The global economic recession that started in 2007 has impacted every business. The recession was especially hard on banks, automobile manufacturing, and retail companies. Banks were largely responsible for the recession. Some of the biggest banks made excessively risky investments collateralized by real estate mortgages, and many of these investments soured when the real estate markets collapsed. When banks had to write these investments down to market values, the regulatory authorities notified them that they had inadequate capital ratios on their balance sheets to operate. Banks stopped lending money. Because stock prices were depressed, companies could not raise capital by selling stock. With both debt and stock financing frozen, many businesses had to close their doors.

Fearing collapse of the whole economy, the central governments of the United States and several European nations loaned money to banks to prop up their capital ratios and keep them open. The government also loaned massive amounts to the largest insurance company in the United States (AIG) as well as to General Motors and Chrysler to help them stay in business. When asked why, many in government replied, “these businesses were too important to fail.” In several cases, the U.S. government has taken an “equity stake” in some banks and businesses by taking preferred stock in exchange for the cash infusion.

Because of the recession, corporate downsizing has occurred on a massive scale throughout the world. Although companies in the retail sector provide more jobs than the banking and automobile industry combined, the government has not chosen to “bail out” any retail businesses. Each company or industry mentioned in this book has pared down plant and equipment, laid off employees, or restructured operations. Some companies have been forced out of business altogether.

Requirements

1. Identify all the stakeholders of a corporation. A stakeholder is a person or a group who has an interest (that is, a stake) in the success of the organization.

2. Do you believe that some entities are “too important to fail”? Should the federal government help certain businesses to stay afloat during economic recessions and allow others to fail?

3. Identify several measures by which a company may be considered deficient and in need of downsizing. How can downsizing help to solve this problem?

4. Debate the bailout issue. One group of students takes the perspective of the company and its stockholders, and another group of students takes the perspective of the other stakeholders of the company (the community in which the company operates and society at large).

5. What is the problem with the government taking an equity position such as preferred stock in a private enterprise?