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U.S. Subprime Mortgage Crisis: Policy Reactions(b) conclusion
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Introduction
According to news article on September 2nd contributed by Rexrode (2011) from AP, “The government on Friday sued 17 financial firms, including the largest U.S. banks, for selling Fannie Mae and Freddie Mac (Appendix) billions of dollars worth of mortgage-backed securities that turned toxic when the housing market collapsed”. Beyond the apparent legal issues, this article intrigued me to examine whether or not there are ethical issues involved regarding banks selling mortgage-backed securities. A mortgage-backed security is defined by Securities and Exchange Commission (SEC 2010) as debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property. To put it simple, the buyers/investors of such securities are the lenders to all the homebuyers in the Unites States who pay mortgages.
The reason why US government sues major banks seems rational at first glance: Subprime mortgage crisis caused millions of people lost their jobs; after all, someone must take the blame, right? But after second thought, we may wonder, are banks really the ones that caused subprime mortgage crisis by selling mortgage-backed securities? Should banks be blamed for the hefty loss of investors that involved in subprime mortgage? Is it justified for the government to sue those banks now, instead of stopping the issue of risky securities before? To be specific, the purpose of this essay is to identify if major banks are ethical for selling mortgage-backed securities.
Discussion
Housing Market vs. Major Banks
Should banks be blamed by selling mortgage backed securities? They shouldn’t be blamed for it, because the dramatic price drop of mortgage backed securities was not the ul...
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Fannie Mae (2011). About Fannie Mae.
Retrieved September, 21, 2011, from: http://www.fanniemae.com/kb/index?page=home&c=aboutus
Freddie Mac (2011). About Freddie Mac.
Retrieved September, 21, 2011, from http://www.freddiemac.com/corporate/company_profile/our_business/index.html
Parsons, J. (2011) Inflation adjusted house price. JP’s Real-estate Chart
Retrieved September, 21, 2011, from: http://www.jparsons.net/housingbubble/
Rexrode, C. (2011) Feds sue big banks over sales of risky investments.
New York: Associated Press
Retrieved September, 21, 2011, from: http://online.wsj.com/article/APb385e88b96c543718ec2671061996bab.html?KEYWORDS=federal+government+sue+bank#articleTabs%3Darticle
SEC (2010) Mortgage-Backed Securities.
Retrieved September, 21, 2011, from: http://www.sec.gov/answers/mortgagesecurities.htm
After the time of financial crisis, JP Morgan was not the only national bank in US which got involved in trade of toxic loans related to mortgage. Before JP Morgan, it was Goldman Sachs-another large US Bank that faced the allegation of manipulating the trades in its own self interes, ended up in favor of SEC while GoldMan Sachs were asked to pay $500 Million during late 2011 in a deal called Abascus 2007-AC1 where the bank were alleged to mislead its investors on a deal related to Collateral Debt Obligation(CDO). (Eaglesham, 2011) The ab...
Sase, J. F., and Gerard Senick. Another Mortgage Tsunami? “Let Them Eat Cake” (Part Two). 2010. Print.
Jake Clawson Ethical Communication Assignment 2/13/2014. JPMorgan Chase, Bailouts, and Ethics “Too big to fail” is a theory that suggests some financial institutions are so large and so powerful that their failure would be disastrous to the local and global economy, and therefore must be assisted by the government when struggles arise. Supporters of this idea argue that there are some institutions that are so important that they should be the recipients of beneficial financial and economic policies from government. On the other hand, opponents express that one of the main problems that may arise is moral hazard, where a firm that receives gains from these advantageous policies will seek to profit by it, purposely taking positions that are high-risk, high-return, because they are able to leverage these risks based on their given policy. Critics see the theory as counter-productive, and that banks and financial institutions should be left to fail if their risk management is not effective.
A majority of mortgage defaults that Americans used were on subprime mortgage loans, which were high-interest-rate loans lent to people with high risk credit rates (Brue). Despite knowing the risks, the Federal government encouraged major banks to lend out these loans to buyers, in hopes, of broadening ho...
The Sub-Prime Mortgage Crisis of 2008 has been the largest financial crisis to take place since the end of the Great Depression. It was the actions of individuals and companies that caused this crisis. For although it could have been adverted, too much money was being made by too many people in place of authority to think deeply on the situation. As such, by the time actions were taken to attempt to rectify the situation, it was already too late. Trillions of dollar of tax payers’ money was spent trying to repair the situation that was caused by the breakdown of ethics and accountability in the private sector. And despite the government’s actions to attempt to contain the crisis, hundreds of thousands lives were negatively affected before, during, and after this crisis.
"Subprime Mortgage Crisis - A Detailed Essay on an Important Event in the History of the Federal Reserve." Subprime Mortgage Crisis - A Detailed Essay on an Important Event in the History of the Federal Reserve. N.p., n.d. Web. 04 May 2014.
Reserve Bank of Australia (2010). Measures of consumer price inflation. Retrieved August 19, 2010, from http://www.rba.gov.au/inflation/measures-cpi.html.
The victims in the United States were: the largest commercial banks, the whole investment banking industry, the major savings and loans, the largest insurance company, and the two enterprises licensed by the government to smoothen the progress of mortgage lending.
Freddie Mac was accused of either lying or misrepresenting the facts in order to make the amount of risk they were taking appear smaller. Investigators believed that this was done in order to comfort investors. The mortgages they were talking about, the ones that were considered risky were sub-prime loans, and they were prone to failure. A lot of these people should never have been given loans with interest rates that high. It was the job of Freddie Mac to hel...
The "subprime crises" was one of the most significant financial events since the Great Depression and definitely left a mark upon the country as we remain upon a steady path towards recovering fully. The financial crisis of 2008, became a defining moment within the infrastructure of the US financial system and its need for restructuring. One of the main moments that alerted the global economy of our declining state was the bankruptcy of Lehman Brothers on Sunday, September 14, 2008 and after this the economy began spreading as companies and individuals were struggling to find a way around this crisis. (Murphy, 2008) The US banking sector was first hit with a crisis amongst liquidity and declining world stock markets as well. The subprime mortgage crisis was characterized by a decrease within the housing market due to excessive individuals and corporate debt along with risky lending and borrowing practices. Over time, the market apparently began displaying more weaknesses as the global financial system was being affected. With this being said, this brings into question about who is actually to assume blame for this financial fiasco. It is extremely hard to just assign blame to one individual party as there were many different factors at work here. This paper will analyze how the stakeholders created a financial disaster and did nothing to prevent it as the credit rating agencies created an amount of turmoil due to their unethical decisions and costly mistakes.
Mortgage loans are a substantial form of revenue for the financial industry. Mortgage loans generate billions of dollars in the financial industry. It is no secret that companies have the ability to make a lot of money by offering a variety of mortgage loan products. The problem was not mortgage loans but that mortgage companies were using unethical behavior to get consumer mortgage loans approved. Unfortunately, the Countrywide Financial case was not an isolated case. Many top name mortgage companies have been guilty of unethical behavior. Just as the American housing market was starting to recover from its worst battering since the Great Depression, a new scandal, an epidemic of flawed or fraudulent mortgage documents, threatens to send not just the housing market but the entire economy back into a tailspin (Nation, 2010).
During the 1920s, approximately 20 million Americans took advantage of post-war prosperity by purchasing shares of stock in various securities exchanges. When the stock market crashed in 1929, the fortunes of many investors were lost. In addition, banks lost great sums of money in the Crash because they had invested heavily in the markets. When people feared their banks might not be able to pay back the money that depositors had in their accounts, a “run” on the banking system caused many bank failures. After the crash, public confidence in the market and the economy fell sharply. In response, Congress held hearings to identify the problems and look for solutions; the answer was found in the new SEC. The Commission was established in 1934 to enforce new securities laws that were passed with the Securities Act of 1933 and the Securities Exchange Act of 1934. The two new laws stated that “Companies publicly offering securities must tell the public the truth about their businesses, the securities they are selling and the risks involved in the investing.” Secondly, “People who sell and trade securities must treat investors fairly and honestly, putting investors’ interests first.”2
Eight years ago, the world economy crashed. Jobs were lost, families misplaced, hundreds of thousands of people left shocked and confused as they watched the security of their world fall to pieces around them. In, “The Big Short,” a film directed by Adam McKay and based on the book written by Michael Lewis, viewers get an inside perspective on how the financial crisis of 2008 really happened. Viewers learn the truth about the unethical actions and irrational justifications made by those who unwittingly set the world up for failure. Two main ethically tied decisions are brought into question when watching the film: how could anyone conscionably make the decision to mislead investors by misrepresenting mortgage backed securities (MBS), and why
What is the difference between a '' and a ''? Federal Reserve Board's Survey of Consumer Finances (2010). 18. What is the difference between a '' and a ''? Capitalism by Geoffrey K. Ingham.
Used Car Loans: 3 Pros and Cons. (2012, January 27). Retrieved May 3, 2014, from Cars Direct: http://www.carsdirect.com/auto-loans/used-car-auto-loans-3-pros-and-cons