“The 2007–2009 Financial Crisis: An Erosion of Ethics: A Case Study”

(A Case Study Analysis)

November 16, 2020

I. Fact of the Case

The case study examines five crucial dimensions of the 2007–2009 financial crisis

in the United States: (1) the devastating effects of the financial crisis on the U.S.

economy; (2) the multiple causes of the financial crisis and panic; (3) the extraordinary

efforts of government regulatory agencies to stem the financial freefall triggered by the

crisis; (4) the ethical implications of the conduct of the various parties contributing to and

ultimately rescuing the country from the financial crisis, and (5) the major provisions of

the Dodd–Frank Wall Street Reform and Consumer Protection Act signed into law to in

response to the financial crisis.

The 2007–2009 financial crisis had a devastating effect on the U.S. economy and

plunged the country into a long and deep recession officially beginning in December

2007 and ending in June 2009 (The Financial Crisis Inquiry Report [“FCI Report”. The

disastrous effects included serious and long-lasting unemployment and huge declines in

gross domestic product.  The financial crisis also generated the mortgage foreclosure

crisis. After the housing bubble burst, about four million families lost their homes to

foreclosure and another four and one half million families slipped into the foreclosure

process or were seriously behind on their mortgage payments. Prior to 2007, the mortgage

foreclosure rate was historically less than 1 %. Following the housing market collapse,

mortgage foreclosures increased dramatically. In 2009, 2.2 % or one out of 45 houses,

faced at least one foreclosure filing.

II. Point of View

A journal written by Edward J. Schoen and published by springer.com, titled “The

2007-2009 Financial Crisis: An Erosion of Ethics: A Case Study”, discusses and
challenges themorality of the rating firms. The rating firms deeply flawed models in
assessing the safety of thebonds and looked the other way when mortgages they
previously rated low were repackaged intotrench bonds. The rating firms’ subsequent
 downgrading of securities ratings caused huge lossesand investors, pension funds, and
insurance companies were forced to sell mortgage backedsecurities (Junk) and
collateralized debt obligations (“The 2007-2009 Financial”, Schoen).

III. Problems /Objectives

Problems:
1. What morality of the action of the principal players that triggered and enhanced the

financial crisis?

Objective:

I. To enhance students’ understanding of the 2007–2009 financial crisis in the United

States.

II. To provide a convenient tool that assists faculty members to address the 2007–2009

financial crisis in their classes and to enhance the student’s understanding of ethics.

IV. Areas of Considerations

STRENGTHS WEAKNESSES

 The case study 2007-2009 financial  Inflated asset prices, especially of

crisis: An Erosion of Ethics provided houses ( the housing bubble) but also
a convenient tool that assist faculty of certain securities ( the bond
members ri address the 2007-2009 bubble)
financial crisis into their class  Excessive leverage (heavy
borrowing) throughout the financial
system and the economy.
 Lax financial regulation, both in
terms of what tye law left
unregulated and how poorly tye
various refulations performed their
duties.
 The case will help students enhance  Disgraceful banking practices sin
their understanding on 2007-2008 subprime and other mortgage
financial crisis in the US and lending.
understanding of Ethics.  The abysmal performance of the
 statistical rating agencies, which
helped the crazy-quit get stitched
together
 The crazy-quilt of unregulated
securities and derivative that were
built in theses bad mortgages.

 Credit default swap( CDs) enhance  The perverse compensation systems

leverage ( small premium can in many financial institutions that
produce a significant payout). created powerful incentives to for
 The case study examine five broke.
dimensions if 2007-2009 financial  Lack of transparency in the
crisis in the U. S. derivative markets formered
unbridled fear of the sellers default
and shut derivative markets down.
OPPORTUNITIES THREATS

 The ethical implication can make  2007-2009 financial crisis had a

actions by the help of government divesting effect on the U. S.
institutions to rescue financial economy and plunged the country
institutions and drag the country into deep recession
back from the brink of global
financial collapse.
 Dodd-Frank Wall Street Reform can
sign into law to response tintype
financial crisis and for the purposes
if correcting the egregious conduct
of major financial institutions.

 Students can securitize mortgages by  Compensation paid to mortgage

assessing whether banks brokers constitutes a conflict of
securitization of mortgage loans into invest with respect the individuals
investment securities with multiple
 tranches and selling those securities
to investors was ethical or unethical.

 Employing derivatives to hedge risk

 Students can assess whether or not
and enhance leverage.
the securitization of mortgages and
"Pushing the risk downstorm" was
ethical or unethical.
 Case study can assist faculty
members to include the 2007 - 2009
financial crisis in their courses and
to enhance their students
understanding of ethical principle.

V. Course of Action

1. Dodd–Frank Wall Street Reform and Consumer Protection Act signed into law to in
response to the financial crisis and for the purpose of correcting the egregious conduct
of major financial institutions.
2. The “Unprecedented Rescue Efforts” section will examine the extraordinary efforts of
the Federal Reserve, the Federal Reserve Bank of New York, and the Department of
the Treasury to rescue and resuscitate financial institutions.
3. The “Major Ethical Issues” section will outline the major ethical questions that rise
from the activities of the players contributing to the financial crisis and the
government institutions implementing unprecedented rescue strategies to drag the
financial crisis back from the brink of total global collapse.
VI. Conclusion

As noted in the introduction, the purpose of the case study is twofold: (1) to

enhance students’ understanding of the 2007–2009 financial crisis in the United States,

and (2) to provide a convenient tool that assists faculty members to address the 2007–
2009 financial crisis in their classes and to enhance the student’s understanding of ethics.

Toward those ends, the case study examines five crucial dimensions of the 2007–2009

financial crisis: (1) the devastating effects of the financial crisis on the U.S. economy, (2)

the causes of the financial crisis and panic, (3) the extraordinary rescue efforts undertaken

to stem the financial freefall triggered by the crisis, (4) the ethical implications of the

parties involved, and (5) the major provisions of the Dodd–Frank Act enacted in response

to the financial crisis. The heart of the case study is the examination of the morality of the

actions of the principal players who triggered and ameliorated the financial crisis.

Notably, these questions address the actions of financial companies, their executives and

government regulatory agencies. By posing questions about their actions and suggesting

answers to those questions, the case study hopefully will assist faculty members to

include the 2007–2009 financial crisis in their courses and to enhance their students

understanding of ethical principles.

VII. Recommendation

To address the problem of what morality of the action of the principal players that
triggered and enhanced the financial crisis are :

1. Develop a plan which consisted of buying troubled assets from the banks in order to
minimize uncertainty in the market.
2. There should be real compensation systems in many financial systems and institutions
that create powerful incentives to go for brokers.
3. Not engage in excessive leverage throughout the financial system and the economy.
4. There should be a financial regulation in both the law makers and the regulators must
perform their duties as abided by the law.
5. Improve the banking conduct of the banking practices in subprime and other mortgage
lending.
6. There must be no bias in the performance of the statistical rating agencies so that
those crazy-guilt could not stich together.
VIII. References
Schoen, E. J. (2017). The 2007–2009 Financial Crisis: An Erosion of Ethics: A
Case Study. Journal of Business Ethics: JBE; Dordrecht, 146(4), 805–830.
http://dx.doi.org.sacredheart.idm.oclc.org/10.1007/s10551-016-3052-7
Jin, K. G., et al. (2013, January). The role of corporate value clusters in ethics,
social responsibility, and performance: A study of financial professionals and
implications for the financial meltdown. Journal of Business Ethics. Retrieved
from http://link.springer.com/article/10.1007/s10551-012-1227-4.