Dividend Theories

Lecture 11 discusses dividend policy. Dividend relevance theory was proposed by Lintner (1956) and Gordon (1959). They suggested that investors are generally risk adverse and would rather have dividends as appose to capital gains because of uncertainty (‘Bird-in-the-hand’ argument). Where future gains are uncertain, investors would rather have the money now than leave it tied up in uncertain investments. Therefore as investors prefer dividends, the dividend policy will influence the market value of the company.

According to this theory, optimal dividend policy should be determined which will ensure maximization of the wealth of the shareholders. Empirical studies fail to provide conclusive evidence in support of the dividend relevance argument. In practice, however, the actions of both financial managers and shareholders tend to support the belief that there is some connection between dividend policy and share price. (Frankfurter, 2003)

Conversely, Modigliani and Miller showed algebraically that dividend policy did not matter. They argued that as long as the firm was realising the returns expected by the market, it did not matter whether that return came back to the shareholder now as dividends, or reinvested. The clientele effect argues that shareholders are not indifferent to dividends vs. capital gains. (Myers, 2010) This could be because some shareholders require a regular income (dividends) to meet liabilities. On the other hand, M&M (1961) suggested that the shareholder can create their own dividend by selling their shares when cash is needed. (Booth and Cleary, 2010) However, this would be time consuming for the shareholder and possible issues could be that there would be control implications and transaction costs involved. Their argument that dividend policy is irrelevant to a company’s market value and therefore shareholder wealth is based on the assumption that perfect capital markets exist and there are no taxes or transaction costs.

However, in reality, where perfect markets do not exist and tax and transaction costs do, M&M’s views are unrealistic. (Watson and Head, 2003)

Research suggests that dividends are important to both investors and companies. Moreover, if dividends do not remain stable or increase in the long run, the value of shareholders investment will not be seen as returned or maximised, plus performance and reputation of the business may be doubted, potentially leading to a decrease in market value of the company and therefore shareholder value destruction. (Gillet, Lapointe and Raimbourg, 2008)

M&M argue that changes in dividend policies from low-to-high pay-outs, for example, should not have a bearing on the market value of the shares, but rather on the clientele that the firm will attract. Looking at this from the other end, Miller, Black and Scholes (1974) argue that if clients are satisfied, their demand for high or low pay-outs will have no effect on prices of shares. In the real markets, studies have however shown that large changes in dividends do affect share prices. (Gitman, 2011) M&M’s counter argument to this is that the effects on the prices are attributable to the informational content of dividends with respect to future earnings rather than to the dividend itself.

Marks & Spencer was the first British retailer to publish pre-tax profits of over £1 billion in 1998. (BBC, 1998) However, a few years later it plunged into crisis which lasted for several years. They publish £millions loss and lost their entire market share. Simply, they got the branding wrong; they copied the catwalks in Milan and changed the target market, and ignored their main customer base. This resulted in a multi-million pound refurbishment throughout the whole company. In 2001, their profits recovered somewhat and they recovered some of its market share, but it was soon evident that problems remained. However, their dividend pay-out policy remained exactly the same. It remained the same during their good years, their bad years and also their recovering years. The fluctuation in profits would not be apparent looking at their dividend. They drew on reserves to pay the dividend. They did this because it was the dividend that said something about marks and spencer. If they had massively slashed the dividend, which might have been expected, it would have affected the attractiveness to invest in their company.

In conclusion, there are many different factors that will influence the decisions of management with regard to dividends. Although offering high dividends to investors may satisfy them in the short term, future performance must be considered as it may not be possible to continue with such high payments, especially if the financing of future projects is threatened by the fact that money was spent on issuing dividends.

Optimal Capital Structure

Lecture 10 discusses whether or not it is worthwhile for organisations to adjust their gearing ratio, and whether it can add value to their business, so that they can ultimately maximise shareholder wealth. The traditional answer is yes however Modigliani and Miller argue against the traditional method and say no.

Basically, is it possible to maximise shareholder wealth by varying the proportions of debt and equity in a company’s capital make up?

The traditional theory of capital structure is that the optimal capital structure exists, where the WACC is minimised and market value is maximised. (Arnold, 2005)

The traditional approach argues that a moderate degree of debt can lower the firm’s overall cost of capital and thereby, increase the firm value. The initial increase in the cost of equity is more than offset by the lower cost of debt, but as debt increases, shareholders perceive a higher risk and the cost of equity rises until a point is reached at which the advantage of lower cost of debt is more than offset by more expensive equity. (Pandy, 2005)

However, the contention of the traditional theory, that moderate amount of debt in ‘sound’ firms does not really add       very much to the ‘riskiness’ of the shares, is not defensible. Also, there is insufficient justification for the assumption that investors’ perception about risk of leverage is different at different levels of leverage.

In the traditional view of capital structure, it is also argued that investors do not always have the information and/or the time needed to closely monitor changes in the level of debt relative to equity. Consequently there is a period of time where the expected return or required return on the levered firm’s stock does not fully account – in the M&M sense – for the added financial risk that is associated with the higher levels of debt. (Grant, 2002)

Modigliani and Miller (1958) studied the capital structure theory intensely and from their analysis, they developed the capital structure irrelevance proposition. Their approach is opposite to the traditional approach. Essentially they hypothesized that in perfect markets, it does not matter what capital structure a company uses to finance its operations. They say that there is no relationship between capital structure and cost of capital; and changing the capital structure would have no effect on the overall cost of capital and market value of the firm.

Modigliani and Miller argued that it would not be possible for one company to remain more valuable than another, since the overvalued company would be bought and sold until the prices equalise. However, M&M’s hypothesis relies on a few assumptions: capital markets are perfect (information is costless, no taxes, no transactions costs) so the imperfections need consideration.

The M&M capital structure irrelevance proposition assumes 1) no taxes and, 2) no bankruptcy costs. Taking these assumptions into consideration, the WACC should remain constant with changes in the company's capital structure. For example, no matter how the firm borrows, there will be no tax benefit from interest payments and thus no changes/benefits to the WACC. Additionally, since there are no changes/benefits from increases in debt, the capital structure does not influence a company's stock price, and the capital structure is therefore irrelevant to a company's stock price. (Graham and Harvey, 2001)

However, in the real world, taxes and bankruptcy costs do significantly affect a company's stock price. In additional papers, Modigliani and Miller included both the effect of taxes and bankruptcy costs.

In 1963, when Modigliani and Miller admitted corporate tax into their analysis, their conclusion altered dramatically. As debt became even cheaper (due to the tax relief on interest payments), the cost of debt fell significantly. Thus, the decrease in the WACC (due to the even cheaper debt) was greater than the increase in the WACC (due to the increase in the financial risk). Thus, WACC falls as gearing increases. Therefore, if a company wishes to reduce its WACC, it should borrow as much as possible.

There is clearly a problem with Modigliani and Miller’s with-tax model though, because companies’ capital structures are not almost entirely made up of debt. Companies are discouraged from following this recommended approach because of the existence of factors like bankruptcy costs, agency costs and tax exhaustion. All factors which Modigliani and Miller failed to take in account. (ACCA, 2009)

The traditional approach assumes that there are benefits to leverage within a capital structure up until the optimal capital structure is reached. The theory recognises the tax benefit from interest payments. Studies suggest, however, that most companies have less leverage than this theory would suggest is optimal.

In comparing the two theories, the main difference between them is the potential benefit from debt in a capital structure. This benefit comes from tax benefit of the interest payments. Since the M&M capital-structure irrelevance theory assumes no taxes, this benefit is not recognised, unlike the traditional theory, where taxes and thus the tax benefit of interest payments are recognised.

On reflection by the author, the traditional view appears to be a more worthwhile approach to achieving optimal capital structure. In the absence of perfect capital markets and the existence of corporate taxes, M&M’s theory is more unrealistic to real life situations. It has been suggested that some firms are financed entirely by equity, but very few firms are financed entirely by debt, and neither of these observations are consisted with the M&M theory.

Fracking

Lecture 9 discusses the rise of social responsible investments, this links in with a key issue that has recently been reported and that has caused controversy, the new technology used by the energy industry to unlock previously inaccessible supplies of domestic oil and clean-burning natural gas, fracking.

This “shale” oil and gas, up to a few years ago, was thought to be impossible to recover. But over the past few years fracking, along with horizontal drilling has unlocked this abundant resource. (Marks, 2012)

Along with increasing domestic oil production and unlocking what could be a century’s worth of natural gas, this shale oil and gas is changing the face of America and the UK - bringing back manufacturing jobs, creating an abundant source of cheap energy, all while boosting the economy. (www.dailyresourcehunter.com)

Despite the fact that hydraulic fracturing has been employed for half a century at comparable depths of thousands of feet, opponents of natural gas insist that groundwater is now being contaminated. This claim, no matter how many times it is repeated, lacks substantive data to support its conclusions as both the national association of state groundwater agencies and the multistate governmental agency representing states' oil and gas interests have found no evidence of groundwater contamination from hydraulic fracturing fluids. (Simmons, 2011)

Britain’s top environmental regulator said that the controversial technique for extracting the new energy source of shale gas should be allowed. The hydraulic fracturing of shale rock, which has been blamed for causing earthquakes and polluting ground water and has generated fierce opposition from environmentalists, should proceed as long as it is monitored carefully and is accompanied by measures to minimise carbon emissions, said the chairman of the Environment Agency, Lord Smith of Finsbury. (McCarthy, 2012)

Lord Smith's qualified endorsement of fracking will further encourage the Government to permit widespread use of the technology, which involves pumping a mixture of water, sand and chemicals under very high pressure into underground shale rock deposits, to blow them apart and release the natural gas they contain.

In the US, shale gas has provided an energy bonanza in recent years, and has caused gas prices to tumble. The downside is that fracking is known to be responsible for causing seismic movements – small earthquakes – and in America there are allegations that the chemicals used, and the shale gas itself, pollute groundwater. In the UK, an energy company, Cuadrilla Resources, has discovered a substantial shale gas field near Blackpool. (McCarthy, 2012)

Nathan Roberts, from the anti-fracking group Frack Off, criticised Lord Smith's position. "Lord Smith's endorsement of commercial-scale fracking in the UK suggests the Environment Agency is either ignorant of the facts or ignoring them," he said.

Joss Garman, a Greenpeace campaigner, said: "Evidence from America suggests fracking for shale gas could be as damaging to the climate as coal burning."

During the fracking process, methane gas and toxic chemicals leach out from the system and contaminate nearby groundwater. (Bracken, 2010)

However, the concerns about groundwater pollution are actually unproven. Faulkner (2011) argued that the United States has a wealth of oil and gas reserves trapped in layers of shale rock. He also suggests that the country has enough natural gas to power itself for the next 200 years and that those reserves can be accessed through fracking.

In conclusion, when looking at fracking, critics see polluted wells, exploding houses, and earthquakes - an environmental disaster in the making. Anti-frackers have a simple solution: ban it. In contrast, industry supporters see hydraulic fracturing as a safe technology that drillers have been using for decades without controversy and that now promises a new era of energy abundance. The pro-frackers, too, have a simple solution: get the government out of the way and drill. (Dolan, 2012)

Social Responsible Investments (SRI)

Lecture 9 discusses the rise of social responsible investment: A European context.

SRI is about ethical and socially responsible investments. These are terms used to describe any area of the financial sector where the social, environmental and ethical principles of the investor influence which organisations or ventures they choose to place their money with. This could mean avoiding investments in industries such as the tobacco, alcohol, gambling and arms trade industry, or industries that use animal testing. Renneborg et al. (2008) describe SRI as an investment process that integrates social, environmental and ethical considerations into investment decision making.

SRI links into the ethical trading and ethical standards that people operate by.

Traditionally, a portfolio’s performance has been judged by two variables: risk and return. Through this scope, it is an investment manager’s responsibility to construct a portfolio that generates the highest return while maintaining a tolerable risk level. A faulty assumption in this philosophy is that the investor has no interest in the social costs incurred through the creation of this portfolio. For a variety of reasons, whether environmental, religious or political, investors are in fact concerned with how their money is generating its return. SRI has emerged from this social awareness. (Winnie, 2007)

From an investment point of view, there is some ambiguity regarding what is considered as social responsible investing. A problem with this is that there are many different viewpoints on what constitutes the proper values to seek in companies; it is difficult to provide a universal definition of SRI. For some investors, being socially responsible means not investing in companies involved in alcohol, while for others, alcohol is perfectly acceptable. The most commonly screened companies are those involved in tobacco, which is almost universally seen as detrimental. (Schyndel, 2011) For example, an investor may maintain strong moral principles against investing in tobacco companies because of the obvious health implications that are associated with smoking. The investors may face a dilemma when considering whether to invest in a company that sells tobacco products despite not being directly involved in the manufacturing of them.

The importance of social responsibility in investing is far from self-evident. It has been said by economists that maximisation of shareholder wealth is the corporate purpose and infusion of social objects will destroy the free enterprise system. A corporate executive’s responsibility is to make as much money for the shareholders as possible, as long as he operates within the rules of the game. When an executive decides to take action for reasons of social responsibility, he is taking money from someone else, from the shareholders, in the form of lower dividends; from the employees, in the form of lower wages; or the customer, in the form of higher prices. (Smith, 1952)

Harrington (1992) argues that in the critics view social investing is really irresponsible investing, at best a form of charity or simply a way to lose other people’s money. Many argue that instead of investing in a socially responsible manner, investors should seek to maximise their profits and then, in the words of one critic, if they desire, each such investor should make contributions and gifts from their gains to aid causes that they consider socially responsible.

This argument is deeply flawed. It ignores the fact that the investment decision in itself may have created or contributed to the social problem in the first place. (Harrington, 1992)

An example of a company that operates by SRI is Starbucks. Since Starbucks Coffee started in 1971, the company has focused on acting responsibly and ethically. One of Starbucks' main focuses is the sustainable production of green coffee. With this in mind, it created C.A.F.E. Practices, a set of guidelines to achieve product quality, economic accountability, social responsibility and environmental leadership. The company supports products such as Ethos Water, which brings clean water to the more than 1 billion people who do not have access. To date, Ethos Water has committed to grants totalling more than $6.2 million. (Liodice, 2010)

Another company that trades using the ethical standards of SRI is Toms, the American shoe company. Blake Mycoskie started Toms Shoes on the premise that for every pair of shoes sold, one pair would be donated to a child in need. This innovative idea resulted from a trip to Argentina where Mycoskie saw an overwhelming number of children without shoes. Toms Shoes recognized that consumers want to feel good about what they buy, and thus directly tied the purchase with the donation. In just four years, Toms Shoes has donated more than 400,000 shoes, evidence that consumers have clearly embraced the cause. Toms has also recently launched eyewear using a similar ‘one for one’ model. For every pair of Toms glasses sold, a child in need will receive medical care, prescription glasses or sight-saving surgery. (Brune, 2007; Chansanchai, 2007 and Wong, 2008)

Socially responsible investing is a booming market in both the US and Europe. Assets in socially screened portfolios climbed to $3.07 trillion at the start of 2010, a 34% increase since 2005, according to the US SIF's Report on Socially Responsible Investing Trends in the United States (2010)

However, there is a major question about whether businesses have an ethical dimension. If the main aim in a company is to maximise shareholder wealth, should they not aim to achieve this no matter what? SRI maximises shareholder wealth from a limited pool of investments, which in turn could potentially cause missed investment opportunities.

Mergers & Acquisitions

Lecture 7 discusses International Business Opportunities: International Merger and Acquisition Activity.           

Mergers and acquisitions (more generally, takeovers) are an important means through which companies achieve economies of scale, remove inefficient management, or respond to economic shocks.

Mitchell and Mulherin (1996) and Andrade et al. (2001) argue the merger activity in the 1990s was clustered in industries such as telecommunications, banking, and media as a result of technological and regulatory shocks. The ultimate goal of a takeover is to realise synergies.

The primary motivation for M&A deals is the quest for growth. When internal growth initiatives do not materialize, or there are no other organic growth options, M&A transactions prove to be the only way to create growth. (Slywotzky & Wise 2002)

In the pure sense of the term, a merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". The firms are often of about the same size. Both companies' stocks are surrendered and new company stock is issued in its place. For example, in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company, GlaxoSmithKline, was created. In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. (Giddy, 2009)

Slywotzky & Wise (2002) also argue that external pressure can also force managers to initiate additional M&A transactions. The demand for double-digit growth from analysts and investors becomes hard to satisfy. For listed companies the external pressure for more growth can be so immense that it cannot be realized by organic growth through internal projects alone. In this situation, M&A transactions remain the only solution, even if they might have failed in the past.

When the industries is in a period of consolidation, and as other competitors consolidate and challenge a company’s market position, the fear of being left behind spreads. Companies also engage in M&As in order to survive (“bandwagon effect”). (Van Wegberg 1994; Schenk 1996; Fauli-Oller 2000) Promoters of M&As come up with alleged opportunities and the motive to buy companies in order to prevent competitors from doing so is always difficult to evaluate.

Testimonial evidence about businesses at conferences and in the media tell us that some M&As have (supposedly) been a huge success. Often, the thinking goes that if other managers can make it work, I can do it too. But any given situation, and transaction factors, can be totally different, e.g. industry, life cycle of the company, firm-specific problems, timing of the deal and strategic intention. People, however, tend to accept testimonials, evidence that is of questionable validity. (Stanovich 1998) Also, when these success stories are examined in detail, it is often difficult to measure whether they really were successful. People tend to demand little follow-up evidence and do not look at the long-term success. (Steger and Kummer, 2011)

Why do M&A transactions fail so often? The reasons are manifold; the proposed critical success factors for M&As are as numerous as the consultants, managers and academics in the field. (Datta et al. 1991) The fact that change is happening all the time, in addition to the interdependency of factors, can add complexity to the mix and cause significant problems. This is far from being well understood otherwise the success rate of M&As would have improved drastically as a result of defining these success factors.

The main reason for M&A failure is unrealistic expectations. First, making M&A deals work is a difficult task and many managers underestimate this fact. Second, the goals of M&A deals are often unrealistic. (Steger and Kummer, 2011)

Mergers and acquisitions often create brand problems, beginning with what to call the company after the transaction and going down into detail about what to do about overlapping and competing product brands. (Merriam, 2009)

Brand decision-makers essentially can choose from four different approaches to dealing with naming issues, each with specific pros and cons:

1. Keep one name and discontinue the other. The strongest legacy brand with the best prospects for the future lives on. In the merger of United Airlines and Continental Airlines, the United brand will continue forward, while Continental is retired.

 2. Keep one name and demote the other. The strongest name becomes the company name and the weaker one is demoted to a divisional brand or product brand. An example is Caterpillar Inc. keeping the Bucyrus International name. (Merriam, 2009)

 3. Keep both names and use them together. Some companies try to please everyone and keep the value of both brands by using them together. This can create an unwieldy name, as in the case of PricewaterhouseCoopers, the merger of Price Waterhouse and Coopers & Lybrand, which has since changed its brand name to PwC. (www.pwc.com, 2012)

 4. Discard both legacy names and adopt a totally new one. The classic example is the merger of Bell Atlantic with GTE, which became Verizon Communications. Not every merger with a new name is successful. By consolidating into YRC Worldwide, the company lost the considerable value of both Yellow Freight and Roadway Corp. (Carney, 2000)

In conclusion, M&As seem to have many advantages to both owners and shareholders, but only under certain circumstances. Investors need to consider the complex issues involved in M&As and the merged company must have appropriate management in order for it to succeed.

FDI - Foreign Direct Investment

Lecture 6 discusses International Business Investment Opportunities: Trends and Theory of Foreign Direct Investment (FDI)

Foreign direct investments have become the major economic driver of globalisation, accounting for over half of all cross border investments. Companies are rapidly globalising through FDI to serve new markets and customers, map out their value chains in the most efficient locations globally, and to access technological and natural resources. (Financial Times, 2012)

FDI helps to improve the standard of living and to drive economic wealth in the countries where the investment is taking place. (Economy Watch, 2010)

FDI is where one country gets directly involved with another country but is not simply about developing countries, the biggest recipients of FDI funding are developed societies. Britain, USA and Japan are all big recipients of FDI funding. They are not developing nations.

There is not as much lending in the banking systems as there used to be but industry now provides the money for development. Shell in Nigeria, Starbucks, McDonalds and Toyota are a few of a long list of companies that operate FDIs.

One problem with generating an economy is whether there are sufficient funds to do it. The main resource that keeps the economy going is money. A lot of countries open up their opportunities to investment from companies based abroad. (Wessel, 2011)   

Nike is the world’s leading supplier of athletic shoes and apparel and a major manufacturer of sports equipment. It is headquartered in the U.S. and its brands include Nike, Umbro and Converse. In 2009, Nike employed 34,300 people and its sales were $18.36 billion. Nike has contracted with more than 700 factories around the world and has offices in 45 countries outside the U.S. Nike is mainly engaged in offshoring. None of Nike’s athletic shoes are produced in the U.S., and none are produced in a Nike-owned production facility. Nike subcontracts all of its footwear production to independently owned and operated foreign companies. (Ossa, 2010)

Since the global financial crisis, the number of overseas corporations has increased significantly.

A lot of FDI is going to countries that are already developed. It is a shame that the under developed countries are not as involved with FDI as developed countries. The problem is developed countries like America invest in other developed countries such as Germany rather than countries like Africa. Although there is a lot more competition, there is also a lot less risk when dealing with investments within developed economies. This gives the under developed countries less of a chance to improve economic wealth. (Gray, 2010)

Critics of foreign investment have suggested that it leads to dependent, or restricted, development. However, supported have suggested that it can bring capital and technology, develop skills and linkages and increase employment and incomes. (Kiely, 1998)

The Middle East and North Africa region represents an exasperating paradox with regard to the flow of Foreign Direct Investment (FDI). Despite being home to some of the richest oil-producing countries in the world and almost two decades of implementation of structural adjustment, the region continues to attract abysmal flows of FDI (Rivlin, 2001)

Another argument against FDI is that it could lead to job losses, where small businesses will suffer if larger businesses come into the country and displace them. Also if the company coming into the country purchases their goods from the international market and not from domestic sources, it could again, lead to potential job losses. (The Times of India, 2011)

In conclusion, FDI can have a positive effect on companies and investors and even the countries themselves. However, there are also substantial risks involved. Companies therefore play it safe by investing in companies in developed countries where there is less risk.

The Current Financial Crisis

Lecture 8 was Contemporary International Business Issues: The Credit Crunch of 2008.

In September 2008, a global financial crisis was initiated by the bankruptcy of U.S investment bank Lehman Brothers, and the collapse of the world’s largest insurance company AIG. (BBC, 2008) The recession left 30 million people unemployed and cost the world trillions of dollars. (Pollin, 2011)

Weissman (2008) suggests that much if the blame can be put on dynamics of unregulated global financial and other markets. Since the 1980s the rise of the financial sector has led to a series of increasingly severe financial crises. Each crisis has caused more damage, while the industry has made more and more money.

After the Great Depression in America, the financial industry was tightly regulated. Most regular banks were local businesses, prohibited from speculating with depositors’ savings. Investment banks, which handled stock and bond trading, were small, private partnerships. (Thomas, 2012)

In the 1980s the investment banks went public, allowing them to get a huge amount of shareholders money. (Shleifer & Vishny, 1987) People on Wall Street started getting rich.

Also during the 80s, economists and financial lobbyists supported a 30 year period of financial deregulation. Savings-and-loan companies were deregulated allowing risky investments, using depositors’ money. Hundreds of saving-and-loan companies failed, costing taxpayers $124 billion, and cost many people their life savings. Thousands of executives went to jail for looting their companies. (Donahue, 2009)

By the late 1990s the financial sector had merged into a few enormous firms, each of them so large that their failure could threaten the whole system.

According to Willem Buiter, (2010) Chief Economist, Citigroup the firms merged together to create big banks because banks like monopoly power and lobbying power and also because they know that when they’re too big, and fail, they will be bailed.

Since deregulation began, the world's biggest financial firms were caught laundering money, defrauding customers, and cooking their books. (Rozek, 2011)

On April 22^nd, 2008, in the UK, Royal Bank of Scotland announced a write-down of £5.9bn on the value of its investments between April and June - the largest write-off yet for a British bank. (BBC, 2009)

On September 7^th, 2008, the takeover of Fannie Mae and Freddie Mac was announced, two giant mortgage lenders on the brink of collapse. (BBC, 2009) Two days later, Lehman Brothers announced record losses of 3.2 billion dollars. The stability of the global financial system was in jeopardy and under British law, Lehman's London office had to be closed immediately. Lehman's failure also caused a collapse in the commercial paper market, which many companies depend on to pay for operating expenses, such as payroll. When AIG was bailed out, the owners of its credit default swaps, the most prominent of which was Goldman Sachs, were paid 61 billion dollars the next day. (New York Times, 2009)

The AIG bailout cost taxpayers over 150 billion dollars. On October 4^th, 2008, President Bush signed a 700-billion-dollar bailout bill. World stock markets continued to fall, within fears that a global recession was happening. By December of 2008, General Motors and Chrysler faced bankruptcy. (Zywicki, 2011) Millions of people lost their jobs while the top executives at Lehman Brothers made over a billion dollars between 2000 and 2007; and lost nothing when the firm went bankrupt. The CEO of Merrill Lynch, received $90 million in 2006 and 2007 alone. After driving his firm into the ground, he resigned; and collected 161 million dollars in compensation. (Wernke & Mock, 2009) In the U.S., the banks are now bigger, more powerful, and more concentrated than ever before.

Ever since the fall of Lehman Brothers in 2008, it has been a popular view that banker bonuses are at least partly to blame for the financial crisis. (Tonks, 2012)

Rajan (2005) focused on incentive structures that generated huge cash bonuses based on short term profits, but which imposed no penalties for later loses. Rajan argued that these incentives encouraged bankers to take risks that might eventually destroy their own firms or even the entire financial system.

Families responded to the recession in two ways: by working longer hours, and by going into debt. For the first time in history, average Americans have less education and are less prosperous than their parents. When the financial crisis struck just before the 2008 election, Barack Obama pointed to Wall Street greed and regulatory failures as examples of the need for change in America. (Brighenti, 2011)

The Obama administration made no attempt to recover any of the compensation given to financial executives during the bubble. In 2009, as unemployment hit its highest level in 17 years, Morgan Stanley paid its employees over 14 billion dollars; and Goldman Sachs paid out over 16 billion. In 2010, bonuses were even higher. (The Guardian, 2011) For decades, the financial system was stable and safe, but then something changed. The financial industry turned its back on society, corrupted the political system, and forced the world economy into crisis.

At enormous cost, we have avoided disaster, and are recovering. But the men and institutions that caused the crisis are still in power; and that needs to change. They will tell us that we need them, and that what they do is too complicated for us to understand. They will tell us it won't happen again. They will spend billions fighting reform.