ECONOMIC DOWNTURNS AND BUSINESS ENVIRONMENT

PART 1

BACKGROUND OF THE STORY

The subprime mortgage crisis in 2008 signaled the beginning of the Great

Recession as “too big to fail” banks, hedge funds, and insurance firms found

themselves holding worthless investments. Lehman Brothers declared bankruptcy.

Congress passed TARP to allow the U.S. Treasury to enact a massive bailout

program for troubled banks. The aim was to prevent both a national and global

economic crisis. Leaders of nations took initiative for coordinated action to stop the

recession.

Organizations everywhere need to cut production and laid off staff to survive but

others didn’t succeed. Unemployment rate in both poor and rich countries, rose

relentlessly.
 PART 2

DEFINITION OF THE PROBLEM

Financial industries were confident that home mortgages were sound collateral for

Mortgage-Backed Security (MBS), banks and other financial corporations invested in

these in the form of derivatives (contract that derives its value from the performance of

an underlying entity. This underlying entity can be an asset, index, or interest rate, and

is often simply called the "underlying".) To feed the rapid rise in demand for derivatives,

many interest-only loans were made available to even subprime borrowers or those who

lacked creditworthiness. The borrowers failed to repay when the rates raised and

derivatives based on subprime mortgages lost value.

The American Recovery and Reinvestment Act (ARRA) of 2009 was a fiscal

stimulus signed by President Barack Obama on February 17 in an attempt to end the

recession. It took a year of fiscal stimulus before signs of global recovery emerged.

Had TARP, ARRA, and the Economic Stimulus Plan not been enacted, the 2008 Great

Recession could have led into the second Great Depression.

 PART 3

AREAS OF CONSIDERATION (SWOT ANALYSIS)

PROFITABABILITY

- Share markets tanked, commodity prices fell quickly, and even the oil price sank within

months from US$140 per barrel to less than US$40 per barrel, only to resume former

price levels within a year.

- In Australia the exchange rate dropped from parity with the US$ to only 70c to the US$

as the prices of mineral resources bottomed and Chinese demand for coal and iron ore

declined.

- If inflation rebounds in a slow United States recovery, Australia’s exchange rate will fall

and its terms of trade will decline.

STRATEGIC DIRECTION OF THE COMPANY

- The United States government did the formerly unthinkable and virtually nationalized

banks (as did the British government), and made staggeringly large ‘loans’ to big

business, just to keep the economy turning over.

SOURCES OF COMPETATIVE ADVANTAGE

- Hundreds of banks in the United States and other countries collapsed, and

governments injected ‘fiscal stimulus packages’ into economies, aimed at spending their

way out of — or at least delaying the onset of the recession they feared.

- By 2009, it was clear that this was not just a temporary downturn. Leaders of nations,

including Australia, joined together in an unprecedented initiative for coordinated action.

It took a year of fiscal stimulus by Western governments before optimism and signs of

global recovery emerged.

MORALE OF THE COMPANY’S EMPLOYEE

- Management had to accept the downside of their behavior along with the upside they

had enjoyed for years. Ordinary people were furious as their superannuation funds were

savaged while corporate high flyers took large bonuses.

- The key is whether Australia can develop the infrastructure and political institutions to

spread the benefits across the economy and develop other sectors too.1 Regardless, a

slowing global economy in 2015 was a drag on Australian growth. The formerly high

Australian dollar had meant Australians could travel internationally far more readily.

However, this had the downside of making Australian-manufactured goods — and the

formerly profitable tourism sector — less competitive on world markets, so factory

closures and job losses became disturbingly frequent media headlines.

CUSTOMER SATISFACTION

- Hollywood, when it was not offering escapism with stories about unpopular wars, was

quick to capitalize on a trend and reflect both fear and favor, releasing movies showing

organizations selling off toxic assets to unsuspecting buyers and terminating the

employment of loyal and productive staff.

- Romantic comedies took a back seat to risk management. Movies, as a barometer of

the times, showed that the tough decisions demanded by the new workplace could be

better made by managers with a strong moral compass. Business ethics became

ranked with finance as important topics to be studied, in a new age of uncertainty.