Snowballing Unethical Behavior and the Resulting Financial Avalanche - 3 views

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  #1 anonymous on 14 Feb 09

   

  The country's current financial crisis can be attributed to a multitude of unethical practices that have compounded and spiraled our financial systems out of control. Which parties do you think are most responsible, and what do you think were their reasons for unethical behavior? Is it possible to put systems in place to deter these unethical behaviors in the future so that history does not repeat itself?

   

  <div class="cArrow"> </div><div class="cContentInner">The country's current financial crisis can be attributed to a multitude of unethical practices that have compounded and spiraled our financial systems out of control. Which parties do you think are most responsible, and what do you think were their reasons for unethical behavior? Is it possible to put systems in place to deter these unethical behaviors in the future so that history does not repeat itself?</div>

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  #2 anonymous on 14 Feb 09

   

  The financial crisis has reared its ugly head across several different sectors including the mortgage and banking industry, the automotive industry, and the insurance industry, just to name a few. Within this response, however, I intend to focus solely on the sub-prime mortgage crisis.
  
  The unethical behaviors of one party or organization did not alone cause the subprime mortgage crisis. It was the result of compounding a multitude of ethical violations across the board. I will attempt to describe only three.
  
  The first culprits on my list of the most responsible are the borrowers, because they contributed to the problem on several levels. First of all, in many cases subprime borrowers knowingly provided false information in regard to their income and assets just to get approved for a loan (a Type B dilemma based on the description provided in our textbook - pg. 98). This could be due to a number of factors including lack of moral development (influenced by the desire to "keep up with the Joneses"), ignorance level (not understanding the possible repercussion of false reporting), and lack of personal responsibility (having never been responsible for such a large responsibility as first time home buyers). On another level, many subprime borrowers simply walked away from their mortgage obligations, sending the lenders their keys in the mail (dubbed "jingle mail"), which was unheard of decades ago. This sort of unethical behavior could be a factor of weak and single relationships, resulting from recent changes in lending practices in which many borrowers have never even laid eyes on their lenders and use a particular lender for one specific purpose only. Before the recent government initiative to creatively come up with ways for everyone to become a homeowner, borrowers and lenders met face to face, shook hands and had a lending relationship for everything from a car to a home purchase. It was an embarrassment to a borrower to default on a loan, and it hindered borrowing ability going forward. Now borrowers and lenders are geographically isolated, encouraging unethical behavior. If there is a default on their home, they do not have to worry about that lender making them a car loan because the lender does not make that type of loan anyway. Walking away from their responsibilities could also be attributed to situational factors including economic needs, pressures, and other special circumstances relating to job layoffs, unforeseen health problems, etc.
  
  The second culprits on my list of the most responsible are the subprime lending banks because of their obvious predatory lending standards. As noted in Greycourt's White Paper No. 44 (2008):
  
  Looking back, it's clear that the main raison d'être of the subprime banks was to sell mortgage loans to people who couldn't afford them. Screaming ads were created to dupe people into applying for these mortgages, and new, highly misleading mortgage products were developed (teaser rates, Alt-A, etc.) to ramp up volume. (p. 3)
  
  According to Greycourt (2008), the banks never intended to keep the loans on their books, rather to sell pools of loans to investors. They were concerned with quantity over quality and performed little, if any, underwriting. It is questionable whether they cared that they were lending to people that could never pay it back or what would happen to the investors that would buy these securitized pools of loans. (Greycourt, 1998, p. 2) Again, we are dealing with a Type B dilemma, since the banks knew what was right but chose another solution based on what was most advantageous to themselves. The primary factor leading to this unethical behavior was greed; a component of the situational factor economic need.
  
  The third major culprits in the demise of the subprime mortgage industry, in my opinion, were government sponsored entities such as Fannie Mae and Freddie Mac whose ethical dilemmas could be categorized as Type A or Type B. Their unethical behavior was a result of conflict of interest. According to Greycourt (2008), as hybrid private / governmental entities, their noble goal of making everyone a homeowner was not only meeting the government policy goals, but also lining the pockets of the executives, so they continued making as many as they could generate. They bundled and sold pools of the mortgages, but still remained heavily invested in them (leveraging their balance sheets to a 75:1 ratio) greedily anticipating large returns instead of looking out for the best interests of tax payers and passing off the risk to investors. Unfortunately, when the loans tanked, so did Fannie Mae and Freddie Mac. (Greycourt, 1998, p. 5)
  
  I am mixed on the subject of whether these unethical behaviors can be deterred in the future, because the most harsh consequences, legal sanctions, have been employed for centuries and have not deterred them thus far. It is immanent that immoral actions will come to light eventually, such as the Enron scandal, and punishment can be severe. Yet that did not keep the culprits of this debacle from doing what they did. Furthermore, the recent bailouts almost send a message that you do not have to take responsibility for your actions if letting you fail is deemed to be detrimental to society as a whole.
  
  I going to attempt to bookmark the sources, other than our textbook, that I referred to in this response. Hopefully, I will figure it out, but in case I do not, the Greycourt article can be found at:
  
  https://lodgeus.com/cgi-bin/nph-gowingo.cgi/000010A/http/www.greycourt.com/whitepapers/WhitePaper044-FinancialCrisis.pdf
  
  and a related Wall Street Journal article can be found at:
  
  http://online.wsj.com/public/resources/documents/st_creditcrisis_20081022.html

   

  <div class="cArrow"> </div><div class="cContentInner">The financial crisis has reared its ugly head across several different sectors including the mortgage and banking industry, the automotive industry, and the insurance industry, just to name a few. Within this response, however, I intend to focus solely on the sub-prime mortgage crisis. <br /> <br /> The unethical behaviors of one party or organization did not alone cause the subprime mortgage crisis. It was the result of compounding a multitude of ethical violations across the board. I will attempt to describe only three. <br /> <br /> The first culprits on my list of the most responsible are the borrowers, because they contributed to the problem on several levels. First of all, in many cases subprime borrowers knowingly provided false information in regard to their income and assets just to get approved for a loan (a Type B dilemma based on the description provided in our textbook - pg. 98). This could be due to a number of factors including lack of moral development (influenced by the desire to "keep up with the Joneses"), ignorance level (not understanding the possible repercussion of false reporting), and lack of personal responsibility (having never been responsible for such a large responsibility as first time home buyers). On another level, many subprime borrowers simply walked away from their mortgage obligations, sending the lenders their keys in the mail (dubbed "jingle mail"), which was unheard of decades ago. This sort of unethical behavior could be a factor of weak and single relationships, resulting from recent changes in lending practices in which many borrowers have never even laid eyes on their lenders and use a particular lender for one specific purpose only. Before the recent government initiative to creatively come up with ways for everyone to become a homeowner, borrowers and lenders met face to face, shook hands and had a lending relationship for everything from a car to a home purchase. It was an embarrassment to a borrower to default on a loan, and it hindered borrowing ability going forward. Now borrowers and lenders are geographically isolated, encouraging unethical behavior. If there is a default on their home, they do not have to worry about that lender making them a car loan because the lender does not make that type of loan anyway. Walking away from their responsibilities could also be attributed to situational factors including economic needs, pressures, and other special circumstances relating to job layoffs, unforeseen health problems, etc. <br /> <br /> The second culprits on my list of the most responsible are the subprime lending banks because of their obvious predatory lending standards. As noted in Greycourt's White Paper No. 44 (2008): <br /> <br /> Looking back, it's clear that the main raison d'être of the subprime banks was to sell mortgage loans to people who couldn't afford them. Screaming ads were created to dupe people into applying for these mortgages, and new, highly misleading mortgage products were developed (teaser rates, Alt-A, etc.) to ramp up volume. (p. 3) <br /> <br /> According to Greycourt (2008), the banks never intended to keep the loans on their books, rather to sell pools of loans to investors. They were concerned with quantity over quality and performed little, if any, underwriting. It is questionable whether they cared that they were lending to people that could never pay it back or what would happen to the investors that would buy these securitized pools of loans. (Greycourt, 1998, p. 2) Again, we are dealing with a Type B dilemma, since the banks knew what was right but chose another solution based on what was most advantageous to themselves. The primary factor leading to this unethical behavior was greed; a component of the situational factor economic need. <br /> <br /> The third major culprits in the demise of the subprime mortgage industry, in my opinion, were government sponsored entities such as Fannie Mae and Freddie Mac whose ethical dilemmas could be categorized as Type A or Type B. Their unethical behavior was a result of conflict of interest. According to Greycourt (2008), as hybrid private / governmental entities, their noble goal of making everyone a homeowner was not only meeting the government policy goals, but also lining the pockets of the executives, so they continued making as many as they could generate. They bundled and sold pools of the mortgages, but still remained heavily invested in them (leveraging their balance sheets to a 75:1 ratio) greedily anticipating large returns instead of looking out for the best interests of tax payers and passing off the risk to investors. Unfortunately, when the loans tanked, so did Fannie Mae and Freddie Mac. (Greycourt, 1998, p. 5) <br /> <br /> I am mixed on the subject of whether these unethical behaviors can be deterred in the future, because the most harsh consequences, legal sanctions, have been employed for centuries and have not deterred them thus far. It is immanent that immoral actions will come to light eventually, such as the Enron scandal, and punishment can be severe. Yet that did not keep the culprits of this debacle from doing what they did. Furthermore, the recent bailouts almost send a message that you do not have to take responsibility for your actions if letting you fail is deemed to be detrimental to society as a whole. <br /> <br /> I going to attempt to bookmark the sources, other than our textbook, that I referred to in this response. Hopefully, I will figure it out, but in case I do not, the Greycourt article can be found at: <br /> <br /> <a href="https://lodgeus.com/cgi-bin/nph-gowingo.cgi/000010A/http/www.greycourt.com/whitepapers/WhitePaper044-FinancialCrisis.pdf" rel="nofollow" target="_blank">https://lodgeus.com/cgi-bin/nph-gowingo.cgi/000010A/http/www.greycourt.com/whitepapers/WhitePaper044-FinancialCrisis.pdf</a> <br /> <br /> and a related Wall Street Journal article can be found at: <br /> <br /> <a href="http://online.wsj.com/public/resources/documents/st_creditcrisis_20081022.html" rel="nofollow" target="_blank">http://online.wsj.com/public/resources/documents/st_creditcrisis_20081022.html</a></div>

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