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Abstract:
This paper reviews the Private Equity and the potential it has for becoming the next financial bubble. The paper also reviews the global economic crisis and previous financial bubbles. Private Equity is a somewhat obscure business that is integral to developing new business ventures in developed and developing countries. We will examine the potential impacts of this highly lucrative business that operates with even less regulation than the financial giants that collapsed during the 2008 global economic crisis.
Keywords: private equity, financial regulation, global economic crisis, financial bubble
Introduction
As one of the richest men in the world, Warren Buffet is famous for quoting his investment philosophy of "be fearful when others are greedy and be greedy when others are fearful." (CONTRIBUTOR, 2008) Most economists and financial experts agree that the economic crisis of 2008 was twenty-five years in the making. Some would argue that the tipping point was September 15, 2008 when Lehman Brothers, a 158-year-old investment bank behemoth, filed for bankruptcy (Wikipedia, 2009). Prior to September 2008, large financial powerhouses, investment banks, and hedge funds could do no wrong. Needless to say, in the months leading up to September 2008, everything did go wrong. Lehman Brothers was not the only large financial services firm in trouble during the period that some refer to as the perfect financial storm. Bear Sterns was also on the brink of financial collapse, but the Federal Reserve stepped in to bail out the beleaguered financial giant in March 2008. The Economist article "What if?" presents a careful analysis of what would have happened if Lehman had been bailed out. The article argues that credible predictions were made as early as one month prior by Kenneth Rogoff (Harvard Economics Professor) that not only would middle-sized banks soon fail, but that it was more than likely that one of the big investment banks would also fail (Economist, What if? If Lehman had not failed, would the crisis have happened anyway, 2009, pp. Sep 09 - pg 82)? The prediction that a financial contagion was brewing and spreading was made much sooner than most would believe. That this catastrophic event and its effects would spread throughout the American and global banks was "on the mark." Kenneth Rogoff made...