PRESENTS

AGENCY PROBLEM

WHAT IS AGENCY PROBLEM?

A conflict arising when people (the agents) entrusted to look after the interests of others (the principals) use the authority or power for their own benefit instead. It is a pervasive problem and exists in practically every organization whether a business, church, club, or government. Organizations try to solve it by instituting measures such as tough screening processes, incentives for good behavior and punishments for bad behavior, watchdog bodies, and so on but no organization can remedy it completely because the costs of doing so sooner or later outweigh the worth of the results. Also called principal-agent problem or principal-agency problem.

AGENCY THEORY
An agency relationship exists when:

Agency Relationship:
Risk bearing specialist (Principal)

Shareholders (Principals) Firms Owners Hire

Managing Decision Making Specialist (Agent)

Managers (Agents)

Which creates

AGENCY PROBLEM OCCURS WHEN:

The desires or goals of the principal and agent conflict and it is difficult or expensive for the principal to verify that the agent has behaved appropriately Equity: Potential conflict between shareholders and managers (principal agent problem) Debt: Potential conflict between shareholders and debt holders

ENRON
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 20,000 staff and was one of the world's leading electricity, natural gas, communications, and pulp and paper companies, with claimed revenues of nearly $101 billion in 2000. Fortune named Enron "America's Most Innovative Company" for six consecutive years. At the end of 2001, it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud, known as the "Enron scandal". Enron has since become a popular symbol of willful corporate fraud and corruption. The scandal also brought into question the accounting practices and activities of many corporations throughout the United States and was a factor in the creation of the Sarbanes Oxley Act of 2002. The scandal also affected the wider business world by causing the dissolution of the Arthur Andersen accounting firm

The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron was attributed as the biggest audit failure. Shareholders lost nearly $11 billion when Enron's stock price, which hit a high of US$90 per share in mid-2000, plummeted to less than $1 by the end of November 2001. The U.S. Securities and Exchange Commission (SEC) began an investigation, and rival Houston competitor Dynegy offered to purchase the company at a fire sale price. The deal fell through, and on December 2, 2001, Enron filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code. Enron's $63.4 billion in assets made it the largest corporate bankruptcy in U.S. history until WorldCom's bankruptcy the following year

AIG
American International Group, Inc. (NYSE: AIG) or AIG is an American multinational insurance corporation. Its corporate headquarters is located in the American International Building in New York City. The British headquarters office is on Fenchurch Street in London, continental Europe operations are based in La Dfense, Paris, and its Asian headquarters office is in Hong Kong. According to the 2011 Forbes Global 2000 list, AIG was the 29th-largest public company in the world.[4][5] It was listed on the Dow Jones Industrial Average from April 8, 2004 to September 22, 2008. AIG suffered from a liquidity crisis when its credit ratings were downgraded below "AA" levels in September 2008. The United States Federal Reserve Bank on September 16, 2008 created an $85 billion credit facility to enable the company to meet increased collateral obligations consequent to the credit rating downgrade, in exchange for the issuance of a stock warrant to the Federal Reserve Bank for 79.9% of the equity of AIG. The Federal Reserve Bank and the United States Treasury by May 2009 had increased the potential financial support to AIG, with the support of an investment of as much as $70 billion, a $60 billion credit line and $52.5 billion to buy mortgage-based assets owned or guaranteed by AIG, increasing the total amount available to as much as $182.5 billion.[6][7] AIG subsequently sold a number of its subsidiaries and other assets to pay down loans received, and continues to seek buyers of its assets.

On March 2, 2009, AIG reported a fourth quarter loss of $61.7bn (43bn) and revenue of $23.7bn (16.2bn) for the final three months of 2008. This was the largest quarterly loss in corporate history at that time. The announcement of the loss had an impact on morning trading in Europe and Asia, with the FTSE100, DAX and Nikkei all suffering sharp falls. In the US the Dow Jones Industrial Average fell to below 7000 points, a twelve-year low. The news of the loss came the day after the U.S. Treasury Department had confirmed that AIG was to get an additional $30 billion in aid, on top of the $150 billion it has already received. The Treasury Department suggested that the potential losses to the US and global economy would be 'extremely high' if it were to collapse and has suggested that if in future there is no improvement, it will invest more money into the company, as it is unwilling to allow it to fail. The firm's position as not just a domestic insurer, but also one for small businesses and many listed firms, has prompted US officials to suggest its demise could be 'disastrous' and the Federal Reserve said that AIG posed a 'systemic risk' to the global economy. The fourth quarter result meant the company made a $99.29 billion loss for the whole of 2008, with five consecutive quarters of losses costing the company well over $100 billion. In a testimony before the Senate Budget Committee on March 3, 2009, the Federal Reserve Chairman Ben Bernanke stated that "AIG exploited a huge gap in the regulatory system," ... and "to nobody's surprise, made irresponsible bets and took huge losses".

KIDDER, PEABODY & CO.

Kidder, Peabody & Co. was a U.S.-based securities firm, established in Massachusetts in 1865. Its operations included investment banking, brokerage, and trading.

The Firm was sold to the General Electric Company in 1986 and following heavy losses was subsequently sold to PaineWebber in 1994. After the acquisition by PaineWebber, the Kidder, Peabody name was dropped, ending the firm's 130 year presence on Wall Street. In November 2000, PaineWebber itself was merged with UBS AG. Kidder, Peabody & Co. was established in April 1865 by Henry P. Kidder, Francis H. Peabody, and Oliver W. Peabody. The firm was formed through a reorganization of its predecessor company, J.E. Thayer & Brother, where the three founding partners had previously worked as clerks. Kidder, Peabody acted as a commercial bank, investment bank, and merchant bank. The firm had an active securities business, dealing in treasury bonds and municipal bonds, as well as corporate bonds and stocks. Kidder also actively traded and invested in securities for its own account. In the aftermath of the 1929 stock market crash, Kidder, Peabody was in a perilous situation. In 1931, Albert H. Gordon bought the struggling firm with financial backing from Stone & Webster. Gordon helped rebuild the firm by focusing on specific niche markets including utility finance and municipal bonds. Stone & Webster had been an integrated company which designed utility projects, built them financed and operated them for municipalities. Stone & Webster transferred its finance operations to Kidder, Peabody. In 1967, Kidder, Peabody and Co. helped to arrange a deal whereby the USDA's Commodity Credit Corporation invested $21.8 million in the failing Lebanese Intra Bank, a cornerstone of the Lebanese banking industry. This move probably contributed to preventing a major financial crisis in Lebanon from worsening.

Gordon served as Kidder's chairman until selling it to GE in 1986. Soon after the GE purchase, a skein of insider trading scandals, which came to define the Street of the 1980s and were depicted in the James B. Stewart bestseller Den of Thieves, swept Wall Street. The firm was implicated when former Kidder executive and merger specialist Martin Siegelwho had since become head of mergers and acquisitions at Drexel Burnham Lambert admitted to trading on inside information. Siegel also implicated Richard Wigton, Kidder's chief arbitrageur. Wigton was the only executive handcuffed in his office as part of the trading scandal, an act that was later depicted in the movie Wall Street. With Rudy Giuliani, then the United States Attorney for the Southern District of New York, threatening to indict the firm, GE conducted an internal investigation that revealed Kidder executives hadn't done enough to prevent the improper sharing of information. In response, GE fired Kidder chairman Ralph DeNunzio and two other senior executives and stopped trading for its own account.

1994 Bond trading scandal

Kidder, Peabody was later involved in a trading scandal related to false profits booked over the course of 1990 1994. Joseph Jett, a trader on the government bond desk, was found to have systematically exploited a flaw in Kidder's computer systems, generating large false profits. When the fraud was discovered, it was determined that Jett had lost 75 million dollars over the four years instead of the apparent profit of 275 million dollars over the same period. The SEC later concluded Jett had committed securities fraud and banned him from the industry. In the rush of bad press coverage following the disclosure of the overstated profits, General Electric sold Kidder Peabody's assets to PaineWebber for $670 million in October 1994, closing the transaction in January 1995. September 11, 2001, Terrorist Attacks On September 11, the former offices of Kidder, Peabody (which were occupied by Paine Webber, as they had assumed the lease as part of the acquisition in 1994) were among many businesses impacted by the terrorist attacks. The company had offices on the 101st Floor of One World Trade Center, also known as the North Tower. Two Paine Webber employees lost their lives.

BARINGS BANK

Barings Bank (1762 to 1995) was the oldest merchant bank in London until its collapse in 1995 after one of the bank's employees, Nick Leeson, lost 827 million ($1.3 billion) due to speculative investing, primarily in futures contracts, at the bank's Singapore office. Barings Bank was founded in 1762 as the John and Francis Baring Company by Francis Baring, with his older brother John as a mostly silent partner. They were sons of John (n Johann) Baring, wool trader of Exeter, born in Bremen, Germany. The company began in offices off Cheapside and within a few years moved to larger quarters in Mincing Lane. Barings gradually diversified from wool into many other commodities, providing financial services necessary for the rapid growth of international trade. By 1790, Barings had greatly expanded its resources, both through Francis' efforts in London and by association with leading Amsterdam bankers Hope & Co. In 1793, the increased business necessitated a move to larger quarters in Devonshire Square. Francis and his family lived upstairs, above the offices.

18911929 Although the rescue avoided what could have been a worldwide financial collapse, Barings never regained its dominant position. A limited liability company - Baring Brothers & Co., Ltd. - was formed, to which the viable business of the old partnership was transferred. The assets of the old house and several partners were taken over and liquidated to repay the rescue consortium, with guarantees provided by the Bank of England. Lord Revelstoke and others lost their partnerships along with their personal fortunes, which were pledged to support the bank. It was almost ten years before the debts were paid off. Revelstoke did not live to see this accomplished, dying in 1892.[2] Barings did not return to issuing on a substantial scale until 1900, concentrating on securities in the United States and Argentina. Its new, restrained manner, under the leadership of Edward's son John, made Barings a more appropriate representative of the British establishment. The company established ties with King George V, beginning thus a close relationship with the British monarchy that would endure until Barings' collapse in 1995. Diana, Princess of Wales, was a great-granddaughter of a Baring. Descendants of five of the branches of the Baring family tree have been elevated to the peerage: Baron Revelstoke, Earl of Northbrook, Baron Ashburton, Baron Howick of Glendale and Earl of Cromer. The company's restraint during this period cost it its pre -eminence in the world of finance, but later paid dividends when its refusal to take a chance on financing Germany's recovery from World War I saved it some of the most painful losses experienced by other British banks at the onset of the Great Depression.[2] [edit]19291995 During the Second World War, the British government used Barings to liquidate assets in the United States and elsewhere to help finance the war effort. After the war, Barings was overtaken in size and influence by other banking houses, but remained an important player in the market until 1995