The financial market has been dramatically changed in the last few months as the subprime mortgages meltdown in the USA dried up credit markets and funding liquidity (White 2008) and created a ripple effect in the global economy (Harmon 2008).
The impact of the global financial crisis, first felt in July 2007 when Bear Stearns, the fifth largest investment bank in the US , announced that two of its mortgage investment funds, worth about $US 1.5 billion, had literally no value left in them (Nason 2007). Then Lehman Brothers opted for the biggest bankruptcy in US history (The New Age, Dhaka, 8 December, 2008).
The US government also came up with a $US700 billion rescue fund to buy a stake in a broad range of financial companies (The Australian, 5 November, 2008). Central banks of different countries across the world are slashing interest rates to battle the deepening global crisis. In a globalized world where nations are increasingly interdependent, the downturn in the world’s largest economy has had global ramifications. The US downturn is sweeping across the world- Every nation, every government and every economy is affected (Rudd, 2008).
The subprime crisis and resultant economic recession are having significant impact on organizations’ management practices. Unlike normal circumstances, executives in charge of managing enterprises are now focusing more on minimising losses instead of maximising profits. Strategically, organizational leaderships are increasing their focus on reducing (through layoff, cutting back shifts/working time) or relocating their workforce (Ernst and Young 2009) and resorting pay cuts with a view to reducing costs and avoid bankruptcy. For instance, Holden are cutting back shifts in order to slow production (King 2009). Pacific Brands decided to move its production offshore (axing more than 1800 jobs in Australia) in an effort to reduce costs (Schneiders, Sharp & Murphy 2009). Organizations are increasingly getting it difficult to access trade credit from banks/lenders. Critical thinking and strategic decision making by business leadership became essential to weather this difficult period.
The ongoing financial crisis rooted in subprime lending has put enormous pressure on CEO/Boards of enterprise to manage/adjust their workforce wisely and meet cash requirements so that businesses do not suffer in the long run from want of skilled and experienced staffing. This paper contributes to the existing literature by demonstrating how highly decentralised and weak regulatory architecture created conditions for the near collapse of the global financial system that forced governments of major economies to come up with rescue package .
The crisis is so acute that the G-20 leaders (in Pittsburgh meeting) had to reach ‘‘a strong consensus'' on firmer oversight of the global financial system and measures to curb excessive executive pay (Davies, 2009). This paper provides a brief description of the precursors of subprime lending in section 2. Section 3 discusses the factors responsible for the subprime crisis. Section 4 examines why government intervention becomes necessary in the event of financial meltdown and Section 5 offers some suggestions for improvements in the financial regulatory and monitoring regime to minimise the recurrence of such crises. Section 6 concludes the paper.
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