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The global recession came about as a result of liquidity insufficiency in the largest world economy, U.S. This has led to business closures like in the Wall Street and numerous government bail-outs in the banking and industrial sector such as AIG, the American International Group. The global financial crisis was a result of increased shareholder pressure on the firms' managements especially CEO's with an objective of maximizing profits at the expense of practicing required ethics. This paper therefore discusses ethics as the root-cause of the financial crisis and identifies the importance of practicing ethics and corporate social responsibility.
Ethics and professional standards cannot be proved important in a better fashion than by the housing mortgage crisis in the U.S. The U.S Mortgage meltdown is a crisis whereby homebuyers can no longer afford to repay the billions of dollars lent to them by banks. Wall Street is a practical example that aimed at marketing this mortgage as a financially safe security by offering cheap credit that involved high- risk volatile products which were otherwise financially insecure in the long-term, but was in effect only interested in realizing massive profits while propagating corruption and greed.
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The current global financial crisis can be attributed to poor corporate governance and regulation. This financial disaster is attributed to nominal corporate governance and unregulated financial markets. House prices have gone down and mortgage default rates gone up resulting in rapid inflation. The subprime mortgage debacle was due to the banks urge to make large profits. Large unconscionable risks were assumed by investment banks and concealed in securities. These were then sold to other unsuspecting institutions.
Mortgages issued in Stockton are now in default or foreclosure. These mortgages have been termed as subprime implying that they are substandard since the borrowers such as the Fontenots had a sketchy credit capacity and lacked a proper repayment capacity yet bankers went ahead to issue the loan arguing that real estate's value was on a continuous rise. This was a poor market assessment since the borrowers were being serviced in excess of 100% of the property's worth. This was a profit motivated objective that not only led to the auction of these properties after the onset of the global recession, but has also made the banks to fold. This therefore, exemplifies how profit maximization at the expense of proper implementation of ethics can be very disastrous. (House of Cards: The Mortgage Mess). Hence, a self-regulatory market commonly referred to as laissez-faire cannot be left to entirely regulate itself since necessary ethics have been found not to be adhered to.
The banking industry has been characterized as greedy and shadowy. Changes came about after the U.S pulled out of the Dot-Com crisis after reducing interest rates to a low of 1%. In 2004, financial markets saw the need to break away from the traditional banking system to a new order of marketization. Credit transfer and risk management have come around from a more stable to a highly insecure status as the firms drive towards a higher profit realization. (Rowe and Day, 2007). Moreover, it is outside of US regulation laws since an independent, self-regulatory capitalist market is assumed. Christopher Cox, Chairman of the SEC, testifying to the Senate Banking Committee on September 23, 2008, made clear the role of lack of regulation in the current financial crisis.
Major corporations have trounced on ethics dealing with protection of shareholder equity and the issue on government bailouts. On time Federal Reserve Chairman Alan Greenspan testified that he had counted on financial institutions to protect shareholder equity after being questioned by the House Committee of Government Oversight and Reform. This faith in the financial sector to carry out its ethical duties was no totally unfounded as the case was the hedge fund Amaranth in 2006. The company was trading futures in the exchange where the exchange was the counter-party to Amaranth's contracts. As Amaranth started getting bankrupt, the exchange forced the sale of Amaranth's contracts in a liquid market to maintain its margin position (Cecchetti, 2007). As a result of these forced sales, while Amaranth collapsed and shares lost their value, there were no systemic problems.
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The exchange had been properly informed hence the market governance worked. This ensured a transparent transition. This has not been the case with big corporations such as Goldman Sachs. Transparency has been ignored and undue political influence used particularly in the bailout of former largest insurer, American International Group, AIG presently Chartis. Corruption has played a great role not only in collapse of the world's largest economy but also in its bailout strategies. Goldman Sachs stood as the largest loser at $13 billion in credit default swaps against default of bonds floated by other financial institutions without due consideration to repayment capacity. Goldman Sachs came up with a proposal to cover dollar for dollar compensation of Wall Street banks using taxpayer money. This was a strategy to maximize profits and reward their CEO's without consideration of the due ethical context.
To protect himself and the Federal Reserve Board Chairman Ben Bernanke and Timothy Geithner among others, they obtained two ethics waivers. Such unethical behavior coupled with taxpayer subsidies such as debt guarantee have been orchestrated by the current political administration and have not only been instrumental in collapse of major corporations at the advantage of politically-advantaged firms such as Goldman Sachs but also been costly to the taxpayer in form of bail-outs. This therefore can only be eliminated by putting an end to laissez-faire by corporate giants and proper ethics to safeguard against future catastrophes such as the current global financial recession.