Introduction 2
What could have saved the financial crisis? 8
Bibliography 10
Introduction
The following paper is a movie review for the movie “Inside Job” used as an example to discuss various aspects of business ethics. The paper will discuss what ethical or unethical business decisions were taken into account in the movie along with the stance of the movie maker or characters about those ethical or unethical practices. The paper will also analyze the rationales behind those decisions and what lessons can be learned and what steps can be taken to ensure more ethical business decisions by an organization.
The movie “Inside Job” released in 2010, is based on the factors and authorities that led the financial crisis of 2008 and the aftermaths of the crisis that affected people globally. The movie focuses its main plot around the major unethical business decisions made by the financial market and the government that resulted in the major crackdown across the industries with unemployment, economic recession and huge monetary loss for individuals who were not even involved in the financial market. The theme of the movie, can be depicted by a dialogue from the movie that says:
“This crisis was not an accident. It was caused by an out-of-control industry.”
The movie starts with a portrayal of Iceland before the deregulations of the financial service industry that led to the complete downturn of the entire economy. Within the introductory segment of the movie, the narrator discusses the effects of the deregulations and privatization of banks on the country’s financial industry that wrongly facilitated Iceland’s three local banks to borrow an amount that was more than the country’s GDP over 5 years. Though the initial episode of financial crunch hit the three banks but within a short period the crisis was no longer within the financial industry; in fact all the major sectors were affected badly and the wave tripled the unemployment rate of the country. The effects of this financial crisis did not even stayed within the country, the after effects if the shock swept through the major economies and a global crisis was experienced.
The major consequence Iceland faced were the worst unemployment rates ever as shown in the graph below reported by the Iceland economic authorities in September 2012:
Figure 1 Unemployment rate in Iceland, http://icelandicecon.blogspot.com/2012_09_01_archive.html
The initial part of the movie discusses the various scenarios where the financial industry took shortcuts and unprincipled advantages of the deregulation of the financial services industry. The authorities from the industry as well as the government institutions did not act with the desired responsibility and huge investment, insurance and banking firms were established without a serious analysis of the future speculations of the market. A majority of the private sector companies only realized the instant profits that could be made through easy mortgaging.
These private entities issued almost 84% of sub-prime mortgages to low profile borrowers without proper scrutiny of the lending history or fulfillment of the industry standards or rules. As a result the non-bank underwriters only, made more than 12 million subprime mortgages that roughly amounted to $2 trillion.
The movie clearly responds to these circumstances and raises a question with examples of how lower income employees in the financial industry made millions due to these abrupt and irresponsible decisions made by investment and mortgage companies. The narrator exemplifies this through a low wage bond trader in 70’s who was earning millions by mid-80s and another financial broker who left JPMorgan Chase and joined treasury to earn millions as the industry was yielding returns exponentially.
The movie further shows the how the growth continues insanely in the 1990s through derivatives securities markets and investment companies that also played a role in the Dot-Com Crisis in 2001. The movie also make strong statement that most fraudulent activities and white collar crime were associated with the financial industry within this time period implying the irresponsible behavior of the industry. This statement of the movie can be proven by the official stats reported by FBI that mortgage frauds top the list in white collar crimes in US resulting in approximately $4 billion to $6 billion annually. The rate of mortgage fraud increased eightfold between 2002 and 2005.
Figure 2 Mortgage Frauds Stats,
Industry experts believe that a majority of these frauds relate to real estate mortgages where proper scrutiny of the borrowers were not carried out.
The second part of the movie/documentary discusses the events during the most skyrocketing period for the financial services industry 2001 to 2007. The easy processes of credits and mortgages lending especially for the real estate industry resulted in the boom of real estate industry like never before.
Financial Crisis & CSR
One of the key stance made by the movie is the irresponsible behavior of these huge corporation in financial sector, the heads of these companies made decisions looking for quick returns for the companies without understanding the long term devastation it might provoke. The decisions were against the corporate social responsibility (CSR) values that requires companies to be vigilant and morally right while making profits.
The sequence of the events as depicted in the movie show several red flags that were raised but not taken care of by any authorities such as the Federal Reserves authority, which did not foresee the bankruptcy of giants like Lehmann Brothers and CitiGroup and missed the possible consequences on other industries as well as on unemployment rates. The movie also criticize on the role of credit rating agency specifically Moody’s, S&P, and Fitch that defended the high credit ratings all along.
The role of these authorities portray complete lack of CSR and unethical leadership as they carelessly made and defended their decisions with the intent of personal gains regardless of its consequences on the country or community. The financial services’ professionals, politicians and lawyers shown in the movie portray the selfish and greedy traits to achieve their personal gains by exploiting individuals and the industry on the whole.
The portrayal of the professionals most benefitted from the real estate boom is completely against the utilitarian theory of socially responsible behavior of corporations as the decisions made by the top management and the related authorities did nothing to ensure that the good values prevail and never took any actions to control the damages. The movie also comments about how these authorities were driven by their desires to buy expensive houses, personal jets and live million dollar life styles. The same behavior travelled into their subordinates and everyone from top to bottom disregarded any good morals.
Different theories and school-of-thoughts imply different role of organizations as their CSR:
The ‘instrumental’ school-of-thought emphasizes responsible strategic decision making to manage corporate wealth, on the contrary organizations involved in the 2008 crisis showed irresponsible and unethical behaviors while earning profits for the company without any regard to the consequences for the industry. The political school-of-thought demands corporations to structure and promote awareness and values in the society. The examples from the movie portray that the top authorities’ behavior encouraged the lower level employees in the industry to focus on earning more and more without the thought of what were the consequences. The integrative school-of-thought requires companies to understand the needs of society and the acceptable morals, while the leaders of financial services industry gave least attention on how their personal traits would affect the basic demand and supply process and invoke a general sense of greed as the easy mortgages and home loans attracted many borrowers with bad credit history. The immoral and greed among financial institution’s managers exploited others to invest in mortgage security recklessly, as there was no regard for the speculation of the market least emphasis was on the risk or reliability of these instruments.
While the movie correctly analyses the driving factors of the financial crisis and how the top players of the industry were actually responsible for the big bubble burst and the economic crunch, the movie makes clear stance on how the unethical decision making and lack of responsibility depicted by these players ended up in a big damage to the country economy.
What could have saved the financial crisis?
Just as the movie makes the clear statement that the financial crisis was not an accident rather it was a natural outcome of the irresponsible decision making of the authorities in financial industry and government. This stance can also be proven by the speech of Sir Mervyn at Government’s Global Investment Conference in London in 2002 where he accepted that international authorities like Federal Reserves and IMF realized and understood what was going on and how could it affect the global economy still they didn’t strategize any efforts to solve the issue. He also agrees that the authorities of the agency and the industry should have worked together to find a solution but somehow they kept missing the red flags.
Based on these facts, following steps are recommended that could have prevented the crisis:
The financial authorities need to have a more vigilant role while making strategies with in depth speculations of the future trends as well as the analysis of the possible outcomes of those strategies.
One of the core reasons for the crisis was that the industry experts had no risk planning, mitigation or recovery planning for the de-regulation strategies. The authorities needed to be more responsible while implementing the de-regulation decisions to foresee what could go wrong and the ways to control the damages.
Additionally, as the movie also showed financial professionals from top to bottom were so involved in making money for themselves they had no consideration of the fact that the borrowers need to be verified to ensure that the financial institution recovers the amount they are lending, just as the real estate bubble burst majority of borrowers were unable to pay back and the institutions had to carry the burden of unpaid loans.
The high compensation, luxurious lifestyle and million dollar profits gave rise to greed and lust for more rather than a sense of duty, since top management was involved in this reckless earning the bottom layer of employees copied that behavior. If the management had led their companies ethically and would have given due value to the society as well as the industry the damages would have been controllable.
Bibliography
Blau, Sarah Wirskye Charles. "MORTGAGE FRAUD: A Real Crime with Pen." newsletter. 2008. newsletter.
Lauesen, Linne Marie. CSR in the aftermath of the financial crisis. Denmark, n.d. electronic.
Monaghan, Angela. "Sir Mervyn King admits policymakers made 'major mistakes' in financial crisis." The Telegraph (2012). http://www.telegraph.co.uk/finance/financialcrisis/9430249/Sir-Mervyn-King-admits-policymakers-made-major-mistakes-in-financial-crisis.html.
Schmaltz, Mary Sue. "CSR is an "Inside Job"." JustMeans (2011). Digital.
