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Mini-Case -2008 Financial Crisis Learning

2008 Financial Crisis
2008 Financial Crisis

Principles of Finance Mini-Case - 2008 Financial Crisis Learning

Economists and experts have extensively researched the 2008 financial bubble also known as the financial crisis 2008 or the dot com bubble. All of them seek to understand how it came to be that the crisis occurred in the modern time even with all the monitoring of economic variables. Most of the research Centre on explaining the 2008 crisis by relying on the causes and effects that led to the occurrence of the crisis and reviewing the timeline of events that led to its occurrence. The research further elaborates on the impact that the crisis had on different nations, the companies that collapsed after the loss among them the Lehman brothers and the impact that the crisis made in developing of economic monitoring measures.

Below is a sample question that focuses on explaining the occurrence financial crisis

Sample Question on the 2008 Financial Crisis Learning

Overview

The financial crisis in 2008 was a huge disruption to our global economy.

Expected Learning

You will acquire basic understanding of some of the core causes of the financial crisis.

Specific Instructions

  1. In your opinion, who was responsible for the financial crisis?  Who’s fault was it?  Explain your thinking.
  2. The video describes the housing market as a “bubble” in 2008.  What is meant by a bubble?  Do you think it is still possible for “bubbles” to occur in our financial markets?
  3. What is a “moral hazard?”  You can describe it in terms of “too big to fail” or use another example you can think of.  (NOTE:  For more, there is a helpful and brief discussion in Investopedia under “What is moral hazard?”)

Sample Answer on who was responsible for the Occurrence of the Financial Crisis

The 2007/2008 financial crisis has largely influenced how banks operate today. Prior to the crisis, most of the banks would give lending to those institutions that needed shortfall liquidity to address market challenges through the overnight Federal Reserve loan. After the crisis, the Federal Reserve had to include more than just banks in the process of borrowing and lending to influence the accumulated funds. The increase in the accumulated funds has been characterized by enactment of policies allowing more institutions to be partakers of the federal fund. As the article by Craig & Millington (2017) expresses, owing to the crisis, the Federal Reserve has been keen to enhance the market operations and one way of doing this has been to control to flow of funds to overnight collapse of firms as witnessed before. At the same time, increase of funds at the Federal Reserve has made it possible for the Federal Reserve’s rate to cancel out making such rates neutral and stable.

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Question 2

Funding Problem To Be Solved

Assume: Need to raise $10M; Founders (2) put in $500K each; Early stage investor (seed) gets 10X return; Company sells for 1X sales; All proceeds from the sale go to the investors and founders.

Answer:  How many rounds; How much in each round; The pre & post money valuation in each round; Where does each round come from (investor type & example); What is the capitalization chart for each round; What is the selling price of the company; What is the final capitalization chart and returns for the investors and founders.

Mini-Case -2008 Financial Crisis Learning

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