The Sublime Lending Fiasco that occurred in the United States was an, unfortunately, catastrophic example of how the misuse of money and power along, with a lack of ethical consciousness, can lead to a nation wide crisis that affects a unsettling large amount of innocent people. The mortgage investors involved in this fiasco are a prime example of how greedy and selfish behavior can undercut one’s ethical principles. These mortgage investors used their power to enhance their financial gains without taking into consideration the long term effects to the consumers, and public.
The main ethical misconducts coming out from this crisis have to do with the emphasis of quantity, rather than quality concerning mortgage brokers, banks, and investment bankers. Mortgage brokers failed to practice ethical concerns for their clients, banks wrongly approved mortgages to unqualified borrowers, and investment bankers failed to make sure what they were selling to investors was an actual good investment. When looking at this crisis the main ethical concerns that stand out comes from the fact that the lenders of mortgages took advantage of their ability to add risk to new mortgages after houses were defaulted.
This risk was in the form of people, who normally would not qualify for a home mortgage, securing mortgages with no required down payment, no proof of income and only interest paying payments. They were able to add this risk because the recently defaulted homes now belonged to these lenders and were covered by these defaults. Mortgage brokers took advantage of this increased number of people buying mortgages, and since the way they get their money depends solely on the amount of mortgages that are sold, they ere not concerned with the actual quality of these people’s purchases. Similar to the accounting profession, mortgage brokers and mortgage lenders are are part of a service industry who are responsible for providing outstanding and honest services to their customers. These customers include the public and these individuals buying homes. Sadly, money has constantly proven to be a source of concern regarding the ethics of big businesses. These businesses are run by humans who are not perfect and can be quite easily persuaded by greed.
Therefore, it is of great importance to stress the importance of remaining ethical, especially during times of temptation. These mortgage brokers and mortgage lenders should have paid closer attention to what exactly they were doing when providing these large loans to individuals who could not afford them. After these mortgages were signed off and approved, the brokers received their check and did not have to experience any repercussions that later would ensue. Another ethical misconduct involving this financial fiasco was that of the banks who approved these mortgages.
Banks are required to properly review the documentation provided about the individual buying the home and decide whether or not they believe that individual is financially capable to pay their mortgage continuously. It is safe to say that the public, who generally do not have this expertise on finance, relies on these banks to provide accurate information and approval. These banks ended up approving mortgage loans to people who more or less obviously were not able to afford it, and these new home-owners wrongly assumed that since the bank gave their approval that must therefore mean that they do have the ability to pay for these homes.
The banks abused their power and need for leverage and sold these mortgages as quickly as possible to investors. Ethics revolves around the concept of institutions and individuals performing their functions for the good of others, and generally, not acting out of selfishness. When looking at this seemingly corrupt act of lying that continuously occurred in these banks, it is relatively easy to characterize these actions as unethical. These banks were succumbing to their selfish greed and only strived to remove these mortgages from their own balance sheets in order to eventually make more money.
This in turn hurt both the people buying the mortgages and the investment banks who were sold these mortgages and created a collateralized debt obligation. This fiasco could have easily been avoided if these mortgages were not approved, as they should have been, and the following debacle involving these collateralized debt obligations made by investing banks and the investors who purchased them, would not have occurred. All of these events lead to one of the biggest financial crisis’s in the United States and caused great damage to all those involved, including the home buyers.
Motivated by the power of money, these investment bankers sold their deemed “good” or “safe” mortgages to investors who were eager to find their next good investment. These investment banks failed to do act out of the best interest to these investors by not looking, or simply ignoring the actual quality of these mortgages, many of which were obviously poor quality. The investors assumed that these investment banks would have their best interest in mind when providing them with “good” investment opportunities. In order for society to function properly it requires a basic understanding and belief in the ethics of others.
I do not see it as unethical that these investors invested in these mortgages provided to them by these banks because it is normal for one to assume that who they are working with possess good ethical character. The ethical concerns come from the investment banks who either failed, or purposefully acted with disregarded to the implications and subsequent events of their actions. Their actions caused harm to the investors and to these people trying to buy homes. The whole financial situation becomes frozen as these home buyers default on their loans because they were not able to keep up with their payments.
As more and more houses go up for sale, there is a surplus, which leads to a decrease in the value of these homes. Investors no longer want to buy these mortgages from the investment banks and both the investors and investment bankers are left with mortgages they cannot sell. Also, the mortgage broker no longer is making money since no one is buying houses. All of this shows how the unethical actions of just one business or individual can lead to major consequence to multiple other people, many of whom are innocent but simply, unknowingly placed their trust in these businesses.
While these different institutions were participating in this eventual crisis, they were not concerned with the effects their actions would have because they once they sold the mortgage to the next person they no longer were concerned with the following, destructive implications. Based on virtue ethics, what is considered ethical has to do with the person’s character, this means that putting others before oneself when necessary and not acting in such a way as to improve one’s own wealth at the expense of another’s are considered ethical.
The act of each of these institutions reaping the benefits and carrying over the consequences to others without fair warning of the harm of this action, can be seen as extremely unethical. Market to market accounting, also known as fair-value accounting, is the practice of revaluing an asset and recording in the financial statements what price it would be sold at in the current market. After the market became frozen, due to the large amounts of foreclosures on homes, these mortgages fell greatly below their fair value.
This lead to the banks being unable to pay off their debts, and then selling their assets at low prices for a fast sale, eventually leading to values continuing to fall. The alternative to this accounting approach, historical cost accounting, would have been able to prevent this downward spiral as the assets would have continued to be recorded based on their historical cost. There is still a debate as to whether or not this market to market accounting practice was a main cause of this fiasco. It is important to recognize that what underlies this whole situation is the specific people who were involved and performed unethical activities.
Therefore, it is unfair to place all the responsibility on the accounting practice of the situation and ignore the ethical misconducts. Society and all of its institutions are built about individuals, and it is imperative that these individuals possess a morally ethical character, which will be a better force against damaging situations such as this one, rather than accounting principles. The Dodd Frank Act that was implemented in direct response to this financial fiasco and created the Consumer Financial Protection Bureau who is now the one responsible for mortgage lending and the clarity of the associated paperwork.
This bureau is also responsible for making sure these mortgage brokers do not repeat the greediness that contributed to the plague of the crisis by lessening the motivation to sell as many mortgages as possible and push people to purchase the more expensive ones. The Financial Stability Oversight Council, also created by this act, was put in place to prevent this sort of financial crisis from occurring again through regulating big businesses that were seen as “too big to fail”, being able to break up big banks that posed a threat, and the ability to liquidate financially weak firms.
One of the simplest, yet important, aspects of this Act was the requirement that mortgage loan papers be more clear and understandable to the consumers. This way, consumers have better access to understand what exactly they are getting themselves into. I believe this Act does goes far enough, especially relating to the Financial Stability Oversight Council’s ability to monitor these big business that have the risk of abusing their power. The major problem with this situation was the fact that there was no regulation of the large investment banks who were making an exorbitant amount of money.
This fiasco could have been avoided if there was a institution regulating their activities, which would have saved many people a considerable amount of their money. Many people observing this crisis that occurred in 2008 see its procedural causes but often forget the effects that ethics has on business. Without ethics, society would collapse as they would not trust the businesses and the businesses would not trust each other, and nothing would ever be accomplished. All professions that require giving services to others must maintain an ethical code of conduct in order for society to continue to function.
Investors must be able to trust the banks, businesses and/or accountants in their approval or denial of the investment. It is also important for government to enact new regulations, boards, and rules based on current conditions and new situations that arise. Ethical misconducts often lead to consequences beyond just that of the one committing the misconduct, but also to innocent victims, and as a society it is important for all of us to realize the importance of remaining ethical in both our personal and professional life.