Financial Markets and Innovation in 1980s

In the 1980s, any one could make millions depending on his timing and where his business was located.  The Wall Street was booming, and anyone who wanted to achieve the American Dream was participating in the Wall Street. Life was fast including getting money and losing it. Technology had a footing in this decade; venture capitalists were supporting successful technological companies such as Cisco Systems, Microsoft, Genentech, and Sun Microsystems (Honeygold 568).

Wall Street runs through the historic center in the financial district and consists of a majority of New York’s major financial institutions. During the 1980’s, Wall Street experienced some unprecedented growth which declined slightly in the late 1980’s. During this period, the US had just terminated inflation which influenced the growth. Dow Jones annual average tripled while employment rates doubled in the period 1980 to 1987. The financial period saw the increase in trading scandals and collapse of some companies such as Drexel Burnham.

Financial innovation is the marketing itself and creation of new types of securities. Financial innovation involves advancements in technology. The payment systems that are used for lending and borrowing funds undergo various improvements. In the 1980’s, there was a rapid innovation because of the technological progress that reduced the costs of carrying out financial transactions. Another cause of the rapid financial innovation was the effects of high inflation and the effects of interest rates. As such investors were looking to diversify their portfolios. The rapid change in the financial sector led to changes in the way the sector was regulated including the way the US conducted its monetary policy. Interest rates were above the ceiling rates in 1976 the overall effects led to the non-bank institutions offering the quasi banking services. This led to the deregulation of depository financial markets until 1983.

Among the key financial innovations was the Money Market Mutual Fund (MMMF). This involved funds that were pooled by investment companies. The funds included liquid assets, and the companies would sell small denomination shares of the funds in which the public would purchase. These funds were fully backed by liquid assets; they were not subject to reserve requirements and allowed third party transactions in case they were limited. The MMMF funds grew from $76.31 billion in 1980 to $186.902 billion in 1981. Due the growth of the MMMF, the regulatory authority was under pressure to deregulate the market. In 1982 full de-regulation of banks was enacted and they could offer the same services as the MMMFs (Noyelle 87)

The high volatile interest rates led to dynamic developments in the mortgage and securities markets. The innovations were aimed at reducing the risks occasioned by the volatile interest rates.  One of the innovations was experienced in the bonds market; a large portion of the corporate bonds issued were floating rate bonds. The fixed rate bonds had put or call provisions. During this time, there was the growth of the zero-coupon rate bonds which paid their interest rates based on the returns from price appreciation.

In the mortgage market, there was a mortgage lending from pension funds and insurance companies. This led to the recovery of the construction sector. Another financial innovation during this time was the development of interest rate swaps. This allowed companies to reduce the risks that were posed by fluctuating interest rates.

The Major Players in New York (1989)

General Electricity Company is an American corporation incorporated in New York. The company currently operates various business segments among them are Capital Finance, Consumer and Industrial, Technology and Infrastructure and Energy Segments. In 1989, it was ranked among the top 10 companies in the United States in terms of revenue realized. The company had thousands of employees by this time, and they had a compensation culture that focused on long term leadership development. The employees were also compensated through equity schemes. The company has continued to maintain the culture of enabling leaders to grow and develop with the company system through vigorous training. 

Morgan Stanley

Morgan Stanley is a multinational financial services corporation that has its headquarters in New York. In 1989, the company was one of the major financial services company. It had around 20% of the market share in relation to assets. The company had a culture to accept different races and encouraged this diversity in the work place. The company had strike a compensation policy which included the evaluation of individual work of the employees.

Chemical Bank

Chemical was the largest bank in the United States by the value of deposit market share in 1989. It has since purchased Chase Manhattan Bank and latter acquired J.P Morgan & Co. It has since change its incorporation name to JPMorgan Chase & Co. The company adopted a culture of consistent growth and through its manufacturing functions it has developed a financial business. The acquisition of other companies has made this possible.

Wall Street in 2008

There was a meltdown in Wall Street in 2008 as a result of the Financial Crisis. Some companies were forced out of business as they became insolvent. There was a panic in the market and acute financial disturbance. The panic was caused by the failure of Lehman Brothers and Merrill Lynch which were major investment banks in Wall Street.  The government had to takeover Fannie Mae and Freddie Mac. These were mortgage giants which had suffered from the crisis, the fall of Wall Street was evident from the Dow Jones Industrial Average which lost by 4.42% or 504 points. AIG was also suffering, and it was on the break of a bankruptcy (Goetzmann 36).

The fall of the two largest banks in Wall Street resulted to the reduction of excess liquidity in the market and as such the reduction in consumer spending and deterioration of home prices. The Federal Reserve had to take steps to contain the crisis and the tension. The Fed had to introduce some regulations and |more than $9 trillion in the short term loans to prevent further collapse of companies. During this period, the companies were serious cutting their staff costs and thus cutting various jobs. Hewlett-Packards was one such company that rendered 25,000 people jobless while Merrill Lynch and Bank of America were forced to merge by the situation.

By the end of the year, some companies were still performing well. However, most of them had to take emergency loans from the government to prevent their collapse. Such companies were; Goldman Sachs, a Wall Street giant which borrowed over 83 times amounts ranging to $600M dollars. Morgan Stanley used the Fed program for more than 210 times.The bank of America also got loans to survive the liquidity crisis, while Merrill Lynch was voluntary been bought by the Bank of America. The merger enabled the bank not to collapse. The other surviving non financial companies included General Electricity, McDonalds, Harley-Davidson, and Verizon. The Federal Reserve established a direct lending facility to these corporations (Lewis 56).

In 2008, there was uncertainty in the market and fear of lending among one another in the banks. The banks could not manage risks. This replicated in their stocks as investors continuously sold them. This resulted to a further crisis as banks were drained off some liquidity. The investors were also selling off real estate company stocks. The capital markets suffered from the failure of huge companies while trading in securities fell significantly.

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