Lessons from 2000s

Ayesha Majid

The 21st century has proven to be as economically tumultuous as the two preceding centuries. Between a pandemic, wars, technological developments, progress in civil rights, and breakthroughs in science and medicine, the old order has been swept away, sometimes giving way to freer forms of governing and sometimes not. This period has seen multiple financial crises striking nations, regions, and—in the case of the Great Recession—the entire global economy. All financial crises share certain characteristics, but each tells its own unique story with its own unique lessons for the future. Due to these lessons we were able to experience a smoothened run of economy during the covid-19 syndemic that halted the logistics industry at once and created bottle-necks, hurdles and even complete shut-downs in other sectors while creating a need of overtime for front-line workers who are fighting against the virus on the forefront.

Ayesha Majid
Donia Ismail (Editor)
5/4/2021
Lessons from 2000s
Lessons from 2000s
The 21st
century has proven to be as economically tumultuous as the two preceding centuries.
Between a pandemic, wars, technological developments, progress in civil rights, and breakthroughs in
science and medicine, the old order has been swept away, sometimes giving way to freer forms of
governing and sometimes not. This period has seen multiple financial crises striking nations, regions,
and—in the case of the Great Recession—the entire global economy. All financial crises share certain
characteristics, but each tells its own unique story with its own unique lessons for the future. Due to
these lessons we were able to experience a smoothenedrun of economy during the covid-19 syndemic
that halted the logistics industry at once and created bottle-necks, hurdles and even complete shut-
downs in other sectors while creating a need of overtime for front-line workers who are fighting
against the virus on the forefront.
It’s been more than a decade now since the global credit crunch which was triggered by the collapse
of housing bubble in America, luckily the world has learnt its lessons from the 2000’s major economic/
business-world sets-backs of the modern world like Enron case, failure of banks accurately to gauge
riskiness of it loan customers etc. Other noticeable financial events of 2000’s include Argentina’s
financial crisis between 2001 and 2002, which led the country's government to lose access to capital
markets. And Falling commodity prices and the annexation of Crimea and Ukraine led to the collapse
of Russia's economy.
The aftermath of the crises produced reams of new legislations, creation of new regulatory bodies and
oversight agencies that amounted to an alphabet soup of acronyms like TARP, the FSOC, and the
CFPB—most of which barely exist today—new committees and sub-committees, and platforms for
politicians, whistle-blowers, auditors and executives to buildtheir careers on top of, and enough books
to fill a wall at a bookstore, many of which still exist.
As the COVID-19 pandemic sends the economy into a tailspin once again, the U.S. government and
the Federal Reserve Bank are looking back at the lessons learned from the last economic downturn to
see how to help reduce some of the severity. The COVID-19 pandemic that is ravaging the world in
2021 reminds us that for all of our scientific breakthroughs, we’re still vulnerable to deadly viruses
that can shut down economies and disrupt society and are still vulnerable to global financial crisis even
after having evolved from various financial and fiscal crises since the onset of the new world order
which industrialization gave birth to.
Year 2000:
The Dot.com (or Technology) Bubble
Entrepreneurs saw potential in online business. However, online business was really in its infancy.
Everyone was talking about a "new economy" which referred to an internet-driven economy. Most of
the dot.com stocks, like Yahoo.com, were listed on the NASDAQ.
In January 2000, the NASDAQ closed above 5000. 10 years later, the NASDAQ was trading around
2700. Investors were getting rich off unprofitable stocks with high prices and higher price/earnings
ratios—firms like software companies and all things computer and internet. Cisco Systems, for
example, traded at more than 150 times earnings in March of 2000. In April 2000, an inflation report
caused the speculative bubble to burst and there were huge investment losses.
However the bubble burst only impacted the US economy and to some extent the developed nations
as the world of internet was in its infancy and only a handful of tech-savvy personals and aggressive
investors were involve in the dot.com business ventures.
Enron’s Case
Enron’s management was caught in a corporate fraud scandal that led to the bankruptcy of Enron and
the dissolution of Arthur Andersen. Enron hid billions of dollars of debt from its shareholders in failed
deals and projects. Furthermore, it pressured its auditors, Arthur Andersen, to ignore the issues.
Shareholders lost more than $60 billion. This led to the passage of the Sarbanes-Oxley Act of 2002,
which expanded penalties for accounting fraud and instructed accounting firms to remain
independent of their clients. Other firms, such as Tyco and WorldCom, experienced similar scandals.
These scandals shook the securities markets and investor confidence.
Kenneth Lay founded Enron in 1985. The company was formed as a result of a merger between two
natural-gas-transmission companies, Houston Natural Gas Corporation and Inter North, Inc. The
merged company, HNG Inter North’s name was changed to Enron in 1986. Lay quickly converted Enron
into an energy trader and supplier when he took over as CEO of the company. In 1990, Lay created
the “Enron Finance Corporation” and appointed Jeffrey Skilling, as head of the new corporation. Jeff
Skilling made Enron shift their accounting practices from the Historical method to a Market-to-market
method. This would provide the company with a more realistic valuation and analysis of their current
financial system. Market -to- Market is a measure of the fair value of accounts that can change over
time, such as assets and liabilities. Mark-to-Market aims to provide a realistic appraisal of an
institution's or company's current financial situation, and it is a legitimate and widely used practice.
However, in some cases, the method can be manipulated, since MTM is not based on actual cost but
on fair value, some believe MTM was the beginning of the end for Enron as it essentially permitted
the organization to log estimated profits as actual profits. Enron created Enron Online (EOL) in Oct.
1999, an electronic trading website that focused on commodities. Enron was the counterparty to
every transaction on EOL; it was either the buyer or the seller. To entice participants and trading
partners, Enron offered its reputation, credit, and expertise in the energy sector. One of the many
unwitting players in the Enron scandal was Blockbuster, the former video rental chain. In July 2000,
Enron Broadband Services and Blockbuster entered a partnership to enter the burgeoning VOD
market. The VOD market was a sensible pick, but Enron started logging expected earnings based on
the expected growth of the VOD market, which vastly inflated the numbers. By mid-2000, EOL was
executing nearly $350 billion in trades.
When the dot-com bubble began to burst, Enron decided to build high-speed broadband telecom
networks. Hundreds of millions of dollars were spent on this project, but the company ended up
realizing almost no return. When the recession hit in 2000, Enron had significant exposure to the most
volatile parts of the market. As a result, many trusting investors and creditors found themselves on
the losing end. Enron was considered as the America’s Most Innovative Company for six consecutive
years between 1996 and 2001. Enron’s share price rose as high as $90.75 at its peak and would fall as
low as $0.26 at bankruptcy but by the fall of 2000, Enron was starting to crumble under its own
success.
“Around the same time, analysts began to downgrade their rating for Enron’s stock, and the stock
descended to a 52-week low of $39.95. The SEC started their investigation into the company and found
startling results. Enron had losses of $591 million and had $690 million in debt by the end of 2000.”
CEO Jeffrey Skilling hid the financial losses of the trading business and other operations of the
company. For Enron, these accounting practices help them deceive investors and other stakeholders.
The company would create an asset such as a power plant, and straight away claim the expected profit
on its books, even if the project or asset were to become unprofitable, its projected profits would be
shown to make it seem successful. Similar fraudulent accounting activities were undertaken by the
company to make themselves seem more profitable than they actually were. By the summer of 2001,
Enron was in freefall. CEO Kenneth Lay had retired in February, turning over the position to Jeffrey
Skilling. Moreover, in August 2001, Skilling resigned as CEO citing personal reasons. “Enron filed for
bankruptcy after Dynegy backed out of a merger deal in November 2001, with the company filing for
bankruptcy in December. Investors would lose $74 billion in the four years leading up to their
bankruptcy.”
2007–2009 Global Financial Crisis
Housing Bubble:
Unfortunately for international investment banks, the entire global financial system became
increasingly interconnected in the 1990s and early 2000s. Junk securities backed by adjustable-rate
mortgages (ARMs)—many of which inexplicably received AAA ratings from Moody's and Standard &
Poor's—permeated Japanese and European investor portfolios.
The early stages of the crisis began in the second half of 2007, eventually peaking in September 2008.
Several global investment banks were compromised, including Lehman Brothers, AIG, Bear Stearns,
Countrywide Financial, Wachovia, and Washington Mutual.
There were numerous bank failures in Europe as well, including Royal Bank of Scotland, which posted
a $34 billion loss in 2008. RBS was one of the banks that the British government had to bail out with
its $63 billion rescue package. The worst of the U.S. recession occurred in late 2008 and early 2009,
but it took a few months for panic to hit Europe. Countries such as Greece, Ireland, and Portugal were
hit hardest.
However, the impact of the financial crisis wasn't limited to the U.S. and Europe. Global gross domestic
product (GDP), which measures the total output of goods and services for all countries declined in
2009 to -1.67% from 1.85% in 2008, according to the World Bank.
The 2008 monetary emergency, which in the long run prompted the Great Recession that later
expense the world ten trillion dollars and thirty million positions. Practically all significant business
analyst just as the International Monetary Fund (IMF) concur that the downturn is the most noticeably
terrible worldwide downturn that has at any point occurred since the Great Depression of the 1930s.
What made the monetary emergency occur? The root of the emergency, the film contends, can be
followed back to the 1980s, when the cycle of liberation was enthusiastically executed under the
Reagan Era. Preceding the rise of Reaganomics, the monetary business was firmly controlled after the
Great Depression. The greater part of the banks was nearby and were restricted from theorizing
clients' stores (brought by the Glass-Steagall Act), while the speculation banks were unassuming and
private. Be that as it may, everything changed after 1980, when Ronald Reagan became president and
the U.S economy entered a thirty-year period of liberation. Monetary organizations, which included
business and speculation banks at that point set out on the way toward boosting benefit by making
unsafe ventures with the investors' cash. Before the decade's over, saving and credits organizations
failed, causing citizens to lose more than one hundred billion dollars. In any case, the public authority
didn't actualize any change and liberation kept on occurring under the Clinton.
During the housing boom, the ratio of money borrowed by an investment bank versus the bank's own
assets reached unprecedented levels. The credit default swap (CDS), was akin to an insurance policy.
Speculators could buy CDSs to bet against CDOs they did not own. GoldmanSachs sold more than $3
billion worth of CDOs in the first half of 2006.
Goldman also bet against the low-value CDOs, telling investors they were high-quality. The three
biggest ratings agencies contributed to the problem. AAA-rated instruments rocketed from a mere
handful in 2000 to over 4,000 in 2006. The CDO market crashed, and investment banks were left with
hundreds of billions of dollars in loans, CDOs, and real estate that they couldn't get rid of. The Great
Recession began in November 2007 and Bear Stearns ran out of money in March 2008. In September,
the federal government took over Fannie Mae and Freddie Mac, who were on the brink of collapse.
The world financial system was paralyzed. On October 3, 2008, President George W. Bush signed the
Troubled Asset Relief Program, but world equity markets continued to decline. Layoffs and
foreclosures continued, and unemployment in the US and the European Union rose to 10%.
Foreclosures in the United States have reached unprecedented levels. Top chiefs of the wiped-out
organizations left with their own fortunes flawless. The chiefs had hand-picked their sheets of chiefs,
which passed out billions in rewards after the public authority bailout. The significant banks filled in
force and multiplied the enemy of change endeavours. Scholarly financial analysts had for quite a long
time supported for liberation and aided shape U.S. strategy. They actually contradicted change after
the 2008 emergency. A portion of the counselling firms included were the Investigation Gathering,
Charles Stream Partners, Compass Lexicon, and the Law and Financial matters Counselling Gathering
(LECG). A significant number of these business analysts had irreconcilable situations, gathering
aggregates as experts to organizations and different gatherings associated with the monetary
emergency Tens of thousands of U.S. factory workers were laid off. The incoming Obama
administration’s financial reforms were weak, and there was no significant proposed regulation of the
practices of ratings agencies, lobbyists, and executive compensation. Geithner became Treasury
Secretary. Martin Feldstein, Laura Tyson and Lawrence Summers were all top economic advisers to
Obama. Bernanke was reappointed Fed Chair. European nations imposed strict regulations on bank
compensation, but the U.S. resisted them.
Part I: How We Got Here
From 1941 to 1981, the American financial industry was controlled, followed by a long period of
deregulation. A savings and loan crisis cost taxpayers about $124 billion at the end of the 1980s. The
financial sector had consolidated into a few giant companies in the late 1990s. The Internet Stock
Bubble exploded in March 2000 when investment banks supported Internet firms they knew would
crash, resulting in investor losses of $5 trillion. In the 1990s, the industry became popular with
derivatives and added instability. The Commodity Futures Modernization Act of 2000, supported by
many key officials, thwarted attempts to control derivatives. Five investment banks (Goldman Sachs,
Morgan Stanley, Lehman Brothers, Merrill Lynch, and Bear Stearns), two financial conglomerates
(Citigroup, JPMorgan Chase), three securitized insurance firms (AIG, MBIA, AMBAC) and three credit
rating agencies (Moody's, Standard & Poor's, Fitch) dominated the industry during the 2000s.
Investment banks bundled mortgages into collateralized debt obligations (CDOs), which they sold to
investors, alongside other loans and debts. Rating agencies have provided AAA scores to several CDOs.
Loans from Subprime also contributed to predatory lending. Loans were given to many home owners
that they could never repay.
Part 2: The Bubble (2001–2007)
The ratio of money lent by an investment bank versus the bank's own assets reached unparalleled
levels during the housing boom. The credit default swap (CDS) was equivalent to a scheme on
insurance. In order to bet against CDOs they did not own, speculators could purchase CDSs. There
were several CDOs backed by subprime mortgages. In the first half of 2006, Goldman-Sachs sold more
than $3 billion worth of CDOs. Goldman also bet against the low-value CDOs, claiming they were high-
quality investors. The three main ratings agencies have contributed to the problem. From a small
handful in 2000 to over 4,000 in 2006, AAA-rated instruments rocketed.
Part 3: The Crisis
The CDO market crashed and investment banks were left with loans, CDOs, and real estate worth
hundreds of billions of dollars that they could not unload. The Great Recession began in November
2007 and Bear Stearns ran out of cash in March 2008. The federal government took over Fannie Mae
and Freddie Mac in September, which had been on the verge of failure. Lehman Brothers collapsed
two days later. Within days of being bailed out, these companies all had AA or AAA ratings. Merrill
Lynch was purchased by Bank of America on the verge of failure. Henry Paulson and Timothy Geithner
agreed that Lehman had to go bankrupt, leading to the collapse of the market for commercial paper.
The insolvent AIG was taken over by the government on September 17th. The next day, Paulson and
Fed Chairman Ben Bernanke demanded $700 billion from Congress to bail the banks out. The
worldwide financial system has been paralysed. President George W. Bush signed the Troubled Asset
Relief Program on October 3, 2008, but global stock markets kept crashing. Layoffs and foreclosures
persisted, with unemployment in the U.S.A. and the European Union rising to 10 percent. By
December 2008, bankruptcy was also facing GM and Chrysler. Foreclosures have reached
unimaginable levels in the U.S.
In September 2008 the biggest investment bank Lehman Brothers was forced to declare bankruptcy
and Merrill Lynch was forced to sell itself. Then The world's largest insurance company AIG collapsed
and the stocks had the largest single drop in history. This triggered the global financial crisis. After
Lehman Brothers collapsed, share prices dropped to a new low which left million people unemployed.
The global recession was inevitable.
Since 1980, the bubble was eventually going to burst. During the Clinton and Bush administrations,
deregulation continued under Alan Greenspan, chairman of America, central bank, The Federal
Reserve in the late 1990's the financial sector had consolidated into a few gigantic firms each of them
so large that their failure could threaten the whole system; and the Clinton administration helped
them grow even larger.
To regulate the derivatives industry, Alan Greenspan in addition to other congressmen brought about
the Commodity Options contracts Modernization Take action banning every regulation inside the
derivatives industry. Under the Regan administration CEO of the treasury, ML Donald deregulated the
Savings and Loans which created a platform for dangerous investments by simply allowing numerous
financially lifeless institutions to carry on to operate while making even more risky loans.
Three credit agencies namely, Standard & Poor, Moody’s, and Fitch misrepresented the credit rating
of companies such as Lehman Close friend, Merrill Lynch, AIG and Bear Sterns as they had been all
given credit rating of AA and above only weeks ahead of becoming under.
The global financial crisis that unfolded in 2007-08 drove millions of people into bankruptcy and the
economy into recession. "Inside Job" demonstrates how the American financial sector brought the
country to the brink through reckless risk taking, financial structures, and greed. Banks provided
mortgages to people who were unable to afford them in order to earn greater fees. People weren’t
able to repay the banks the mortgages due to which they lost their lifestyle and banks suffered losses.
Derivatives became popular in the US in the 1990s and many invest banks like Lehman Brothers
supported internet companies which were very much considered to default. There is always
something wrong when an economist who can’t point out a risky investment which caused a financial
crisis, is made the head of the biggest bank of the country. There have been some major deregulations
on the banking/financial sector which changed the course of the industry. Through the early 2000s
the United States economic system began to decelerate and, in an attempt, to refresh this downwards
condition the Federal Hold introduced a stimulation task to cut rates of interest to cause customer
spending. Investors got an advantage of this kind of stimulus exercise as the return on mortgage
guaranteed securities was attractive and as a result there was a boost and desire to purchase this kind
of securities. Collateralized Debt Obligation were the main reason for the recession. Lehman Brothers
alone sold billion of CDOs. At the end of 2008, The Icelandic bank collapsed and every Icelandic
inhabitant was affected. The government was supposed to regulate and prevent this from happening.
Iceland’s economy had already been shaken by the economic liberalization and this while regulation
and supervision were quite strong, however, the banking industry in Iceland increased shortly after
the report. Frederic was paid $124, 500 by the Iceland government to write down the report even
though the report proved to be extremely wrong. Top traditional bank executives getting integrated
into important government positions even having complete knowledge of wrong doings and dishonest
behaviour. The basis of this corruption was motivated by big compensation and hefty bonus deals.
The documentary film brought the rubble down on credit ranking agencies since it provided
undeniable evidence of their particular involvement inside the financial crisis. Economists had been
apparently paid out handsomely to produce favourable reviews. All of these instances combined
created a bullwhip effects which not only effected US but the whole world. What happened in Iceland
and US caused a domino effects and soon every financial institution felt the fall.
Government watchdog agencies that could have stopped this had been gutted, and reading agencies
like Moody’s and standard and poor that should have alerted investors the risks of these products,
didn't bother because they were paid for high ratings not whether they were accurate. This caused
the housing bubble and an orgy of greed on Wall Street, with enormous bonuses for traders and
Investment bankers, many of whom knew they were steering the gravy train off a cliff, but didn't care
because they and their millions would be clear of the wreck.
The result
They laid off tens of thousands of U.S. factory employees. The financial reforms of the incoming
Obama administration were weak, and there was no major proposed regulation of the activities of
ratings agencies, lobbyists, and executive compensation. Geithner became Secretary of the Treasury.
All of Obama's top economic advisors were Martin Feldstein, Laura Tyson and Lawrence Summers.
Bernanke was reappointed as president of the Federal Reserve. European countries implemented
stringent bank compensation rules, but the U.S. opposed them.
2014 Russian Financial Crisis
The Vladimir Putin-led Russian economy grew appreciably in the first half of the 21st century, thanks
in large part to the thriving energy sector and rising global commodity prices. The Russian economy
became so dependent on energy exports that nearly half of the Russian government's revenues were
generated by the sale of oil and natural gas.
But global oil prices took a nosedive in June 2014. The average price for a barrel of oil dropped nearly
40% in six months from the previous $100 threshold. The dip below $100 was noteworthy since that
was the number that Russian officials estimated was necessary to keep a balanced budget.
Putin exacerbated the energy problem by invading and annexing Crimea from Ukraine, resulting in
economic sanctions from the U.S. and Europe. Major financial institutions, such as Goldman Sachs,
began to cut off capital and cash to Russia. The Russian government responded with aggressive
monetary expansion, leading to high inflation and crippling losses among Russian banks.
As a result, economic sanctions were imposed by the U.S. and Europe as well as other countries, which
included a ban on buying western technology to develop oil. Other sanctions included blocking Russian
banks from obtaining capital from Europe or the U.S.
The impact of the crisis and the sanctions on the Russian economy were significant. In 2015 the GDP
declined by -1.97% from the year earlier. It wasn't until 2017 before the Russian economy posted an
annual growth rate of over 1.5%, according to the World Bank
2020 Recession
The stock market crash of 2020 began on Monday, March 9, followed by the largest point plunge for
the Dow Jones Industrial Average (DJIA) to that date. Two more record-setting point drops followed it
on March 12 and March 16. The crash was fuelled by global investor fears about the coronavirus
spread, which was anticipated to cause oil price drops and a recession.
On March 11, 2020, the World Health Organization declared the outburst of Corona-virus. As a result,
most governments closed non-essential services. In just a few months, the pandemic devastated the
U.S. economy. In the first quarter of 2020, growth declined by 5%. In April, retail sales plummeted
16.4% as governors forced the closure of non-essential businesses. The closure put many people out
of work, lifting the number of unemployed workers to 23 million.
The pandemic's total impact on the global economy will be under investigation for many years to
come. Recent projections show that global poverty is on track to fall back to 2017 levels after more
than 20 years of continuous reduction.
Conclusion
While the financial system of the company is under the control of handful of organisations, they not
only make great profits alone and keep everything in their pockets without having to share with
others, they also get a free hand to manipulate the system. When they are hit by the losses, the
damages are not confined to their own beings but the ripple affect reaches far and wide. There is a
great lesson to be learned here. After 1930s Great Depression, 2008 recession was the second great
recession that the world was hit by. If the system is not changed there will be more recessions to
follow and its affect will not be confined to this generation but to the coming generations as well.
In both of these catalysts we can see that there is one thing in common; both started off as daily
business failures and because these malpractices were not checked in time they grew big and caused
a domino effect through which the industry’s/company’s inattention to business ethics not only
created trouble for themselves but first for their industry/business area then for the national economy
and later penetrated into the global economy as well.
If we analyse the outburst of covid-19 we see a similar setting as well, where negligence of worker’s
in Wuhan resulted in a global pandemic as the results of their carelessness created a bull-whip effect,
effecting the whole world. Thus, I would say that we should learn from these examples and every
business should take their quality assurance and ethics seriously and ensure that ideally one in their
value chain but at least in their company doesn’t indulge into malpractice especially when they are
indulged into complex knitted activities e.g. stock-exchange or are dealing with contagious materials
e.g. germs/virus research labs etc.

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Lessons from 2000s

  • 1. Ayesha Majid Donia Ismail (Editor) 5/4/2021 Lessons from 2000s
  • 2. Lessons from 2000s The 21st century has proven to be as economically tumultuous as the two preceding centuries. Between a pandemic, wars, technological developments, progress in civil rights, and breakthroughs in science and medicine, the old order has been swept away, sometimes giving way to freer forms of governing and sometimes not. This period has seen multiple financial crises striking nations, regions, and—in the case of the Great Recession—the entire global economy. All financial crises share certain characteristics, but each tells its own unique story with its own unique lessons for the future. Due to these lessons we were able to experience a smoothenedrun of economy during the covid-19 syndemic that halted the logistics industry at once and created bottle-necks, hurdles and even complete shut- downs in other sectors while creating a need of overtime for front-line workers who are fighting against the virus on the forefront. It’s been more than a decade now since the global credit crunch which was triggered by the collapse of housing bubble in America, luckily the world has learnt its lessons from the 2000’s major economic/ business-world sets-backs of the modern world like Enron case, failure of banks accurately to gauge riskiness of it loan customers etc. Other noticeable financial events of 2000’s include Argentina’s financial crisis between 2001 and 2002, which led the country's government to lose access to capital markets. And Falling commodity prices and the annexation of Crimea and Ukraine led to the collapse of Russia's economy. The aftermath of the crises produced reams of new legislations, creation of new regulatory bodies and oversight agencies that amounted to an alphabet soup of acronyms like TARP, the FSOC, and the CFPB—most of which barely exist today—new committees and sub-committees, and platforms for politicians, whistle-blowers, auditors and executives to buildtheir careers on top of, and enough books to fill a wall at a bookstore, many of which still exist. As the COVID-19 pandemic sends the economy into a tailspin once again, the U.S. government and the Federal Reserve Bank are looking back at the lessons learned from the last economic downturn to see how to help reduce some of the severity. The COVID-19 pandemic that is ravaging the world in 2021 reminds us that for all of our scientific breakthroughs, we’re still vulnerable to deadly viruses that can shut down economies and disrupt society and are still vulnerable to global financial crisis even after having evolved from various financial and fiscal crises since the onset of the new world order which industrialization gave birth to. Year 2000: The Dot.com (or Technology) Bubble Entrepreneurs saw potential in online business. However, online business was really in its infancy. Everyone was talking about a "new economy" which referred to an internet-driven economy. Most of the dot.com stocks, like Yahoo.com, were listed on the NASDAQ. In January 2000, the NASDAQ closed above 5000. 10 years later, the NASDAQ was trading around 2700. Investors were getting rich off unprofitable stocks with high prices and higher price/earnings ratios—firms like software companies and all things computer and internet. Cisco Systems, for example, traded at more than 150 times earnings in March of 2000. In April 2000, an inflation report caused the speculative bubble to burst and there were huge investment losses.
  • 3. However the bubble burst only impacted the US economy and to some extent the developed nations as the world of internet was in its infancy and only a handful of tech-savvy personals and aggressive investors were involve in the dot.com business ventures. Enron’s Case Enron’s management was caught in a corporate fraud scandal that led to the bankruptcy of Enron and the dissolution of Arthur Andersen. Enron hid billions of dollars of debt from its shareholders in failed deals and projects. Furthermore, it pressured its auditors, Arthur Andersen, to ignore the issues. Shareholders lost more than $60 billion. This led to the passage of the Sarbanes-Oxley Act of 2002, which expanded penalties for accounting fraud and instructed accounting firms to remain independent of their clients. Other firms, such as Tyco and WorldCom, experienced similar scandals. These scandals shook the securities markets and investor confidence. Kenneth Lay founded Enron in 1985. The company was formed as a result of a merger between two natural-gas-transmission companies, Houston Natural Gas Corporation and Inter North, Inc. The merged company, HNG Inter North’s name was changed to Enron in 1986. Lay quickly converted Enron into an energy trader and supplier when he took over as CEO of the company. In 1990, Lay created the “Enron Finance Corporation” and appointed Jeffrey Skilling, as head of the new corporation. Jeff Skilling made Enron shift their accounting practices from the Historical method to a Market-to-market method. This would provide the company with a more realistic valuation and analysis of their current financial system. Market -to- Market is a measure of the fair value of accounts that can change over time, such as assets and liabilities. Mark-to-Market aims to provide a realistic appraisal of an institution's or company's current financial situation, and it is a legitimate and widely used practice. However, in some cases, the method can be manipulated, since MTM is not based on actual cost but on fair value, some believe MTM was the beginning of the end for Enron as it essentially permitted the organization to log estimated profits as actual profits. Enron created Enron Online (EOL) in Oct. 1999, an electronic trading website that focused on commodities. Enron was the counterparty to every transaction on EOL; it was either the buyer or the seller. To entice participants and trading partners, Enron offered its reputation, credit, and expertise in the energy sector. One of the many unwitting players in the Enron scandal was Blockbuster, the former video rental chain. In July 2000, Enron Broadband Services and Blockbuster entered a partnership to enter the burgeoning VOD market. The VOD market was a sensible pick, but Enron started logging expected earnings based on the expected growth of the VOD market, which vastly inflated the numbers. By mid-2000, EOL was executing nearly $350 billion in trades. When the dot-com bubble began to burst, Enron decided to build high-speed broadband telecom networks. Hundreds of millions of dollars were spent on this project, but the company ended up realizing almost no return. When the recession hit in 2000, Enron had significant exposure to the most volatile parts of the market. As a result, many trusting investors and creditors found themselves on the losing end. Enron was considered as the America’s Most Innovative Company for six consecutive years between 1996 and 2001. Enron’s share price rose as high as $90.75 at its peak and would fall as low as $0.26 at bankruptcy but by the fall of 2000, Enron was starting to crumble under its own success. “Around the same time, analysts began to downgrade their rating for Enron’s stock, and the stock descended to a 52-week low of $39.95. The SEC started their investigation into the company and found startling results. Enron had losses of $591 million and had $690 million in debt by the end of 2000.”
  • 4. CEO Jeffrey Skilling hid the financial losses of the trading business and other operations of the company. For Enron, these accounting practices help them deceive investors and other stakeholders. The company would create an asset such as a power plant, and straight away claim the expected profit on its books, even if the project or asset were to become unprofitable, its projected profits would be shown to make it seem successful. Similar fraudulent accounting activities were undertaken by the company to make themselves seem more profitable than they actually were. By the summer of 2001, Enron was in freefall. CEO Kenneth Lay had retired in February, turning over the position to Jeffrey Skilling. Moreover, in August 2001, Skilling resigned as CEO citing personal reasons. “Enron filed for bankruptcy after Dynegy backed out of a merger deal in November 2001, with the company filing for bankruptcy in December. Investors would lose $74 billion in the four years leading up to their bankruptcy.” 2007–2009 Global Financial Crisis Housing Bubble: Unfortunately for international investment banks, the entire global financial system became increasingly interconnected in the 1990s and early 2000s. Junk securities backed by adjustable-rate mortgages (ARMs)—many of which inexplicably received AAA ratings from Moody's and Standard & Poor's—permeated Japanese and European investor portfolios. The early stages of the crisis began in the second half of 2007, eventually peaking in September 2008. Several global investment banks were compromised, including Lehman Brothers, AIG, Bear Stearns, Countrywide Financial, Wachovia, and Washington Mutual. There were numerous bank failures in Europe as well, including Royal Bank of Scotland, which posted a $34 billion loss in 2008. RBS was one of the banks that the British government had to bail out with its $63 billion rescue package. The worst of the U.S. recession occurred in late 2008 and early 2009, but it took a few months for panic to hit Europe. Countries such as Greece, Ireland, and Portugal were hit hardest. However, the impact of the financial crisis wasn't limited to the U.S. and Europe. Global gross domestic product (GDP), which measures the total output of goods and services for all countries declined in 2009 to -1.67% from 1.85% in 2008, according to the World Bank. The 2008 monetary emergency, which in the long run prompted the Great Recession that later expense the world ten trillion dollars and thirty million positions. Practically all significant business analyst just as the International Monetary Fund (IMF) concur that the downturn is the most noticeably terrible worldwide downturn that has at any point occurred since the Great Depression of the 1930s. What made the monetary emergency occur? The root of the emergency, the film contends, can be followed back to the 1980s, when the cycle of liberation was enthusiastically executed under the Reagan Era. Preceding the rise of Reaganomics, the monetary business was firmly controlled after the Great Depression. The greater part of the banks was nearby and were restricted from theorizing clients' stores (brought by the Glass-Steagall Act), while the speculation banks were unassuming and private. Be that as it may, everything changed after 1980, when Ronald Reagan became president and the U.S economy entered a thirty-year period of liberation. Monetary organizations, which included business and speculation banks at that point set out on the way toward boosting benefit by making unsafe ventures with the investors' cash. Before the decade's over, saving and credits organizations failed, causing citizens to lose more than one hundred billion dollars. In any case, the public authority didn't actualize any change and liberation kept on occurring under the Clinton.
  • 5. During the housing boom, the ratio of money borrowed by an investment bank versus the bank's own assets reached unprecedented levels. The credit default swap (CDS), was akin to an insurance policy. Speculators could buy CDSs to bet against CDOs they did not own. GoldmanSachs sold more than $3 billion worth of CDOs in the first half of 2006. Goldman also bet against the low-value CDOs, telling investors they were high-quality. The three biggest ratings agencies contributed to the problem. AAA-rated instruments rocketed from a mere handful in 2000 to over 4,000 in 2006. The CDO market crashed, and investment banks were left with hundreds of billions of dollars in loans, CDOs, and real estate that they couldn't get rid of. The Great Recession began in November 2007 and Bear Stearns ran out of money in March 2008. In September, the federal government took over Fannie Mae and Freddie Mac, who were on the brink of collapse. The world financial system was paralyzed. On October 3, 2008, President George W. Bush signed the Troubled Asset Relief Program, but world equity markets continued to decline. Layoffs and foreclosures continued, and unemployment in the US and the European Union rose to 10%. Foreclosures in the United States have reached unprecedented levels. Top chiefs of the wiped-out organizations left with their own fortunes flawless. The chiefs had hand-picked their sheets of chiefs, which passed out billions in rewards after the public authority bailout. The significant banks filled in force and multiplied the enemy of change endeavours. Scholarly financial analysts had for quite a long time supported for liberation and aided shape U.S. strategy. They actually contradicted change after the 2008 emergency. A portion of the counselling firms included were the Investigation Gathering, Charles Stream Partners, Compass Lexicon, and the Law and Financial matters Counselling Gathering (LECG). A significant number of these business analysts had irreconcilable situations, gathering aggregates as experts to organizations and different gatherings associated with the monetary emergency Tens of thousands of U.S. factory workers were laid off. The incoming Obama administration’s financial reforms were weak, and there was no significant proposed regulation of the practices of ratings agencies, lobbyists, and executive compensation. Geithner became Treasury Secretary. Martin Feldstein, Laura Tyson and Lawrence Summers were all top economic advisers to Obama. Bernanke was reappointed Fed Chair. European nations imposed strict regulations on bank compensation, but the U.S. resisted them. Part I: How We Got Here From 1941 to 1981, the American financial industry was controlled, followed by a long period of deregulation. A savings and loan crisis cost taxpayers about $124 billion at the end of the 1980s. The financial sector had consolidated into a few giant companies in the late 1990s. The Internet Stock Bubble exploded in March 2000 when investment banks supported Internet firms they knew would crash, resulting in investor losses of $5 trillion. In the 1990s, the industry became popular with derivatives and added instability. The Commodity Futures Modernization Act of 2000, supported by many key officials, thwarted attempts to control derivatives. Five investment banks (Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, and Bear Stearns), two financial conglomerates (Citigroup, JPMorgan Chase), three securitized insurance firms (AIG, MBIA, AMBAC) and three credit rating agencies (Moody's, Standard & Poor's, Fitch) dominated the industry during the 2000s. Investment banks bundled mortgages into collateralized debt obligations (CDOs), which they sold to investors, alongside other loans and debts. Rating agencies have provided AAA scores to several CDOs. Loans from Subprime also contributed to predatory lending. Loans were given to many home owners that they could never repay.
  • 6. Part 2: The Bubble (2001–2007) The ratio of money lent by an investment bank versus the bank's own assets reached unparalleled levels during the housing boom. The credit default swap (CDS) was equivalent to a scheme on insurance. In order to bet against CDOs they did not own, speculators could purchase CDSs. There were several CDOs backed by subprime mortgages. In the first half of 2006, Goldman-Sachs sold more than $3 billion worth of CDOs. Goldman also bet against the low-value CDOs, claiming they were high- quality investors. The three main ratings agencies have contributed to the problem. From a small handful in 2000 to over 4,000 in 2006, AAA-rated instruments rocketed. Part 3: The Crisis The CDO market crashed and investment banks were left with loans, CDOs, and real estate worth hundreds of billions of dollars that they could not unload. The Great Recession began in November 2007 and Bear Stearns ran out of cash in March 2008. The federal government took over Fannie Mae and Freddie Mac in September, which had been on the verge of failure. Lehman Brothers collapsed two days later. Within days of being bailed out, these companies all had AA or AAA ratings. Merrill Lynch was purchased by Bank of America on the verge of failure. Henry Paulson and Timothy Geithner agreed that Lehman had to go bankrupt, leading to the collapse of the market for commercial paper. The insolvent AIG was taken over by the government on September 17th. The next day, Paulson and Fed Chairman Ben Bernanke demanded $700 billion from Congress to bail the banks out. The worldwide financial system has been paralysed. President George W. Bush signed the Troubled Asset Relief Program on October 3, 2008, but global stock markets kept crashing. Layoffs and foreclosures persisted, with unemployment in the U.S.A. and the European Union rising to 10 percent. By December 2008, bankruptcy was also facing GM and Chrysler. Foreclosures have reached unimaginable levels in the U.S. In September 2008 the biggest investment bank Lehman Brothers was forced to declare bankruptcy and Merrill Lynch was forced to sell itself. Then The world's largest insurance company AIG collapsed and the stocks had the largest single drop in history. This triggered the global financial crisis. After Lehman Brothers collapsed, share prices dropped to a new low which left million people unemployed. The global recession was inevitable. Since 1980, the bubble was eventually going to burst. During the Clinton and Bush administrations, deregulation continued under Alan Greenspan, chairman of America, central bank, The Federal Reserve in the late 1990's the financial sector had consolidated into a few gigantic firms each of them so large that their failure could threaten the whole system; and the Clinton administration helped them grow even larger. To regulate the derivatives industry, Alan Greenspan in addition to other congressmen brought about the Commodity Options contracts Modernization Take action banning every regulation inside the derivatives industry. Under the Regan administration CEO of the treasury, ML Donald deregulated the Savings and Loans which created a platform for dangerous investments by simply allowing numerous financially lifeless institutions to carry on to operate while making even more risky loans. Three credit agencies namely, Standard & Poor, Moody’s, and Fitch misrepresented the credit rating of companies such as Lehman Close friend, Merrill Lynch, AIG and Bear Sterns as they had been all given credit rating of AA and above only weeks ahead of becoming under. The global financial crisis that unfolded in 2007-08 drove millions of people into bankruptcy and the economy into recession. "Inside Job" demonstrates how the American financial sector brought the country to the brink through reckless risk taking, financial structures, and greed. Banks provided
  • 7. mortgages to people who were unable to afford them in order to earn greater fees. People weren’t able to repay the banks the mortgages due to which they lost their lifestyle and banks suffered losses. Derivatives became popular in the US in the 1990s and many invest banks like Lehman Brothers supported internet companies which were very much considered to default. There is always something wrong when an economist who can’t point out a risky investment which caused a financial crisis, is made the head of the biggest bank of the country. There have been some major deregulations on the banking/financial sector which changed the course of the industry. Through the early 2000s the United States economic system began to decelerate and, in an attempt, to refresh this downwards condition the Federal Hold introduced a stimulation task to cut rates of interest to cause customer spending. Investors got an advantage of this kind of stimulus exercise as the return on mortgage guaranteed securities was attractive and as a result there was a boost and desire to purchase this kind of securities. Collateralized Debt Obligation were the main reason for the recession. Lehman Brothers alone sold billion of CDOs. At the end of 2008, The Icelandic bank collapsed and every Icelandic inhabitant was affected. The government was supposed to regulate and prevent this from happening. Iceland’s economy had already been shaken by the economic liberalization and this while regulation and supervision were quite strong, however, the banking industry in Iceland increased shortly after the report. Frederic was paid $124, 500 by the Iceland government to write down the report even though the report proved to be extremely wrong. Top traditional bank executives getting integrated into important government positions even having complete knowledge of wrong doings and dishonest behaviour. The basis of this corruption was motivated by big compensation and hefty bonus deals. The documentary film brought the rubble down on credit ranking agencies since it provided undeniable evidence of their particular involvement inside the financial crisis. Economists had been apparently paid out handsomely to produce favourable reviews. All of these instances combined created a bullwhip effects which not only effected US but the whole world. What happened in Iceland and US caused a domino effects and soon every financial institution felt the fall. Government watchdog agencies that could have stopped this had been gutted, and reading agencies like Moody’s and standard and poor that should have alerted investors the risks of these products, didn't bother because they were paid for high ratings not whether they were accurate. This caused the housing bubble and an orgy of greed on Wall Street, with enormous bonuses for traders and Investment bankers, many of whom knew they were steering the gravy train off a cliff, but didn't care because they and their millions would be clear of the wreck. The result They laid off tens of thousands of U.S. factory employees. The financial reforms of the incoming Obama administration were weak, and there was no major proposed regulation of the activities of ratings agencies, lobbyists, and executive compensation. Geithner became Secretary of the Treasury. All of Obama's top economic advisors were Martin Feldstein, Laura Tyson and Lawrence Summers. Bernanke was reappointed as president of the Federal Reserve. European countries implemented stringent bank compensation rules, but the U.S. opposed them. 2014 Russian Financial Crisis The Vladimir Putin-led Russian economy grew appreciably in the first half of the 21st century, thanks in large part to the thriving energy sector and rising global commodity prices. The Russian economy became so dependent on energy exports that nearly half of the Russian government's revenues were generated by the sale of oil and natural gas.
  • 8. But global oil prices took a nosedive in June 2014. The average price for a barrel of oil dropped nearly 40% in six months from the previous $100 threshold. The dip below $100 was noteworthy since that was the number that Russian officials estimated was necessary to keep a balanced budget. Putin exacerbated the energy problem by invading and annexing Crimea from Ukraine, resulting in economic sanctions from the U.S. and Europe. Major financial institutions, such as Goldman Sachs, began to cut off capital and cash to Russia. The Russian government responded with aggressive monetary expansion, leading to high inflation and crippling losses among Russian banks. As a result, economic sanctions were imposed by the U.S. and Europe as well as other countries, which included a ban on buying western technology to develop oil. Other sanctions included blocking Russian banks from obtaining capital from Europe or the U.S. The impact of the crisis and the sanctions on the Russian economy were significant. In 2015 the GDP declined by -1.97% from the year earlier. It wasn't until 2017 before the Russian economy posted an annual growth rate of over 1.5%, according to the World Bank 2020 Recession The stock market crash of 2020 began on Monday, March 9, followed by the largest point plunge for the Dow Jones Industrial Average (DJIA) to that date. Two more record-setting point drops followed it on March 12 and March 16. The crash was fuelled by global investor fears about the coronavirus spread, which was anticipated to cause oil price drops and a recession. On March 11, 2020, the World Health Organization declared the outburst of Corona-virus. As a result, most governments closed non-essential services. In just a few months, the pandemic devastated the U.S. economy. In the first quarter of 2020, growth declined by 5%. In April, retail sales plummeted 16.4% as governors forced the closure of non-essential businesses. The closure put many people out of work, lifting the number of unemployed workers to 23 million. The pandemic's total impact on the global economy will be under investigation for many years to come. Recent projections show that global poverty is on track to fall back to 2017 levels after more than 20 years of continuous reduction. Conclusion While the financial system of the company is under the control of handful of organisations, they not only make great profits alone and keep everything in their pockets without having to share with others, they also get a free hand to manipulate the system. When they are hit by the losses, the damages are not confined to their own beings but the ripple affect reaches far and wide. There is a great lesson to be learned here. After 1930s Great Depression, 2008 recession was the second great recession that the world was hit by. If the system is not changed there will be more recessions to follow and its affect will not be confined to this generation but to the coming generations as well. In both of these catalysts we can see that there is one thing in common; both started off as daily business failures and because these malpractices were not checked in time they grew big and caused a domino effect through which the industry’s/company’s inattention to business ethics not only created trouble for themselves but first for their industry/business area then for the national economy and later penetrated into the global economy as well. If we analyse the outburst of covid-19 we see a similar setting as well, where negligence of worker’s in Wuhan resulted in a global pandemic as the results of their carelessness created a bull-whip effect, effecting the whole world. Thus, I would say that we should learn from these examples and every
  • 9. business should take their quality assurance and ethics seriously and ensure that ideally one in their value chain but at least in their company doesn’t indulge into malpractice especially when they are indulged into complex knitted activities e.g. stock-exchange or are dealing with contagious materials e.g. germs/virus research labs etc.