Contemporary Issues In Accounting
Inside Job Documentary Film
Research of the Financial Crisis in Comparison to the ‘Inside Job’ Documentary
The ‘Inside Job’ film (documentary film) draws parallel views to the referenced text “Impact on Accounting” of this course coupled with the associated research executed during the past weeks with respect to understanding the cause of the financial crisis. The documentary film zeros in on the contributory factors of the financial crisis such as falling interest rates, securitization of home mortgages and credit default swaps (derivatives). Other stunning contributory factors expressed in the documentary film were greed in addition to the deregulation and an unsupervised financial industry by the Federal government. Snyder (2011) reported that, “There have been several deregulations in the financial and housing markets over the past 30 years. Some of these include The Depository Institutions Deregulation and Monetary Control Act, the Federal Home Loan Bank Board establishing adjustable mortgages, the 1982 Garn-St Germain Depository Institutions Act establishing a secondary mortgage market, the repeal of the Glass-Stegall Act allowing commercial and investment banks to merge, and the 2004 SECs deregulation of investment banks, allowing investment banks to increase their leverage ratio from 12:1 to 30:1.” (pages 1-16)
After researching the cause of the financial crisis, though seemingly insignificant to some, one of the fastening screws that assisted in the great fall with respect to the financial industry was falling interest rates. During the early 2000s the United States economy began to slow down and in an effort to rejuvenate this downward condition the Federal Reserve introduced a stimulation project to cut interest rates to induce customer spending. Investors took advantage of this stimulus exercise as the return on mortgage backed securities was attractive and as a result there was a boost and desire to purchase such securities. Consequently, lending institutions became very excited as the demand for mortgage backed securities increased and thus the quest began to write more mortgages. Hence, the qualifying standards for loan approvals were done away with allowing a prospective home owner getting approval with ‘zero-down’. The introduction of no payment down increased the likelihood of failure to pay by borrowers and this default risk thereof was disregarded.
Another supporting aspect of the documentary film with respect to the cause of the financial crisis was securitization. Historically during the safe age, a home mortgage was a loan contract between the borrower and financial institution which was supported by tangible property used as collateral. Such loans would be held until the full loan obligation has been satisfied in the long term. Conversely to the days of old, financial institutions sought new innovative means to generate income and came up with securitization of home mortgages. In this sense, during the 1990's, home mortgages were not held to maturity but instead the high risk home mortgages were, bundled, repackaged and resold creating mortgage backed securities whereby income is received when homeowners satisfied their home mortgage obligation. Despondently, when borrowers defaulted on their home mortgages, investors suffered dearly as losses were realized, consequently, financial institutions collapsed and unemployment rose above its usual average rate.
Other research has concluded that derivatives also played a chief role in the financial crisis. Derivatives are financial contracts between two parties of which the value can derived with not affiliation to the good or service. For example, a buyer can purchase an option agreement to buy a good or service in the future at an agreed price within a specified time frame. Within the given period the buyer may exercise the right to purchase...
References: Global Economic Crisis Resource Center (2010). Global economic crisis: Impact on accounting. Mason, OH: South-Western Cengage Learning
Snyder, T. (2011). How did deregulation and financial innovations impact housing, wealth, and output?. Journal Of Finance & Accountancy,
Hobbs, J. (2011). Financial Derivatives, the Mismanagement of Risk and the Case of AIG. CPCU Ejournal, 1-8.
Ferguson, C. (Director) & Marrs, A. (Producer). (2010) Inside Job [Motion Picture]. United States: Sony Picture Classics
Froese, R. (2011). THE LIMITS OF INSIDE JOB: CRISIS, IDEOLOGY, AND THE BURDEN OF CAPITALISM. Studies In Political Economy: A Socialist Review, (88), 59-75.
Sterngold, J. (2010). Who Cares About Another $200 Million?. Bloomberg Businessweek, (4177), 56-59.
Maxwell, C. (2011). Inside the crash. Director (00123242), 65(4), 16.
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