Six weeks before it became bankrupt, Lehman Brothers Holdings Inc. was efficiently out of securities that were important as warranty to back the short-term credits it required to endure. The bank's ensuing struggle to stay alive uncovered the dark but decisive role that short-term loaning, done in secrecy in Wall Street referred to as a Repo market, plays in the financial world. (Craig & Spector, 2010)A Repo transaction is an agreement where a business transfers an asset to another company in exchange for short term cash, like a pawn shop, the comes with the agreement they will pay back the asset at a given date, usually within a week or so. This method helped Lehman hide their debt from everyone while showing off the borrowed money as assets. It allowed them to take more risks and in returned paid themselves more money by perpetuating the fraud until the whole scandal brews up. Lehman CEO, Richard Fuld, for instance, paid himself over $500M compensation for over 15 years during his tenure (Ratigan, 2010)Instead, if Lehman was categorizing them as the debt, they placed them as sales never disclosing that they will have to pay back. Their failure to unveil an accounting scheme (Repo Transaction) to significantly and temporally lower leverage, these low leverage numbers represented to investors has positive news, therefore created a misleading portrayal of their true financial health. On the other side, the report says that the directors of African Bank Investment Limited (ABIL) and its subordinate, broke their fiduciary responsibilities to the bank, the business of the Bank were lead neglectfully and irresponsibly. The bank would have collapsed a year earlier were it not for the rescue of R5.5 Billion it received. The bank had bad debts and damages. The bank had gone through subsequent losses before it final collapse for instance in one instant where the CEO purchased furniture for the new outlet Ellerine Holdings and the board had not permitted the procurement. From the report, it stated that Tami Sokutu was not skilled to be the chief risk officer of the bank.
The idea of lending to the poor' hails back during Aristotle error. The microfinance idea of enabling people to boost themselves from poverty, the argument is that it will create long-lasting economic and social growth. It offers reasonable prices for borrowing capital to the small enterprise in developing the world. The form of loaning seen as a bad loan, because, the refunds might not be made as initially agreed between the debtor and creditor, and which may never be paid because there is not much guarantee offered.
Although microfinance does not touch the average income expenditure, it increases the community a reduced amount of defenselessness if there any issue in another area of the economy. This form of finance has a huge bias since over 75% of the debtors are women this instead results to deprived homes. There have been claimed that the industry cannot work efficiently and ethically since some peoples goals are to manipulate the poor to make money (Rzepiennik, 2014).
Deontological ethics juries the morals of policies centered on rules, laws and guidelines, the essential of microfinance is to lift the poor and help them out of lack. There is always a gist from its duty as time flows by, the aims of other business are to make a profit, but for microfinance it to make a change, therefore if it is making money and not helping the poor then it is diverting and failing its mission.
The African bank major fall off was the combination of bad management, recklessness, and the company's poor business model. It was a micro-lender thus gave debts, to people in desperation at unreasonable, unethical rates and conditions. Ethically this mode of business was flawed, regardless of the mission to lift the poor it is good practice to make a profit to run the business. The model lacked transparency when they were selling expensive furniture via Ellerines, but instead, it ended up turning against them when turned against them out of bad debts. African Bank mixed banking and retail, this lead to complications since it became complex hence hard to cope. A business model is valued when it makes some change to the society not summing enormous amount of profits to its shareholders. The bank sold debt, therefore, failed to satisfy it, clients.
The bank's failure in co-operating governance reflects, in reality, the inefficient corporate governance mechanisms in the contemporary banks that have led to the recent financial crisis. The risks administration, transparency, answerability of the directors, the batch to follow these safe practices is what leads to the solvency of a bank. Corporate governance defines how goals and aims are defined, they lead existing bank activities and define what the bank necessities to apply to function securely and ensure a safe monetary situation and defiance with the applicable regulations among other. Failure to comply with these rules it leads to an inevitable failure of the institution.
Any short in the governance of big financial institutions can activate methodical risks. Therefore, there must be someone to regulate and take control to ensure that a particular bank is stable. The core capabilities of the board of directors are to form fundamentals of banks actions, which include approving, and supervision of the planned objectives of the bank and it is co-operating worth. However, in both Lehman and African Bank, the board of directors knew there was a defect in the way the officials were conducting their business but did not stop the activities thus leading to its failure and many others before (Marcinkowska, 2012)Members of the board must spend adequate time on the responsibilities, apart from board meetings and committees, without taking present operative management, it is essential that at least two members of the supervising board meet the measures of freedom. They take keen it actualizing its work, to provide care to the panel in the first chance of the fortunes of the company as well as the balance between the benefits of the principal shareholders and minority shareholders.
The board of directors and senior administration are committed to high standard of corporate governance failure to which might lead to negative results that most of the times results in the closure of the business. The loopholes or weaknesses that occur in such case includes lack of responsibility, the directors' failure to assume responsibility for actions of the group and become decisive at taking measures to keep the corporate at a desirable path that is ethically right and can be sustained. Accountability also plays a key role in this failure where those who make decisions are not able to justify the actions and decisions to it organization shareholders or stakeholders, like in the case of African bank where it uses to do transactions without approving but by just assuming that it is supposed to be done.
Fairness comes along when the stakeholders consider the genuine interests of the stakeholders. Lehman led to its stakeholders as well as African bank did, by operating with hidden agenda and then covering up the mistakes to fool, the stakeholders that all the transactions are conducted in their interest. Only to learn later when the bank is crumbly down that there was foul play. This leads to lack of transparency when the information is not revealed in a manner that enables the consumers and the shareholder to interpret the information and analyze the situation correctly. Management of a bank is a complex organization, and so is mixing a bank with retail, therefore, making the situation way more complex for the shareholders to understand and they fooled by the progress, which only exists in papers.
Lehman is a perfect example of the lack of accountability by the institution categorizing the money borrowed via Repo transactions as sales rather than debt made the shareholders and investors see the bank was making profits instead of losses.
The competence and efficacy of management tactic are proven by research to be valuable in the private sector, mainly when applied to dealing and governing those administrations. Some of this competence and efficacy is exchangeable when corporate governance is functional to public entities. An upsurge is seen universally in the attention paid to corporate governance in the public sector. This tactic that helps improve and lead to the governance of the industry there are also loopholes in the industry. The private sector might is better managed since accountability is the key feature in the administrations. Even though these corporate governance loopholes appear, a huge amount of the business world works better as compared to their public counterparts
These weaknesses are hugely reflective in the public sectors that mostly undergo a series of losses, but the government mostly bails them out. However, regardless of these shortcomings reflective in both sectors; these massive falls out of the banks has provided insights to prevent such crisis from recurring in the future.
Craig, S. & Spector, S., 2010. The Wall Street Journal. [Online] (electronic) Available at: https://www.wsj.com/articles/SB10001424052748703447104575118150651790066 [Accessed 4 May 2017].
Marcinkowski, M., 2012. CORPORATE GOVERNANCE IN BANKS: PROBLEMS AND REMEDIES. ul. Rewolucji 1905 r. Nr 39, 90-214 Lodz, Poland: University of Lodz.
Ratigan, d., 2010. Lehman Brothers Fraud Explained. [Online] Available at: https://www.youtube.com/watch?v=cUQiA4LtkmQ [Accessed 4 may 2017].
Rzepiennik, L., 2014. The Ethics of Microfinance. In L. Rzepiennik, ed. Investing in the Poor. Azusa Pacific University: Azusa Pacific University. pp.3-6.
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