In the Business Ethics course, we encounter philosophies dealing with the appropriate decisions and actions in the face of business circumstances. It is often that business practices solely prioritize raking in money that is possibly disregarding economic impact. To expound on this issue, we would discuss the infamous 2008 Subprime crisis.
The year 2008 made a critical impact to the world of business, especially to the economy of a powerful nation, the United States of America. The economic downfall or in other terms, the financial crisis, that took place in the late 2000s made a lot of people pay for the unfortunate events that happened. Even people who were not part of it were made responsible for this mess.
Understanding this 2008 Subprime crisis would enable us to recognize the factors that contribute to such economic failures. With this, we would be able to amend policies that guide people’s behaviors. Furthermore, we would be able to prevent crises like this from happening again. It is important to note that even a powerful nation such as the United States has gone through this issue. What’s worse is that affecting such a nation could also affect world economy. Factors such as high unemployment rates and the growing deficits from loans and securities are said to be the root of this problem (Biktimirov and Cyr 210).
However, we argue that although critics pointed out many variables, such as lending, deregulation, and securitization that are said to have led to the subprime crisis, it is the ethical business behaviors that ultimately caused these suspecting variables. We believe that one of the leading factors in the 2008 financial crisis was the unethical business behavior, which complicated the crisis even further.
Given the importance of this paper and our stand on the issue, in order to proceed, we are going to discuss what had happened in the Subprime crisis. We would recount the regulations and procedures done in the US financial sector at the time. By exploring these, we would as well be able to tackle the ethics related to the issue of the year 2008’s economic downfall.
Before tackling business ethics, let us put the circumstances of this complex crisis into more understandable bits. The crisis revolves around two key concepts. The first involves the risky loans. Basically, what happened here was that the financial institutions had lent borrowers more finances than they had in their reserves. The Security and Exchange Commission or SEC adopted an amendment that allowed for higher leverage lending among investment banks in 2004 (“Business Ethics” 4).
Residential housing loans, for example, were allowed a 25 to 1 and 60 to 1 leverage ratio. This was the case when loans were pooled together and backed with securities. Lenders were encouraged since the loans were sold to investors for higher returns. Moreover, investment banks gained interests in shorter terms. This was again for profit. So far, there was no danger as the basis was historical data indicating minimal risks. Eventually, this was extended nationally. It also served as a way for the government to give people the hope of owning a home. In turn, many others were encouraged, including those who used to be less qualified for loans (“Business Ethics” 4; Comiskey and Madhogaria 271).
The second key concept that is to blame for the crisis is the mortgage backed securities. US home prices rose to record levels as traced back from 2000. Due to this price increase, more borrowing and loans were encouraged. People were assured since it was traditionally recognized that the real estate never depreciates. The financial institutions as well saw this and took the advantage of investing in these securities. The mortgage loans supported these securities. Unfortunately, the economy began to wobble. Suddenly, homebuyers could not fulfill their financial obligations. As a result, institutions and investors suffered the loss of billions of dollars, with securities turning to an inconsequential value (“Business Ethics” 4-5; Comiskey and Madhogaria 272).
Consequently, the accumulation of these two and other factors pressed considerable financial tension until everything collapsed. The economic meltdown was so immense that it was made into a documentary entitled The Inside Job. In the documentary, one of the main reasons for the financial collapse was the lack of business ethics. Bad derivatives were sold as an AAA rating investment. This led most investors to purchasing those bad derivatives, believing that they were good. The ethical issue caused the USA labor market to lose 8.4 million jobs. This is equivalent to 6.1% of all payroll employment. By far, this was the most dramatic employment contraction of any recession since the Great Depression (“Inside Job”; Biktimirov and Cyr 210).
Business would always have a side to it that is dedicated to making profit. With this in mind, selling investments is essentially the way to go. Fundamentally, this was done on the said derivatives. However, it was deemed unethical. Let us find out what makes it unethical through brief definitions of business ethics elements and concepts.
In order for a business to operate, several departments have to fulfill their roles. Among these roles is keeping the operations known to the public and the government. This is done through the legal department. It is the one that ensures that the business activities follow civil requirements, which would be labeled as lawful. While an act may be regarded as lawful, it does not automatically mean that it is also ethical. The idea of ethics comes in when human rights and morality come into question. The bottom line is that rights must be protected from greedy tendencies. Clearly, the ones who uphold the ethics in a business are the decision makers and influencers such as the managers, suppliers, and the customers (Arnold, Beauchamp, and Bowie Chapter 1).
The issues surrounding the crisis can be traced to where the financial institutions were excessively leveraged. Also, the lending practices emerged despite complicated risks, borrowing, and investor speculation. According to Nielsen (2-4), there are four ethical issues that the crisis had to deal with. The first is the transfer of income and wealth. People leading an ordinary life of working and eating were further dulled through the recapitalization of financial institutions. The ordinary masses, in a way, were taken advantage of. The funds to support the activities of the financial institutions were from the fixed incomes of the people. The sad part is that these people are vulnerable to changing money values such as in the commodities, inflation, currencies, and deficits. Instead of enabling people to stabilize their life, they are threatened due to the income reduction that is going to the financial institutions (Nielsen 2).
The next issue is that of moral hazard. This is in connection to the first issue. Moral hazard supposes that risks were undermined while rewards were exaggerated. This means that the trade-off between the risk and the reward was skewed, making the public unable to exercise neither informed nor sound financial decisions. Moreover, when the financial institutions failed to perform, their way out was through the funds collected from the pool.
The third issue is transparency. The financial service sector admits to the lack of transparency since the loans are pooled and securitized. However, this gives them a way to select details and discriminate people whom they share information with. Certainly, there would be bias as to who would receive particular information. It hampers the rights of people in a way that they could not responsibly participate in the growth of their own financial stature and in turn, the economy Nielsen 3-4).
The last issue is conflict of interest. It pertains to the self-serving behaviors of the financial practitioners. As a result, their responsibilities to the stakeholders are set aside since each of the different financial groups has other goals in mind. For example, traditional banks may uphold their duties to the stakeholders, yet the new banks think otherwise and choose to profit through short-term maximization fees (Nielsen 4).
Here, we see that the business operation is being prioritized. The institution wants to rake in money to keep living. What it missed, however, is that money comes from the stakeholders it serves and needs to satisfy. With this in mind, if it cannot serve them well, it cannot earn the money that it needs to live. Since the crisis happened, people suffered. Thus, they were not able to cash out and spend for the mediocre services they have been receiving. Ultimately, the business that depended on the people’s money had taken its toll.
In conclusion, we learned that the Subprime crisis sprung from risky loans and mortgage backed securities. These two financial procedures encouraged people, including the ones who are less financially stable, to invest in building their lives. However, the fault exactly is in allowing even the ones who cannot pay to participate in this kind of schemes.
This is where business ethics enters. In this study, there were four issues tackled, namely the transfer of wealth, moral hazard, transparency, and conflict of interest. Putting on the ethical glasses, we may infer that the masses put their entirety on the line, believing in the stable life that was promised to them. They have invested. However, the promises they were made were empty due to the purely profit-directed intention of the financial institutions. Because of their self-serving behaviors, what these institutions have leveraged on is the incapacity and unpreparedness of the people for better decision-making. In this regard, they have violated the rights of the people to information as well as their right for the conscious and responsible exercise of freedom.
Clearly, the result of all these is what we have known as the Subprime crisis. It may have happened in the United States but it also affected the world. The world today has become interdependent that it would either strengthen or weaken us. With the understanding and practice of business ethics, it must strengthen us. This is because it is through business ethics that we protect each other’s rights to lead well-informed and responsible decisions.
Works Cited
Arnold, Denis G., Tom L. Beauchamp, and Norman E. Bowie. Ethical Theory and Business 9th ed. Boston: Pearson Education, 2013. Print.
This book is a collection of readings and cases in business ethics. Now on its ninth version, Ethical Theory and Business gives us insight on various perspectives, which enable us to widen our understanding about the matter. The part that is utilized the most is the first chapter. It defines theories and practices that explain the cases.
Biktimirov, Ernest N. and Don Cyr. “Using Inside Job to teach Business Ethics.” Journal of Business Ethics, 117.1 (2013): 209-219.
