Commerce Homework Essay

601 words - 3 pages

What is the ‘Agency Problem’?
The agency problem is a conflict of interest inherent in any relationship where one party is expected to act in another's best interests. For example in corporate finance, the agency problem usually refers to a conflict of interest between a company's management and the company's stockholders.

Briefly explain the main series of events that led to the collapse of Storm Financial, focusing in particular on the nature of the relationship between Storm and their bankers.
ASIC would lodge three legal actions in the federal court against Emmanuel and Julie Cassimatis, Storm Financial Ltd and its main lenders – Commonwealth Bank, Macquarie Bank and BoQ. The main downfall which lead to the collapse of storm Financial were the banks who lent money to Storms clients were “linked credit providers and under section 73 of the Trade Practices Act (TPA can be ...view middle of the document...

The biggest lender was Commonwealth Bank and its subsidiary Colonial Geared Investments, who had 2300 customers between them (borrowing against their homes and on margin).

Storm investors were pushed to the brink. Elderly couples with little or no income were loaded to the max with debt and persuaded to put their houses and super on the line. If the stock market then fell by 10% they were told to put in more cash and buy more shares, because shares were cheap. If the market rose by 10%, they were told to borrow more money and buy more shares to maximise their gains. Storm’s computer system reviewed clients on a regular basis and sent out notices en masse, telling people to take the next “step”.
There were two main problems with this approach: first, investors generally didn’t earn enough to cover their interest payments; and second, the gearing effect meant they would lose everything if markets went down by 30–40%, which they did (and more) during 2008. The strategy worked famously for Storm, which collected a fat 7% fee every time more money was invested.

These close and co-operative relationships will get a work-out in ASIC’s second damages case – against Storm and the banks – that alleges Storm was running an unlicensed managed investment scheme and that the banks were “knowingly concerned” in this illegal activity.

What did the so-called Milgram experiments suggest about human behaviour? What might be the relevance of these findings in explaining episodes such as the collapse of Storm?
The Milgram experiments measured the willingness of study participants, men from a diverse range of occupations with varying levels of education, to obey an authority figure who instructed them to perform acts conflicting with their personal conscience; the experiment found, unexpectedly, that a very high proportion of people were prepared to obey, albeit unwillingly, even if apparently causing serious injury and distress.

Basing the collapse of storm financial around Milgram’s Theory would suggest that human’s will/can essentially do anything to gain power – regardless of the outcome for others involved.

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