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The global recession came about as a result of liquidity insufficiency in the largest world economy, U.S. This has led to business closures like in the Wall Street and numerous government bail-outs in the banking and industrial sector such as AIG, the American International Group. The global financial crisis was a result of increased shareholder pressure on the firms’ managements especially CEO’s with an objective of maximizing profits at the expense of practicing required ethics. This paper therefore discusses ethics as the root-cause of the financial crisis and identifies the importance of practicing ethics and corporate social responsibility.
Ethics and professional standards cannot be proved important in a better fashion than by the housing mortgage crisis in the U.S. The U.S Mortgage meltdown is a crisis whereby homebuyers can no longer afford to repay the billions of dollars lent to them by banks. Wall Street is a practical example that aimed at marketing this mortgage as a financially safe security by offering cheap credit that involved high- risk volatile products which were otherwise financially insecure in the long-term, but was in effect only interested in realizing massive profits while propagating corruption and greed.( Lim, M., 2008)
The current global financial crisis can be attributed to poor corporate governance and regulation. This financial disaster is attributed to nominal corporate governance and unregulated financial markets. House prices have gone down and mortgage default rates gone up resulting in rapid inflation. The subprime mortgage debacle was due to the banks urge to make large profits. Large unconscionable risks were assumed by investment banks and concealed in securities. These were then sold to other unsuspecting institutions.
“ The increasing complexity of securitization and the change in leading practices to ‘originate to distribute’ led to acute moral hazard where each participant in the mortgage chain was trying to make continuously greater returns while assuming that they passed on all associated risks to other participants” (Lewis, 2007).
Mortgages issued in Stockton are now in default or foreclosure. These mortgages have been termed as subprime implying that they are substandard since the borrowers such as the Fontenots had a sketchy credit capacity and lacked a proper repayment capacity yet bankers went ahead to issue the loan arguing that real estate’s value was on a continuous rise. This was a poor market assessment since the borrowers were being serviced in excess of 100% of the property’s worth. This was a profit motivated objective that not only led to the auction of these properties after the onset of the global recession, but has also made the banks to fold. This therefore, exemplifies how profit maximization at the expense of proper implementation of ethics can be very disastrous. (House of Cards, 2008). Hence, a self-regulatory market commonly referred to as laissez-faire cannot be left to entirely regulate itself since necessary ethics have been found not to be adhered to.
The banking industry has been characterized as greedy and shadowy. Changes came about after the U.S pulled out of the Dot-Com crisis after reducing interest rates to a low of 1%. In 2004, financial markets saw the need to break away from the traditional banking system to a new order of marketization. Credit transfer and risk management have come around from a more stable to a highly insecure status as the firms drive towards a higher profit realization. (Rowe and Day, 2007, pp. 39-44.). Moreover, it is outside of US regulation laws since an independent, self-regulatory capitalist market is assumed. Christopher Cox, Chairman of the SEC, testifying to the Senate Banking Committee on September 23, 2008, made clear the role of lack of regulation in the current financial crisis:
“The failure of the Gramm-Leach-Bliley Act to give regulatory authority over investment bank holding companies to any agency of government was, based on the experience of the last several months, a costly mistake. There is another similar regulatory hole that must be immediately addressed to avoid similar consequences. The $58 trillion notional market in credit default swaps — double the amount outstanding in 2006 — is regulated by no one. Neither the SEC nor any regulator has authority over the CDS market; even to require minimal disclosure to the market”
(Cox, 2008).
Major corporations have trounced on ethics dealing with protection of shareholder equity and the issue on government bailouts. One time Federal Reserve Chairman Alan Greenspan testified that he had counted on financial institutions to protect shareholder equity after being questioned by the House Committee of Government Oversight and Reform. This faith in the financial sector to carry out its ethical duties was no totally unfounded as the case was in the hedge fund Amaranth in 2006. The company was trading futures in the exchange where the exchange was the counter-party to Amaranth’s contracts. When Amaranth got bankrupt, the exchange forced the sale of Amaranth’s contracts in a liquid market to maintain its margin position (Cecchetti, 2007). As a result of these forced sales, while Amaranth collapsed and shares lost their value, there were no systemic problems. The exchange had been properly informed hence the market governance worked. This ensured a transparent transition. This has not been the case with big corporations such as Goldman Sachs. Transparency has been ignored and undue political influence used particularly in the bailout of former largest insurer, American
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