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Ad Management And The Recent Turmoil In Financial Markets

1472 words - 6 pages

There is a need for high level of consultation, co-ordination and co-operation in every organization or business. To this effect, managers all over the world are often faced with the dilemma of effectively deploying human, material, technological, natural and financial resources to achieve desired organizational goals and objectives.
The collapse of the financial markets, touching off reverberations in the real economy in the last months of 2008 has inevitably been described as the “worst economic catastrophe” since the great depression of the 1930s. To this effect, many observers have raised several questions such as; which parties had a hand in the creation of the financial and emerging ...view middle of the document...

In the case of the financial crisis in 2008, we could identify gray areas in virtually all the elements of management as stated by Drucker.
Like many scholars have argued, the creation of unorthodox and poorly designed incentives and performance measurement systems by the management of financial institutions promoted certain behaviors that led to undesirable results. The misalignment of the interest of managers with those of the shareholders led to compensation systems that emphasized on short-term returns which lead to harmful behaviors like manipulation of stock prices and excessive risk taking. This reward system encouraged high risk taking with a myopic focus on short-term revenue and even incentivized manager for their failures. A particular insight can be drawn from the United Bank of Switzerland (UBS) report of 2008 which showed how employees were compensated with strong incentives to use UBS capital to invest in high yielding mortgage-backed securities. Whilst this was, they failed to provide sufficient incentives to protect the company, hence, mismatching priorities. This would not have proved costly if only the senior managers of the firm were wise enough to put in place strong risk measurement and control system.
Another issue, particularly in the line of managing objectives and misalignment of incentive structure is that of the two major financial institutions in the US; Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). These institutions, although government sponsored to stabilize the housing and mortgage market in the US, but also privately owned, however still berated by the government to be more aggressive in supporting the social goal of increase home ownership. In addition, government bears the risk of insurance, hence permitting high leverage of companies. Mangers in organization hereby get involved in more risky activities with highest potential payoffs, yet the government assures; setting up a system inherently prove to thrive in booming situation and a fatally fall during decline. A little wonder why the financial turmoil had roots in the housing markets.
In addition, there were evidence of faulty strategic planning and organization by managers of financial service firms. A clear fault was the decision to allow excessive leverage and rely hugely on short-term financing. For instance, Jamie Dimon of JPMorgan Chase pursued a strategy for financial mobility by limiting the company’s vulnerability to a market disruption and preserving the option to buy assets at distressed prices. In contrast, Bear Stearns, Lehman Brothers and many other financial firms sacrificed financial mobility for greater short term profits. They borrowed short to invest long, they relied on “hot” overnight funding, and they had high debt relative to equity, they had limited cash liquidity (relative to the cash required in a panic). These factors, coupled with poor risk management processes...


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