Commerce Homework

What is the ‘Agency Problem’?

The agency problem is a conflict of interest inherent in any relationship where one party is expected to act in another's best interests. For example in corporate finance, the agency problem usually refers to a conflict of interest between a company's management and the company's stockholders.

Briefly explain the main series of events that led to the collapse of Storm Financial, focusing in particular on the nature of the relationship between Storm and their bankers.

ASIC would lodge three legal actions in the federal court against Emmanuel and Julie Cassimatis, Storm Financial Ltd and its main lenders – Commonwealth Bank, Macquarie Bank and BoQ. The main downfall which lead to the collapse of storm Financial were the banks who lent money to Storms clients were “linked credit providers and under section 73 of the Trade Practices Act (TPA can be sued for any damage inflicted by storm misdeeds. BoQ and Macquarie acted unethically by letting particular investors enter high-risk transactions in which they were likely to lose their home, while they held their house and shares as security and were bound to make money. Again under section 73 of the Trade Practice Act this is illegal.

BoQ had 370 customers from Storm, who borrowed around $105 million against their homes. Macquarie had 1000 clients who borrowed an estimated $800 million in margin loans that were secured against shares. The biggest lender was Commonwealth Bank and its subsidiary Colonial Geared Investments, who had 2300 customers between them (borrowing against their homes and on margin).

Storm investors were pushed to the brink. Elderly couples with little or no income were loaded to the max with debt and persuaded to put their houses and super on the line. If the stock market then fell by 10% they were told to put in more cash and buy more shares, because shares were cheap. If the market rose by 10%, they were told to borrow more money and buy more shares to...