Chapter 1 Article Response

http://afp.google.com/article/ALeqM5hMG74jHIgVBnsKTuTgc3sAemW4Kg

Summary
The article I read is about the recent failures and turmoil of investment banks, the effects of the problems on financial markets and the actions of business and government to prevent further disaster. Up for discussion first, is the recent announcement that Lehman Brothers (a very large US investment bank) is filing for bankruptcy. It is reported that the cause of Lehman's trouble is the credit crunch and real estate market crash. Lehman Brothers reported a $3.9 billion loss last quarter as it had to write down a large portion of its mortgage assets. The article also reported the recent purchase of Merrill Lynch by the Bank of America. The purchase of Merrill Lynch was reported as a rescue sale as Merrill Lynch is in the same situation as Lehman Brothers.

Connection
The connection for me is the importance of financial reporting. Even with reporting, these large and very well established institutions are failing and it seems that the different users (especially investors and regulators) of financial statements did not recognize the problems. It seems that the problems at Merrill Lynch and at Lehman Brothers stemmed from operating activities as the mortgage assets become worthless as homeowners defaulted on the mortgages that these institutions held. Also, the Bank of America will be reporting the purchase of Merrill Lynch as investing activities in future financial statements.

Reflection
Even with regular reporting, different users of financial statements were not able to recognize or predict the failure of well established and large investment banks. I have to wonder if perhaps some regulations stronger than GAAP need to be in place to classify the risk level of assets so that investors and regulators can act before things evolve into a crisis. Perhaps we would not need the government bail-outs and emergency funds. This situation needs to be opened for debate as problems are crossing over several sectors (housing, banking, stock markets) and problems are crossing borders as well.