Analyze the recent (2008 to present) bank, brokerage, mortgage, automotive and insurance failures and the subsequent Congressional bailouts Consider the following stakeholders and comment on the ethics of the parts they played:
1. The Federal Government (Congress and Fannie Mae/Freddie Mac) leading up to the meltdown
2. The banks
3. Shareholders of the banks
4. Mortgage Brokers
5. The people who accepted no-doc mortgages
6. The Government in bailing out the banks
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With almost all the parties involved in the mortgage banking industry and the government support of it, the "ethics" of their actions are complex and depend a great deal on perspective.
1. In the case of the Federal Government and their creation of and support of the mortgage giants Fannie Mae and Freddie Mac, a relatively positive original motivation, helping Americans to own their homes rather than rent, became a gigantic problem because it shifted the incentives for mortgage issuers and also created a situation in which banks suddenly had less and less incentive to be sure that borrowers could actually pay back their mortgages. Because the federal government was buying and implicitly backing all the mortgages that Fannie Mae and Freddie Mac were purchasing, it quickly became more important for banks to issue mortgages as quickly as possible and then quickly sell the debt to these government/private hybrids. Along with low interest rates, this changed the business model for banks and contributed to the build up to the crash.
2. Banks found themselves in a situation where they were less concerned with issuing mortgages that were reliably going to be paid back and more concerned with issuing as many mortgages as possible. Combine this with the fact that many large banks were then involved with selling and insuring mortgage backed securities that were built on the backs of these mortgages (that quickly got out of hand all the way to the no-document mortgages, etc.) that were then implicitly guaranteed by Fannie and Freddie.
3. Shareholders were interested only in short term gains in stock price as well as profits. This led to pressure on banks to continue to issue as many mortgages as possible and use massive amounts of leverage (debt) to fill their accounts with mortgage backed securities. Because of the bubble in home prices leading to unprecedented increases in home value, issuing mortgages as quickly as possible and buying up MBS (mortgage backed securities) and CDO (the insurance packages on those securities) seemed to be a great path to huge profits. One might want to blame shareholders but their interest is only in increasing the value of their shares so ethically it is difficult to fault them.
4. Mortgage brokers were even more interested in the short term profits and issuing as many mortgages as possible to generate fees. They quickly sold off their mortgages leaving someone else holding the bag if things went south. So ethically they also can be faulted but because of the incredibly skewed incentives, they were responding to market conditions and these perverse incentives. Certainly issuing mortgages they knew would be impossible to repay is unethical.
5. If you were in a position to own a house that was far beyond your means to pay for, and you knowingly accepted a mortgage, one could definitely make the argument that you were acting unethically. Some people were misled by mortgage brokers who showed them interest-only type payment plans and so things may have seemed feasible and issued mortgages to citizens who were not prepared to understand the complexities of what they were getting into. So fault lies on both sides of those transactions.
6.By bailing out the banks, the government also created a situation in which the consequences for all the poor decisions the banks made were removed. Again the change in incentives and consequences away from the natural ones created the perfect situation for this giant bubble and the subsequent collapse. Banks actually took advantage of these bailouts and the collapse of some institutions to further consolidate and grow even larger, basically the opposite of the government's stated purpose which was to create a situation in which these institutions were no longer "too big to fail." Because so many government officials previously worked for big banks and still had very close ties, their ethics are seriously in question. Particularly because many of those involved left the government to work for the banking industry immediately after the bailouts it appears that their interests were not always completely aligned with helping protect taxpayers (main street) but were more closely aligned with helping the big banks avoid serious consequences.
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