The bloodless saga of the major banks’ continues and Goldman Sachs is the new victim. All eyes are set on the fraud charges brought against Goldman Sachs. It seems that the current financial crisis will not be over until it exposes all the skeletons in the closet. Such exposure is sending seismic shocks to global economy. The charges brought on Goldman Sachs has led to further investigations in Europe in its practices. So what went wrong?
Big banks and Wall Street are blamed heavily for bringing on the financial mess that literally led to freezing of the system and the credit lines. The bundling of subprime mortgages and other credit stocks led to the biggest global crisis and spared no one. The governments of the developed countries stepped in and bailed out the system before it collapsed causing further chaos.
The crisis further exposed the grand pay and bonuses of the executives, the greed and the power of the system in creating panics and contractions within the economy. On the other side, Greece deals with Goldman Sachs is now under question as the figures of the Greek economy is expected to be worst than before.
So how did this system ever came about and become so powerful to actually bring the global economy to a stand still?
Too Big To Fail – Really?
The theory ‘Too Big to Fail’ primarily meant that the operations of the entity are so large and diversified that the system is immune to failure. On the other hand, the existence of large operations also meant that the governments will not allow them to declare bankruptcy as it could set off a chain reaction within the system. With economy being dynamic today, the chain reaction will ripple across through various routes, directly and indirectly, bringing undesirable consequences.
The financial institutions became so large that it was assumed that they were immune to failure. And if something was to happen, the government will step in to save them in fear to avoid chain reaction.
What is in question here is why was it ever presumed that large corporations because of their diversified and extensive operations remain immune to failure? Common sense says ‘What goes up must come down’. Thus, if an entity continues to expand to the extent that it becomes global and dominates the particular industry, there are chances no matter how low that one day it is going to come down or rather in the current crisis come crashing down.
The assumption above got tested in a BIG way because the financial institutions that created this whole complex world of derivatives and credit swaps knew too well that the government will not allow bankruptcy to take place. This very line of thought provided the very incentive to take on high risk even if it came at the expense of the ordinary individual down on the street. This is what in economics is termed as ‘moral hazard’ problem. This moral hazard ended up creating the biggest financial mess in the global history.
Lehman Brothers, AIG, Merill Lynch (only to be saved by Bank of America) and now Goldman Sachs all are examples of how becoming BIG leads to power, greed and exploitation. The financial crisis exploded and bared the dirty mechanisms at work on Wall Street and financial entities.
President Obama call for reforming the financial sector comes at a time when the theory of too big to fail is being questioned by all, especially, regarding the financial sector. There is further talk of breaking down the operations of these large financial entities in order to bring them under closer regulatory scrutiny and lowering the power within the sector. There are various questions on the reforms being brought about, for example, will the reforms guarantee that such a crisis will not occur again and that too on a grand scale? Will the regulations be tough enough to bring and rein in the loose financial entities?
However, at this time, the calls for reforming are being welcomed by all. The questions will be debated and the world will keep an eye on the situation. Currently, the saga of the Goldman Sachs will be followed by all and one wonders whether more secrets will be out.
For now, the financial crisis is hell bent on baring more dirty secrets of the industry and will only rest in peace once justice is served.