http://www.canada.com/vancouversun/news/story.html?id=3dfba6f3-30e4-4f1d-ac42-08958cb0fb69
Summary:
A week ago, the ongoing financial markets subprime mortgages alarmed the United States. The TSX/S&P Composite index dropped dramatically. When investors heard about the news that Lehman Brothers, one of the largest investment banks in the United States, was going bankrupted, they all dumped their stocks. This began when lenders were searching for ways to finance house purchases by giving mortgages to unqualified buyers. When the rates rose but house prices stayed the same, the buyers were unable to pay back; the increase of the interest rate escalated the situation. Banks were left with many houses with prices that stayed unchanged. The banks also sold this to investors by having mortgages packaged into securities; they were hoping that the money could be used to issue more loans.
Connection:
This article relates to making financial decision by putting financial statements into good use. This problem wouldn’t have risen if the company had made better decisions. For example, there was not much thought put in when the lenders gave mortgages to unqualified buyers; they should’ve foreseen that the unqualified buys wouldn’t be able to repay them back when the rates rose. Furthermore, they had placed too high of an expectation that house prices would increase, but they never accounted for the what-if factors. Financial statements should be used in decision making which includes the potential risk that a business could be facing. This article is an example of what could potentially happen to any business; if they don’t look further into the future when making choices, bankruptcy could possibly be the result. Management of businesses by using financial statements effectively is the key to avoid such disasters.
Reflection:
I feel that this problem in the United States was caused by a domino effect which could’ve been prevented. I believed that better decision making would’ve been helpful; the lack of seeing the possible consequences caused this nosedive. When making decision, they should look beyond the issues itself; not just looking at the short-term results. Unqualified buyers are not the answer. Relying on the government to carry the heavy burden is also not the answer either, but that's what's happening. This makes me question if the convenience of being easily connected around the world due to modern technology is an advantage, for this event caused a downfall worldwide. Overall, this crisis shows that good decision making is vital in the business world.
-KimM
