Transparency of financial institutions during the Credit Crisis.
Select a financial institution that had serious financial problems as a result of the Credit Crisis. Review the media stories about this institution during the six months before its financial problems were publicized. Were there any clues that the financial institution was having problems? At what point do you think that the institution recognized that it was having financial difficulties? Did its previous annual report indicate serious problems? Did it announce its problems, or did another media source reveal the problems?
Sample Solution
One financial institution that had serious financial problems as a result of the Credit Crisis was Lehman Brothers. In the six months before its financial difficulties were publicized, there were numerous red flags in the media that signaled potential trouble for the bank.
The first indication came from an article published in April 2008 by The Wall Street Journal which reported on Lehman’s decision to raise $6 billion in new capital to cover losses caused by bad mortgage bets. This action suggested that something was not right at Lehman, as they sought additional funds when their stock value was still near yearly highs (Garrity et al., 2008). It also indicated that management knew more than what was initially being shared with investors and analysts about how much damage had been done due to investments in subprime mortgages.
In addition to this, stories began emerging around this time of senior executives leaving Lehman amid declining performance and increasing pressure from regulators over issues such as accounting practices used by the firm (Greene et al., 2008). These departures raised questions about whether or not leadership at Lehman had lost confidence in their ability to turn things around. Additionally, reports suggested a possible liquidity crisis brewing at the bank due to their need for short-term funding which further fueled speculation about potential problems (Sarbanes & Mackenzie, 2019).
Based on these pieces of evidence it appears likely that management recognized they were having financial difficulties sometime between April and June of 2008 – shortly after sources within The Wall Street Journal revealed details concerning their decision to raise capital and prior to news breaking regarding senior executive departures . After this point ,it is likely media coverage increased exponentially – especially given how closely scrutinized banks have become since then considering recent economic trends.
