Global Financial Crisis in 2008 Essay Example | Topics and Well Written Essays - 2000 words

Global Financial Crisis in 2008 - Essay Example Precisely, some of the great organizations that succumbed to this crisis include Lehman Brothers, Bear Stearns, AIG, Fannie Mae, Freddie Mac as well as Meryl Lynch. All these were recognized as brand organizations and as such, they had been nationalized effectively. In addition to this, these organizations had risk management systems entailing technical excellence. Irrespective of this, they still succumbed to the effect of the Global Financial Crisis. The question is: if they indeed had implemented a superior risk management strategy, then why did they go under? Therefore, this article aims at establishing what could be the corporate weakness that contributed to their failure.2 Despite the fact that these institutions had established the right risk management strategies, there must have been flaws within those systems. To establish and better understand these flaws, it is essential that one understand some various concepts: Interconnectivity between operational risk, credit risk and systemic risk Risk management strategies are usually established and implemented in an effort toward readying an organization for any eventual risk that may occur. There are three categories of risks that an organization faces depending on the nature of its operations. These are: Operational risks: These are usually described as breakdowns that occur internally within the control systems as well as the corporate governance and as such, it results in financial losses attributable to errors, fraud or even inability to perform timely. In addition to this, these risks cause the interest rates set by the financial institutions to become compromised in some way.3 Systematic risks: These are risks that occur within a certain market segment or within the entire market. According to financial analysts, the aftermath of systemic risks is that the value of the portfolio of an organization declines. Such risks arise due to political or even economical problems like the global financial crisis in 2008. Other factors that facilitate the occurrence of systemic risks include changes of interest rates, wars as well as calamities. Credit Risks: These are risks that arise out of uncertainty in credit worthiness of a borrower, that is, uncertainty on the ability of the borrower to meet his obligations. They usually take a variety of forms since the borrowers could be a range of parties including the sovereign governments. According to most financial analysts, all these risks are interrelated or interconnected and as such, they are the major risks that warrant an organization to establish risk management strategies. According to most financial analysts, both the systemic as well as the credit risks are commonly underpinned by the need for individuals within an organization to follow some stipulated work procedures as well as the need to engage in particular work related activities, which can be said to be strong human elements. This underpinning is what can be referred to as oper ational risks, and this is where the interconnectivity is underlain.4 These three types of risks can therefore be said to have caused the extinction of the aforementioned organizations that were major players within the economy. The most obvious reason for this is due to failed transactions. Whenever financial credit occurs, the approval of credit worthiness of any organization by the financial institutions is usually delayed. This is because during such times, credit approval must be