to separation of ownership and management of the company make reference to Berle and Means ‘ The modern Corporate and Private Property (1932)  they revisited the Governance and powers of large US corporation in (2004)  – attached

 

Stakeholder Theory – discuss

broader theory, regognising the relationship of the Directors and the shareholders

we need to consider the employees, banks, creditors of the companies.

suggest return to shareholders (dividend) focus on the widest stakeholders,

 

Comment: discuss about the importance of good corporate  governance and discuss about the regulatory framework around the word (see below) identify the weakness of the below regulations, policies and question why the regulators did not predict the ‘GFC’ –   if these regulations were there prior to the GFC then why they directors abused their powers and did not act on the benefit and to the best interest of the organisation

 

Principles of the Oganisation for Economic Co-operation and Development  (OECD) check the pdf document – originally issued in 1999 and were revised in 2003 taking into consideration the development of corporate governance,

Regulatory framework in the UK; Companies Act 2006, The Financial Conduct Authority (FCA) UK Corporate Governance Code

Regulatory Framework in the USA;

the Securities and Exchange Commission  (SEC) , The Securities And Exchange Commission (SEC) was created in 1934 to help restore investor confidence in the wake of the 1929 stock market crash.

Sarbanes – Oxley Act 2002 (SOX ) enabled in 2002 in response to corporate failures in 2001-2002

 

 

 

 

3. The Global Financial Crisis (700 words)

background and how it started (https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf) make reference to the Great depression,  and discussed the causes briefly (a)  the financial crisis  growth of financial products and practices toxic assets (b) and the uncontrolled risk and (c) the growth of the, largely unregulated, “shadow banking” result to the  Global financial crisis discuss further the impact this had in US, the UK Europe ‘European debt crisis’  and make reference to the worldwide events whereby Corporate Collapsed due to scandals with reference to the cases of above   (note: BNP Paribas was warning investors that they might not be able to withdraw money from two of its funds, and the British bank Northern Rock would soon seek emergency funding from the Bank of England.

 

 

4. The Decision Makers (600 words)

make reference to the UK’s Model Articles as well as the Delaware General Corporation Law which both make clear that the ultimate power to ‘manage’ or direct the company is by default vested in the board of directors.

DIRECTORS: discuss the key role of the directors they play in the organisation of the company and the proponents of shareholder for empowerment

discuss about the Functions of the board, and discus directors failure from the cases above without concluding make clarify that “shareholders and directors are not in an agency relationship” (this is quoted from the book ) make reference in relation to Belre and Means revisited: the governance and the power of large US large corporation

 

SHAREHOLDERS ROLE:  identify the role of the shareholders play within a corporate structure – analyse the principles that have an impact on them, and discus shareholders failure from the cases above

consider the role of the institutional shareholders while analysing the shareholders role

(very important) and refer to the institutional shareholders Committee (ISC)  as their statement on the responsibilities of institutional shareholders formed the body of the first UK Stewardship code (2010) – theory- in accordance to the Section 21 of UK  Companies act shareholders have the power to re-structure the governance of the company

 

5. A Decade after the Economic Financial Crisis (600 words)

consider fully the political, technological, philosophical and economic implications of the debate over the balance of power within the corporate governance partnership.

Dodd-Frank Wall Street Reform and consumer protection Act – which concluded the financial stability Oversight Council in   2010 to increase transparency and prevent banks from taking on so much risk and to redue predatory lending.

the European Union introduced European System of Financial Supervision in 2011 and the EU banking union in 2012 – European Securities and Markets Authority introduced in 2011

 

UK Financial Services Act reformed – 2013

 

 

6. Conclusion (300 words)

The US government failed to regulate and supervise the financial system. The regulations are set by humans, Human failing,- to paraphrase Shakespeare, they wrote,’ The fault lies not in the stars, but in us”  conclusion to the legal analysis – lesson learned – unsecured, uncontrolled profit making highlighting the importance of Good Corporate Governance advise what  the future of the Corporate governance should be

– unlocking shareholders powers, (https://www.theguardian.com/politics/video/2012/jan/16/nick-clegg-john-lewis-economy-video)  increase institutional shareholders activism https://youtu.be/T_DsIgHesqg – https://youtu.be/j651zi-Y_Wo

consider the idea of  increased globalisation of the corporate governance – society will act as regulator of corporate structures thus the need of

corporate social responsibility. Gender diversity – consider monitoring directors remu

6. Bibliography