The financial crisis of 2008 affected the economies of many countries across the globe. Many scholars agree that the housing bubble recorded in the United States between 2006 and 2007 triggered this meltdown. The discussion presented below uses the documentary “The Big Short” to give a detailed analysis of this crisis and the issues associated with it. The discussion goes further to describe the best strategies that a true leader could have adopted to prevent such a fraud.
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Incentive, Rationalization, and Opportunity
The occurrence of the financial crisis of 2008 is attributable to various factors that prevailed in the country from 2000. The first one is that of incentive and it is attributable to the poor remuneration systems employed during the period. According to the selected documentary, it is evident that many companies failed to introduce and implement appropriate reward schemes. Bankers were also allowed to set their compensations and stock options.
Using the case of Michael Bury, the viewer observed that the introduced bonus systems provided incentives to banks to engage in risk-taking while at the same time ignoring the need to minimize costs whenever necessary (McKay, 2015). The existing policies for incentive compensation also failed to consider the long-term performance and profitability of the affected companies. Consequently, the appetite for risk and absence of appropriate controls triggered favorable conditions for this infamous crisis.
The concept of rationalization was evident since most of the managers were incompetent and had acquired their skills when the country never experienced any form of economic slowdown. This development explains why majority of the leaders pursued expansionary practices or lending options to remain relevant in their relevant sectors (McKay, 2015). Additionally, managers were focusing on current or short-term profits without considering the long-term health of their companies.
Those who engaged in inappropriate risk-taking practices and pursued dynamic prices for stocks continued to be rewarded (Hegarty & Moccia, 2018). Astonishingly, managers who invested wisely and implemented safe structures to maximize long-term performance lost their jobs. This means that most of the leaders failed to act in the interest of different shareholders or the public.
The presence of opportunity encouraged many investors, banks, and leaders to be part of this crisis. Before 2004, the federal government had decided to get rid of anti-predatory policies and laws in the different states (McKay, 2015). A new opportunity emerged whereby the country lacked appropriated regulations to prevent inappropriate lending in different sectors. Burry was aware that the time was right to make profits since the country’s housing market was becoming unstable (McKay, 2015). This became a new opportunity for him to establish a credit default swap market. Similarly, commercial banks and investment agencies were encouraged to be part of this unfolding financial crisis.
True Leader: Fraud Triangle
The fraud triangle outlines three factors or enablers that contributed to the studied financial crisis. The absence of ethical leadership during the period played a significance role towards the development of this catastrophe. A responsible manager could have established or promoted desirable values to ensure that all employees were satisfied with their working conditions. This strategy would have reduced the pressure to deliver positive results.
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Similarly, more workers would not be afraid of losing their positions or jobs. An effective leader could have supported the best communication channels and improved the level of transport across all departments (Hegarty & Moccia, 2018). This practice could have discouraged more employees from engaging in dishonesty practices. Assuming that Michael Burry was receiving appropriate leadership or guidance, chances are high that he would have considered the most appropriate approaches to overcome the negativities of an unstable housing market.
When managers engage and support their followers continuously, it can be possible for all people to feel involved and avoid stealing from the company or unsuspecting clients. This kind of practice increases the commitment of employees and makes it possible for them to report any issue that might affect organizational performance. From this analysis, it is evident that a true leader can consider the power of effective strategies and ethical procedures to take one or two legs of the fraud triangle out (Hegarty & Moccia, 2018).
If the leaders of different companies that led to the economic crisis of 2008 were transparent and ethical, it would have been possible to overcome most of the challenges associated with it. Those who consider these issues will minimize chances of fraud and eventually make their firms more profitable.
The above discussion has described the events that led to the infamous financial crisis of 2008. The leading contributors of this economic meltdown included incentive, rationalization, and opportunity. The absence of proper leadership in different companies worsened the situation and eventually catalyzed the bubble burst. When managers apply their competencies effectively, it can be possible to get at least one of the three legs of the fraud triangle out. The insights gained from the presented documentary should become meaningful lessons for preventing any other economic crisis in the future.
Hegarty, N., & Moccia, S. (2018). Components of ethical leadership and their importance in sustaining organizations over the long term. The Journal of Values-Based Leadership, 11(1), 1-10. Web.
McKay, A. (Director). (2015). The big short. [Video file]. Web.