Why Do Financial Institutions Fail?

Why Do Financial Institutions Fail? Do you remember that there was an extremely important historical event, which is the worst financial crisis since the Second World War. The most serious result was that all the investment banks in Wall Street failed, which was a block of healthy development of the world economy. Here is a reason why these investment banks failed. Was it resulting from the wrong policy made by American government or investment banks themselves? Although many people subscribe to the belief that investment banks should take responsibility for the wrong policy, this is in fact a common misconception that we need to clear up. The government should take most responsibility for investment banks failing. Some people say that the reason investment banks failed is the investment banks sold Subordinated bonds (A loan or security that ranks below other loans or securities with regard to claims on assets or earnings) to the customers of the world. However, the subordinated debts were sold by the Federal Reserve Bank, which belongs to American government; it means the investment failed is government’s responsibility. The reason Federal Reserve banks sold subordinated debts to the investment banks is the Federal Reserve banks were risk-averse. At the beginning of this issue happened, the Federal Reserve banks wanted to loan to people with poor credit since they had already loan their money to people with good credit. The Federal Reserve banks counterfeited customer credit to avoid the laws for the people with poor credit. All in all, the government just wanted to make more money. This is the reason why the investment banks failed, American government’s mistakes. (baike.baidu.com) Some people say that credit crisis revealed that the credit risk was caused by the risk of investment banks’ own financial systems, which meant investment banks failed by themselves. The reason investment banks failed were the policies and weak governmental regulation. The employment system of America went against the development of employment situation, since there was a great impact labor union organizations, which had a stronger impact on the industry wage levels, determine and improvement. The main objective of American expansion fiscal policy is near-bankrupt financial institutions, this kind of salvation only can eliminate the financial system risk, and it is unable to create the new operating post actually. Therefore, the reason credit crisis was policies, and weak governmental regulation. This is the reason why the investment banks failed. (baike.baidu.com) Some people say that American government had already done what they had to do. However, government financial regulation was not inadequate. There were many reasons behind the investment banks failed, which was not only including both inappropriate macroeconomic policies of the economies, but also including deficiencies in financial regulation. This destroyed operation of financial market, which meant deficiencies in financial regulation led to the information of the financial market is not symmetric. Therefore, government’s negligence caused investment banks failed. (futures.hexun.com) In conclusion, there are three reasons investment banks failed. They are: Federal Reserve banks were risk-averse, government’s policies and weak governmental regulation, and deficiencies in financial regulation of government. As is mentioned in all things considered, government should take responsibility for the failure of the investment banks. As far as I am concerned, it is high time government took actions to examine the financial system and improve the supervision of the market.

Work Cited
95ysy. http://baike.baidu.com/view/1903335.htm. January 05, 2013. Accessed January 22, 2013
Danhua, Huang. http://futures.hexun.com/2009-03-23/115924753.html. March 23, 2009. Accessed January 22, 2013

Cited: 95ysy. http://baike.baidu.com/view/1903335.htm. January 05, 2013. Accessed January 22, 2013 Danhua, Huang. http://futures.hexun.com/2009-03-23/115924753.html. March 23, 2009. Accessed January 22, 2013