The shareholder wealth and the financial crisis

With the financial crisis continuing, people begin wondering about the cause of the financial crisis. Many arguments suggests that the reason for this is the greed of the managers. However, some believes that it more related to the shareholder wealthy. 

This could be found from the company of HBOS, which illustrated as follows. The HBOS plc is a banking and insurance company, it used to be a well know company in the UK. During the financial crisis, the company meet the problem of credit crunch, which is a suddenly tightening of loan condition. The reason is because of the manager of HBOS use their bank loan invest in some high risk projects. However, suddenly the project failed and then the debtors worry about their money could not come back, so they are careful with their money and not willing to lend any of their money. This problem lead the company’s share price fell down 17 per cent in March 2008. Moreover, it fluctuated between 88p to 220p per share during the September 2008. Finally, in order to avoid another Northern Rock style collapse, this company was took over by Loyds TSB at 232p per share, which is much lower than the BBC estimated 300p per share. 

From this case, it could found that how the shareholder’s wealth has been destroyed through the financial crisis. From my point of view, after taking this into further consideration about the reason of the financial crisis, it could be found that the reason of financial crisis might be the greed of the shareholder. In order to create more shareholder wealthy, the manager uses all he could to make more profit of the shareholder, such as invest in some high risk project. For example, the manager of HBOS choose to provide their loan to some low creditworthy in order to make more profit. However, once the bad debts increased to a great level and met the problem of credit crush, the company in the position of bankrupt or take over by other company.

Therefore, I believe the purpose of the shareholder wealth sometimes lead some kind of misbehaviour like the financial crisis. Instead of creating more shareholder wealth, it destroy the shareholder wealth. However, all of those are depends on the manager’s operation. Hence, it back to the pervious problem that the manager should choose the right direction to create more shareholder wealthy instead of destroy it.