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Submitted By freedom7788
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1. What do you understand by the term ‘Agency Problem’?

The agent problem incur when the agent agree to work in favor of principle in return for incentives. Such agreement may incur huge cost for agent, thus the agent may begin to pursue its own agenda or ignore interest of principle which cause agency problem. For example, the management would like to borrow money to repurchase shares to lower the corporation’s share base and increase shareholder return. Stockholders will benefit. However, creditors will concern given the increase in debt that would affect future cash flow.

2. What role does asymmetric information play in producing this problem?

Asymmetric information exists in a game when a player does not know some relevant fact about another player. Game of this nature is called incomplete information game. In the principle-game, principle wants to induce some actions by agent. If principle cannot observe the behavior of agent, the information problem is the hidden action. If principle cannot observe some relevant characteristic of agent ( e.g. skill-level, or firm’s cost) , the problem is the hidden information.
Thus asymmetric information may cause agency problem.

3. Briefly explain the main series of events that led to the collapse of Storm Financial.

Firstly, Storm Financial encourages their investors to buy stock by borrowing against their home and using cash to raise more money to invest. Actually all these investors don’t have sufficient income to make the repayments.

Secondly, some of the people with little or no income were loaded to the max with debt and persuaded to put their house and super on the line. If the stock market falls by 10%, they were told to put in more cash and more shares, because the shares were cheap. If market rose by 10%, they were told to borrow money to buy more shares to maximum their gains. Storm’s

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