Banking Ethics, Foreclosure Fraud, and the 2008 Financial Crisis
This paper examines the ethical and structural failures in the U.S. banking industry that contributed to the 2008 global financial crisis. Beginning with a critique of the efficient market hypothesis, the paper traces how deregulation — particularly the repeal of the Glass-Steagall Act — enabled the proliferation of sub-prime mortgages, derivatives, and credit default swaps that inflated and ultimately burst the real estate bubble. It then assesses both the value and the limitations of financial intermediaries before turning to documented ethical violations, including the robo-signing scandal and fraudulent foreclosure practices targeting homeowners and active-duty military personnel. The paper concludes with recommendations for re-regulation and structural reform to prevent a recurrence.
- Introduction: Overview of causes and scope of paper
- Efficient Market Hypothesis: Theory, evidence for and against efficiency
- The Real Estate Bubble: Glass-Steagall repeal and housing overvaluation
- Sub-Prime Mortgages: Risky lending, derivatives, and foreclosure wave
- The Value and Limits of Banks: Banks' essential economic and social functions
- Arguments Against Financial Intermediaries: Reform arguments and Glass-Steagall debate
- Ethical Violations in Foreclosure and Mortgage Practices: Robo-signing, fraud, military targeting
- Conclusion: Calls for re-regulation and structural reform
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What makes this paper effective
- The paper builds its argument logically, moving from theoretical foundations (efficient market hypothesis) through structural causes (deregulation, sub-prime lending) to concrete ethical violations (robo-signing, fraudulent foreclosure), giving the reader a coherent causal chain.
- It balances critique with acknowledgment of banking's genuine social value, which strengthens its credibility and avoids one-sided polemic.
- Specific examples — such as the Chase military-member settlement and the Massachusetts attorney general lawsuit — ground abstract claims in documented, real-world evidence.
Key academic technique demonstrated
The paper uses the efficient market hypothesis as an analytical lens that threads through every section. Rather than treating it as an isolated concept, the author repeatedly returns to it as a standard against which real-world market behavior is measured and found wanting — a technique that unifies the argument and demonstrates theoretical application across multiple contexts.
Structure breakdown
The paper opens with an introduction that outlines all major claims, then proceeds through eight sections: a theoretical overview (efficient market hypothesis), two structural cause sections (real estate bubble, sub-prime mortgages), a balanced assessment of banks' economic role, a review of reform arguments, a dedicated ethics section covering specific scandals, and a conclusion that synthesizes findings and calls for structural reform. The Works Cited section follows MLA formatting conventions.
Introduction
This research paper aims to shed light on what led to the global financial collapse that, for the most part, began in the U.S. housing market, and on the ethical implications that followed. Many researchers agree that the primary drivers of the real estate crisis were the lifting of the Glass-Steagall Act, the fostering of sub-prime lending, and the creation of derivatives and credit default swaps, which were used as complex financial instruments. These developments offered the largest banks an entirely new range of operating opportunities. All of these financial tools were justified by the efficient market hypothesis, and as a consequence they provide evidence for the absence of a truly efficient market.
As a result of the financial failures, many banks were either acquired by competitors, went bankrupt, or had to be bailed out by the federal government because of overwhelming losses in the industry. The consolidations that followed made the largest banks more powerful than at any previous point in history.
Another trend that emerged was that banks were so overwhelmed by the sheer number of foreclosures they faced that many resorted to taking shortcuts in the foreclosure process, or were prone to making grave errors and evicting customers who did not qualify for foreclosure. This paper begins with the efficient market hypothesis and works toward an examination of how the groundwork was set for banks to engage in improper foreclosure and other mortgage practices in the wake of the financial crisis of 2008. Many of these actions were clearly unethical and led to numerous cases of negative publicity. The paper concludes with recommendations for how regulations could potentially prevent another financial catastrophe from occurring in the future.
Efficient Market Hypothesis
The efficiency of capital market allocation is a subject that has been widely promoted in both business and economics. An efficient capital market is defined as one in which prices "fully reflect" all available public information and are priced accordingly (Fama). If the market price of a house, for instance, reflects all available information — including risks and potential returns — then in theory all financial investments should be equal and speculation would yield no benefit. This model also assumes that gathering all public information has essentially no cost to investors. Yet these activities clearly carry some costs, and therefore the strong version of the efficient market hypothesis is almost certainly false (Fama). Furthermore, the formation of various asset "bubbles" in markets also suggests that the efficient market hypothesis is undoubtedly untrue (Deng).
There are many real-world cases that provide evidence against the efficiency of capital markets. One study examined growth versus value stocks, and large-cap versus small-cap firms in international markets over a ten-year period (Bauman, Conover, and Miller). Value stocks are those in which the market price is relatively low in relation to earnings per share or dividends per share. Growth stocks are identified by high growth rates, high earnings per share, and market price appreciation. The study found that value stocks generally outperform growth stocks on a total-return basis when controlling for variables such as risk. It also found that a firm's size may affect profitability: value stocks outperformed growth stocks in each size category except the smallest one included in the study. The efficient market hypothesis is relevant to the financial crisis because it served as the principal justification for the deregulation that allowed the financial industry unprecedented freedom to operate (Ball).
Works Cited
Ball, R. "The Global Financial Crisis and the Efficient Market Hypothesis." CFA Digest (2010): 44–45. Web.
Bauman, S., M. Conover, and R. Miller. "Growth vs. Value and Large-Cap vs. Small-Cap Stocks in International Markets." Financial Analysts Journal 54.2 (1998): 75–89.
Beers, B. "End the Fed, Save the Dollar: Ron Paul." 7 September 2009. CNBC. Web. 19 March 2012.
Chen, B. and F. Kaboub. The Repeal of the Glass-Steagall Act and the Subprime Mortgage Crisis. 8 February 2012. Web. 19 March 2012.
Demyank, Y. and O. Hemert. "Understanding the Subprime Mortgage Crisis." 5 December 2008. Social Science Research Network. Web. 19 March 2012.
Deng, P. "Rethinking Efficient Market Hypothesis." 7 June 2009. Economist Online. Web. 20 March 2012.
Fama, E. "Efficient Capital Markets: A Review of Theory and Empirical Work." The Journal of Finance 25.2 (1970): 383–417. Web.
—. "Efficient Capital Markets: II." The Journal of Finance 46.5 (1991): 1575–1617.
Morris, A. "Robert Shiller: 'Efficient Markets and the Recession.'" 17 February 2011. Guru Focus. Web. 20 March 2012.
Occupy Wall Street. "Now Is the Time to Demand Glass-Steagall." 20 November 2011. Occupy Wall Street. Web. 19 March 2012.
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