Analysis of An Initial Inquiry into the Causes of the 2008 Financial Crises Article by Coffee - Essay Example

Coffee states that one of the reasons why a financial bubble comes to an end is when investors realize that institutions have failed to perform their jobs. In the case of crises that were financial during 2008, the institution that failed to operate effectively was the rating agencies that have the responsibility of verifying the legitimacy and effectiveness of financial products being offered in the financial sector.

In 2008, the gatekeepers provided misleading information regarding the ratings of financial products and when the financial products could not live up to their ratings, the investors realized and started offloading their investments. Due to this, a panic was caused and a freefall of the prices of the investment products could not be stopped. Management FailureManagement failures have occurred in the past due to which policymakers were promoted to create the Sarbanes-Oxley Act. Managers are involved in the act of providing misleading (overly positive) information regarding their organization.

They do so because this results in increased investments and increased investments lead to increased salaries and benefits for the managers. Similar kinds of activities took place before the crises of 2008 and when the real valuation of the financial products was realized, the offloading of investments took place and the odds turned against the managers. Failure of Regulatory Agencies Before the crises of 2008, the SEC altered its policies in 2004 and removed the ceiling set on the amount of money that financial institutions including banks could use.

Due to this policy change, several banks increased the amount of number their investments and provided a huge amount of loans and the result was that some of the major banks in the US lost all their liquidity and were on the verge of going bankrupt.

John C. Coffee asserts that there are three main causes of the crises of 2008, these include the Failure of gatekeepers which in this case is the rating agencies, managerial failures which in this case is that the managers gave precedence to their interest over the interest of their investors and lastly because the regulations were relaxed by the Securities and Exchange Commission.