**6. The 2008s crisis: a different one**

The credit crunch of 2008 was surrounded by a market overleveraged, debt misrated by rating agencies and incorrect investment banking models [88]. The result was that financial institutions, investors, analysts and rating agencies underestimated the level of toxicity of assets held in portfolios–consciously or not [9]. Complexity, lawful creative accounting and greed, all elements presented in prior frauds and scandals, contributed to it.

Trading models were usually constructed by traders that do not know how to interpret data within them. Some of them had never read the financial statements of companies used to model, but financial sector rely on them [88]. Although the reputation of rating agencies had been affected by 2000s scandals as they kept their high rating level up to the scandal time or too near (and it does not matter here if there was corruption involved on it), financial market used them to give credibility to portfolios. And once again, they sustained ratings even when scandals were eminent, like in Bear Stearns case [9, 88].

Financial market was too leveraged with credit derivatives, based on bad lending practices. When the leverage is high, the quality of loans should also be high to reduce risk. Mortgage loans conceded to people that could not afford the payments, known as sub-prime, were packaged up creating the securitization instrumentals as collateralized debt obligation (CDO) that could be backed by many combination of debt: credit derivatives, asset-backed securities, mortgage-backed securities and the most famous as credit default swaps (CDS) and collateralized mortgage obligation (CMO) [9, 88].

What intensified the effect of contamination of this crisis on entire financial market was the fact that losers were not only the investors that deliberated bet on financial game but people aware of it around the world. The participation of hedge funds in this crisis deserves a comment.

Hedge funds are for rich investors and as rich they enacted an image of sophisticated investors. Many public pension funds and other institutional investors allocated their money in hedge funds. In 1990, there were a few hundred hedge funds managing up to US\$ 50 billion assets. In 2008, there were around 8.000 global hedge funds managing almost US\$ 3 trillion in assets–all of these under little regulation [88]. The illusionism and the spectacle used in Enron's world were intensified within this financial folly. The excuse for secrecy was used by hedge funds. It was not so different from Enron's discourse about measurement of its derivatives. What is new and not regulated open a window to flourish this modus operandi [70].

restated their financial reports, between 1997 and 1989 there were 292, but the number increased to 330 companies only in 2002. After SOX, in 2004 and 2005, there were 1.818 earning restatements [15, 62]. A study conducted over 919 restatements between 1997 and 2002 found that the most of them were driven by deceptive accounting practices [85]. Approximately 10% of all listed companies restated their financial information at least once during this period of time [15].

Corporate accounting scandals led to important reactions that created laws, rules and code of conducts. Over the time, all these regulations become cumulative and environment more complex. Increased penalties, punishments, stricter regulations seemed not to avoid creative accounting and malpractices [67, 86, 87]. Instead of being effective against misconducting, all

Notwithstanding, it is worthy to point out that SOX did not reverse the deregulation of financial market. There was an amendment to SOX approved in 2003—The Securities Fraud Deterrence and Investor Restitution Act that actually limited states activities to uncover frauds. Therefore, mutual fund was protected from over regulation. FASB and SEC continued

The credit crunch of 2008 was surrounded by a market overleveraged, debt misrated by rating agencies and incorrect investment banking models [88]. The result was that financial institutions, investors, analysts and rating agencies underestimated the level of toxicity of assets held in portfolios–consciously or not [9]. Complexity, lawful creative accounting and greed,

Trading models were usually constructed by traders that do not know how to interpret data within them. Some of them had never read the financial statements of companies used to model, but financial sector rely on them [88]. Although the reputation of rating agencies had been affected by 2000s scandals as they kept their high rating level up to the scandal time or too near (and it does not matter here if there was corruption involved on it), financial market used them to give credibility to portfolios. And once again, they sustained ratings even when

Financial market was too leveraged with credit derivatives, based on bad lending practices. When the leverage is high, the quality of loans should also be high to reduce risk. Mortgage loans conceded to people that could not afford the payments, known as sub-prime, were packaged up creating the securitization instrumentals as collateralized debt obligation (CDO) that could be backed by many combination of debt: credit derivatives, asset-backed securities, mortgage-backed securities and the most famous as credit default swaps (CDS) and collater-

What intensified the effect of contamination of this crisis on entire financial market was the fact that losers were not only the investors that deliberated bet on financial game but people aware of it around the world. The participation of hedge funds in this crisis deserves a comment.

these effort turn environment yet more complex and vulnerable [9].

all elements presented in prior frauds and scandals, contributed to it.

scandals were eminent, like in Bear Stearns case [9, 88].

alized mortgage obligation (CMO) [9, 88].

to be politically influenced by lobbies [29].

40 Corporate Governance and Strategic Decision Making

**6. The 2008s crisis: a different one**

The greed was also fed by spectacular possibilities of getting rich fast, increasing the anxiety to goes beyond. The whistle blowing and articles in media questioning the performance of hedge funds were misled [89]. It is important here to recover the team phenomenon described by Goffman [57] years ago. He stated that people create a mutual confidence on each other within the team leading to a reciprocal dependence where the objective is to sustain the representation, the impression to determined audience. The reciprocity is reinforced with the purpose of self-protection, reaffirming the consensus. Open disagreement with consensus is not socially accepted. That what's happened in 2008.

If this impression management was efficient to general public and useful to specialized one that chose to participate in the folly, it should not be overlooked and ignored by SEC. Derivatives instrument had also been used by Enron to spectacular fraud. SOX promoted a huge change in corporate governance and accounting activities but did not reach this market functioning [87]. As SEC did not halt securitization activity, investment banks accelerated it in 2007. It seemed that there was a conflict of interest as some SEC's officials used to work for investment banks, for law firms that represented them, became affiliated with a private equity fund or even started one financed by investment banks [88].

Rating agencies were part of this spectacle. Seen as providers of comprehension concerning complex asset-backed securities tranches, they misrated them, which were used by financial institutions to justify investment and leverage. In March 2007, Bloomberg asserted that 90 percent of bonds in the AAA index of S&P were not even investment grade, in other words, would be rated above BBB- (see [88]).

When the world's second largest private equity firm collapsed, on March 2008, their assets were mostly AAA rated and they affected many important creditors. The American response was an exchange of these AAA papers for treasuries, issuing a US\$ 200 billion lending program to provide liquidity to the U.S. banking system. This unprecedented action included U.S. taxpayers in losers list.

Accounting rules allowed some classification that could favor financial firms to hide the effective risk embodied in its assets. Then SEC, after this billionaire program, encouraged companies to classify assets using models with significant unobservable inputs. If FASB rules allowed companies to do it under some circumstances, SEC was announcing that that was the circumstance [88]. Accounting errors and some investigation were in course in 2006, but they were not red flag enough to halt the folly.

This collapse was spread around the world as bank system is interlinked, turning to be a global credit crisis. Nationalization and public rescue programs were replicated in Europe in order to protect financial system (see [9]). Financial stability depended on taxpayers and probably the extension of social impacts of increasing public debt was not been measured yet.

Carlyle Group, Bearn Sterns, Lehman Brothers, AIG, Merril Lynch, Wells Fargo and many others, were directly involved on this crisis. The Madoff case, however, was pretty different. It was a corporate fraud like others of 1990s that survived longer as its distinction was that there was no transaction at all, no business. SEC received six complaints against Madoff between 1992 and 1998 [90, 91], which raised many red flags [92]. Notwithstanding, Madoff Ponzi scheme was only broke out when investors started to demand their money back as they were losing with credit crunch in other investments. Only in 2008 investors took of US\$ 12 billion from Madoff's fund, and this led to the collapse of it. The Madoff case turned explicit how feeder funds activities were so unregulated [9, 93].

One of the important responses was The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 [94]. This Act finally imposed some regulation back over financial market. Among recommendations, Federal Reserve should supervise any company that gets too big to fail. The consequence was the increase of its reserve requirement. President Trump has announced that this increased reserve drained financial resources from banks and decreased their competitiveness.

The Volcker rule prohibited banks from using hedge funds in its behalf and determines 7 years to bank get out of hedge fund business. Banks lobbies were successful in delaying this approval (only in 2013), and new pressures can decrease enforcement by regulators.

The Act required that risky derivatives like CDS be regulated and all hedge funds and other advisors as well. All of them must be registered with the SEC. It created an Office of Credit Ratings at the SEC in order to oversee rating agencies, with the power to require methodologies and deregister them.

It created the Consumer Financial Protection Bureau under U.S. Treasury Department to assure that homeowners be aware of risky mortgage loans, to oversees and regulates credit activity, and also require banks to verify borrower's income, credit history and job status. Banks and funds in 2008 crisis overlooked all of this information. As it depends on public budget, it is easy to relax the enforcements on it. Under the same U.S. Treasury Department the Act created a Federal Insurance Office in order to increase supervision of insurance companies, mainly over those that create a risk for entire system, like AIG.

Finally, the Act gave power to the Government Accountability Office to audit Fed's emergency loans like that in financial crisis and required that The Treasury Department approve any other emergency loan given by the FED. This was a response to protect taxpayers from new financial folly.
