How do individuals' business & financial risk lead to Wall Street crisis?

  When we invest or make business decisions, business risk and financial risk are all together like rewards and penalty; the more risk, the more returns. For instance, in the subjects of new projects, the cash flows related to capital budgeting projects in general have all kinds of risk, therefore, it is vital to include risk considerations in capital budgeting. In this situation, various behavioral approaches (e.g., the breakeven cash flow, scenario analysis of cash flow and NPVs, and simulation of statistics) can be used to deal with project risk (Gitman, 2009).  Managers must understand the significance of recognizing risk in the examination of capital budgeting projects or implications of these beliefs on deciding which new ventures to finance. No plan and no gain.

      In investment world, both business risk and financial risk are related to benefits, profits and rewards, or failure and punishment as well-- all these also are parts of human behavior, patterns, and civilization. However, individuals, or organizations must take full responsibilities, and keep up with business ethics and moral management, or at the end, they may hurt others as well. Pulfer (2008) examines the business risk of investors or speculators in the Wall Street crisis and claims, “short sellers, who were supposedly spreading rumors about companies’ liquidity to drive down their stock. New York attorney general Andrew Cuomo announced that he is launching a wide-ranging investigation into short-selling, in relation to the pressure that Lehman, AIG, Morgan Stanley and Goldman Sachs…” (P.1). Some of these famous stocks on the Wall Street fell from hundred dollars per share to less than 50 cents in a short period. The business risk and hazard of short sellers, day traders, or speculators were not only just their financial risk, but also led to others’ layoff , impair or damages, plus worldwide recession. Why many hard working employees or business people lost their jobs, income, or businesses, and got the upshot from this financing risk? John Berlau (director of the Center for Entrepreneur-ship think-tank in Washington, D.C.) analyzed, “[Business failure is not only a permissible outcome of capitalism, it’s a necessary one. For innovation to flourish and the standard of living of the populace to improve, the market must be free to reward success and punish failure]” (Pulfer, p.1). One wonders if this were true capitalism, why the government now owned more than 79.9% of  AIG’s debt capital and equity capital. Where is the end of issuing new equities and changes? (Pulfer)

References:

 Gitman, L. J. (2009). Principles of Managerial Finance (12th ed.).Boston, MA: Prentice Hall.

Pulfer, R. (2008). Nightmare on Wall Street. Canadian business 81 (17), 9-11. Retrieved March 07, 2009, from firstSearch database.