Ethical mistakes and accountability in the 2008 financial crisis

¶ … Financial Crisis

The ethical mistakes that led to the 2008 financial crisis

The root cause of the 2008 financial crisis was the ongoing, but at the end of the day, complete downfall of ethical behavior all through the financial industry. There are a number of ethical mistakes that gave rise to the 2008 financial crisis. A lot of these mistakes lay in subprime lending. To begin with, the mortgage brokers at the time were paid in terms of the number of mortgages collected rather than the quality of the mortgages. The brokers did not care whether the borrowers took part in considerate transactions or were going to face anguish and destitution. Secondly, the banks gave approval of the mortgages subsequent to assessing the applications (Conclusions of the Financial Crisis Inquiry Commission, n.d). However, the banks had no intent of keeping the papers, but rather purposed to build leverage into their financial books. This implied getting the papers off the financial statements as fast as possible (Greycourt, 2008). As a result, they were retailed into mortgage pools that were subsequently retailed to unwary investors. In time, the standards for underwriting deteriorated and in the end, vanished altogether. The banks did not care whether their substandard practices gave rise to lending money to individuals who could not conceivably pay it back and also did not care what was bound to ensue to the eventual investors of the papers (Argandona, 2012).

Third of all, since the banks purposed to leverage their balance sheets, this eventually gave rise to a market for pooled mortgages. Major banks, investment banks and most prominently, Fannie Mae and Freddie Mac, placed these pooled mortgages and thereafter sold them to investors. The ethical mistake is that these financial firms did not take any precaution in determining whether the paper they were selling was of good quality and the conceivable harm to the investors who eventually purchased it. Instead, they only cared about decreasing their costs and increasing their profits. One other ethical mistake was done by the rating agencies who failed to rate the papers in an objective manner, but rather sold their rating to the one who gave the highest bid (Greycourt, 2008; Conclusions of the Financial Crisis Inquiry Commission, n.d).

The reasons why people engaged in the behavior that led to the crisis

The main reason why people engaged in the sort of behavior that resulted in the crisis is largely a lack of self-preservation. All of these individuals took part in activities of high risk with very minimal capital due to the fact that they wanted to generate and enjoy the high level of profits that came about (Conclusions of the Financial Crisis Inquiry Commission, n.d).

Role of managers and boards in curbing unethical behavior at companies

The managers and the boards of directors have an important role to play in curbing unethical behavior within their organizations. For starters, the managers and board have to institute a code of conduct within the company. However, it is imperative to note that the existence of such a code does not curb unethical behavior, but rather the implementation and enactment of the code does. The code of conduct enforced ought to be one that emphasizes and outlines behavioral norms. The managers and board of directors have to link any form of unethical behavior to the harm that it brings about. They have to demonstrate to the employees the stringent impact of unethical behavior on a particular victim that the employees acknowledge. It is the responsibility of the managers and board of directors, as leaders of the organization, to model proper behavior and also the human resource systems ought to recompense such behavior so as to generate a string ethical corporate or organizational culture (NBS, 2010). The managers and board have to cultivate a culture of openness, transparency and communication. Lastly, these elements cannot work if the companies do not hire right. Selecting quality individuals can go a long way in terms of ethics within the organization (NBS, 2010).

What citizens and business leaders can do to avoid repeating the ethical mistakes that were involved in the 2008 financial crisis

There are elements that citizens as well as business leaders can undertake to evade a repetition of the ethical mistakes that were involved in the 2008 financial crisis. For business leaders, they ought to develop internal strategies to promote an organizational or corporate culture that is conducive to ethical decision making and amenability with the law. This will be a great step for the organizations to function and act as good corporate citizens. On the other hands, citizens who encompass employees as well, have to function as whistleblowers with the main purpose of decreasing misconduct within organizations and improve prompt uncovering and exposure of misconduct that occurs (Haggerty, 2011).

Practical methods for implementing your ideas

One of the practical methods for executing these ideas is handing bonuses to individuals who serve as whistleblowers. The main endeavor of offering financial rewards to the whistleblowers ought to be to decrease misconduct within the organizations and increase faster and prompt revealing of misconduct that takes place. What is more, the process ought to be designed so that it complements, instead of destabilizing, an organization's prevailing ethics and compliance functions. If it is structured in a proper manner, this sort of system for rewards can substantially improve ethical business behavior (Haggerty, 2011).

Problems you foresee with implementation of your ideas

Regardless of this being a significantly solid plan, there are a number of problems I foresee with the implementation of the aforementioned ideas. The granting of rewards or bounties to the whistleblowers implies that they circumvent and go around all of the internal reporting structures that the companies, over the several numbers of years, have carefully put into place. In addition, it is imperative to note that these are structures that the government has mandated companies to have and institute to make them more ethical and responsible. Bypassing and failing to take these structures into consideration implies that the corporations will have worked hard for no particular reason. Corporate internal-reporting systems are keystones of operational ethics and compliance plans, and personnel are duty-bound to adhere to them as specified in their corporate codes of ethics and business conduct. To hand employees incentives to go openly to the government to give an account of wrongdoing, destabilizes the running of operational corporate ethics and amenability programs that offer the critical infrastructure to inspire ethical business behavior (Haggerty, 2011).