The Subprime Lending Fiasco: The Social Dimension of Ethics, Criticisms that Mark-to-Market Accounting (Essay Sample)

The submarine lending fiasco
Name
Institution
The submarine lending fiasco
Introduction
The United States submarine lending fiasco was countrywide banking emergency that occurred when the United States was experiencing December two thousand and seven to June two thousand and nine (Brooks & Dunn, 2010). Ethical failures and a significant decline in home prices resulting from the collapse of housing bubble show the triggering of the submarine lending fiasco. The top three ethical issues that played a central part in the submarine lending fiasco are personal ethics, the social dimension of ethics and ethics of the organization. Several critics also mark – to – market fair value accounting or accounting rules in contributing to the fiasco leaving everyone to wonder whether Dodd-Frank Act goes far enough (Markham, 2015). The unethical issues resulted in foreclosures, mortgage delinquencies and the devolution of securities related to devolution. Residential investment's decline preceded recession and was later followed by drops in household spending and then the business investments. There was a significant spending reduction in areas with a combination of larger housing prices declines and high household debt. Both collateralized debt obligations and mortgage-backed securities helped in the expansion of the family debt. Elements of the fiasco first become more significant during the year of two thousand and seven as the lower credit qualities ultimately causing massive defaults (White, 2008). The year two thousand and eight saw the major financial institutions collapsing with the significant disturbance in the areas of flow of credit to consumers and business and the onset of a severe worldwide recession.
Personal ethics
Personal ethics is one of the top three ethical failures in the submarine lending fiasco as it presents some of the behaviors that relate to one way or the other to the actions that led to the financial crisis. It is evident, the primary cause of the lending fiasco was greed, presenting a moral dimension to the crisis (Nguyen, 2011). The greed resulted in the excessive and selfish desire for more of money or something than is needed hence creating room for the crisis. Some managers realized what was happening but instead evaded the difficult decisions that might have resulted in jeopardy of their remuneration or career. There were also behaviors of arrogance, hubris, and pride among economists, but also among financiers, governments and regulators, all convinced that their skills and knowledge were superior, hence making them have no reason of submitting to the supervision of others or seeing themselves be above the law. In short, several managers placed a high value on glory, honor, fame, wealth and everything else that could easily have been achieved through professional excellence and lies and proved that they were more than willing to lie than to reorient their values or restrain their desires. All the personal misbehaviors resulted in situations of injustice precisely the commutative justice. The outrage manifested in the form of misleading advertisement, manipulation of stock recommendations, withholding information and multiplication of unnecessary churnings or operations in generating higher commissions and so on (Cleland & Ireland, 2008). It is evident practical, or prudence rationality is the chief virtue of any banker, but it is very hard in exercising it in an environment of higher growth, extraordinary opportunities and low-interest rates for profit, hence leading to greater leverage and drop in perception of risk. All the factors contribute to the perfect environment for exercising poor management. The actual behavior and the boom phase which can be rational and can also result in increased volatility. Volatility is likely to spread to other markets, thus leading to fear or panic attributing to crowd behavior. The various immoral actions show the submarine lending fiasco and have the ethical dimension.
The ethics of organization
The submarine lending fiasco is often presented as a governance or leadership crisis in organizations as a varied investment and commercial banks, rating agencies, monolines, hedge funds, government, central bank and supervisory bodies. There have been several cases of lack of professional competence, poor governance on the part of senior managers, directors and analysts in all kinds of organization (Snowden, 2010). Often, the role of valuation and asset analysis and even the decision of selling or buying was entrusted to young professionals with little experience in banking and finance, who applies the use of sophisticated models based on overly simplistic assumptions without no one daring to criticize them because of lack of better models. The superiors also lack the information of what their subordinates were doing, since they did not understand the models they were using and they did not also exercise enough oversight. There was a total lack of understanding of the entire mechanisms of structured products in addition to the economic knowledge to put the structures in context and the necessary management skills in running the organization that markets the products. The failures of ethics of society were mostly manifested in administration and risk analysis, leading to key personnel in almost all the financial institutions. It is mainly argued that the submarine lending fiasco was due to the creation of tenacious incentives in the financial institutions management (Tong & Wei, 2008). Financial, incentives or otherwise are aimed at promoting certain behaviors in expecting to lead to desired results, but the effects can also cause unwanted effects, may be because of their poor design, making the unwanted results rewarded.
The social dimension of ethics
There was a creation of social conditions that probably encouraged or did not stop the bad behaviors hence impeding the functioning of legal, social and institutional mechanisms. The social conditions would have slowed the effects of those behaviors in the organization (Michaelson, (2009). Some of the experts, moralists and economists deny the fact that ethics play a role in the current crisis. The agents started with provided preferences that are taken as data by economic science. The submarine lending fiasco is evident to be caused by the serendipitous confluence of events like credit expansions in sustaining for too long of some array of failures and financial innovations in the prevention, control and monitoring mechanisms that had been created. The realm of politics also aided in the changing of moral positions in some western societies. The societies decide to set up political projects in orientation towards universal and rational purposes such as equality, welfare, freedom and development (Martinez, C. (2009). Citizens of rich nations tend to attribute other market and to the State the role of guaranteeing their social and economic rights. The rights include pension, safety, health, employment, health and so on. Most of the citizens are seen to be giving up to the important part of their independence in such areas.
Criticisms that mark-to-market accounting
It is evident, fair value accounting is not the source of current crisis. The mark – to – market accounting only aided in the communication of effects such bad decisions. The bad decisions are writing credit defaults swaps and subprime loans. Alternatively, keeping the loans at their original amount on the books is simi...