The financial crisis was fueled by an unrestrained capital market highly dependent on models based on the efficient market hypothesis and its progeny of other financial theories. Regulation was lax at all levels, on the theory that markets alone would correct any defects. This permissive financial environment paved the way for the development of debt instruments (e.g., mortgage backed securities, collateral debt obligations, credit default swaps) by a host of new market participants who, driven by the lure of profit, and/or poor historical analysis, didn't properly assess the risks involved. The credit rating agencies did not pick up on the risks either, offering generous grades to undeserving investments. The corporate governance of financial sector participants was just as tolerant, short term gains based on share price became widely accepted as the touchstone of corporate strategy and compensation. The non-financial sector followed suit and catered to the short term demands of the capital markets. The financial crisis has clearly exposed the faults of the efficient market hypotheses and its progeny: the lack of regulation which it spawned; and the lack of appropriate corporate governance it fostered.
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