In this artifact I will be previewing my research essay. The purpose of writing this essay was to inform my audience that the financial crisis was caused by a crisis of ethics. The audience I’m addressing this to are students in college and my peers as well as people that are curious about the financial crisis. The context of my research essay that I wrote addresses the ethical issues of the financial crisis. I became interested in the causes of the financial crisis, although at first while conducting my research it was quite difficult to understand although my passion for the topic allowed me to put in the time and the effort to understand the topic better. By understanding the topic better I became better at explaining the topic to my peers. Through the process of completing my final draft I first looked at the comments from my first peer review to come up with a second draft. After the second draft I had my professor look over my draft and she told me that I had major work to do. During this process she said that I need to make sure that the audience that I’m addressing has an understanding of what I’m talking about when using financial terms and jargon. She also commented on my structure saying that it should have been more organized.
I took the feedback from my professor as well as my peers to develop a more clear and concise research essay for my final draft. I structured the paper basically in this order; to educate the audience through using facts, to present a counter argument to that, and to then present an argument that basically blasts facts to prove the counter argument wrong.
Through reading the book everything’s an argument, it helped me develop a strong argument in my research essay as well as my research proposal. The book also made me an overall better and well rounded writer. Through my understanding of how the role of the technology and derivatives changed financial markets, it helped me convey information easier to my audience while writing this paper. By writing this research on the financial crisis and conducting research I’ve learn how to read and interpret financial jargon better. I’ve also learned how to interpret certain diction and syntax used by authors of books regarding finance or articles regarding finance. Also by interpreting my research better I developed into a better writer about finance which is my major and a topic that I’m passionate about.

Ethics & The financial crisis of 2008

A financial crisis is a disturbance to financial markets, associated with depreciating asset prices, which spreads through the financial system disrupting the markets capacity to allocate capital. This is exactly what happened during the financial crisis of 2008. I became interested in the financial crisis due to my curiosity of how it happened. I began to wonder how home mortgages and the complexity of loans were connected to Wall Street and how billions of dollars were in rotation between commercial banks and investment banks out of the general public’s knowledge. I’m intrigued how the economy of the United States almost collapsed and only a few people could see it prior to happening.
According to the United States senate the three roots of the financial crisis were “ High risk lending by the U.S. financial institutions, inflated credit ratings and high risk poor quality financial products sold by investment banks” ( Wall street and the financial crisis). I completely agree to the statement the senate has the made although something the senate did not indicate is that the financial crisis’ was motivated by greed. While conducting my research I began to realize that the financial crisis was more than a financial problem, it was as ethical problem. It should be addressed as a crisis of ethics. This crisis of ethics began when mortgage lenders and commercial banks such as Washington Mutual (“WaMu”) would issue mortgage loans to borrowers with subpar credit. In other words mortgage companies and commercial banks provided loans to uncreditworthy borrowers. A mortgage loan is a sum of borrowed money to pay for a home mortgage, that is expected to be paid back with interest.

These mortgage loans provided to individual with subpar credit were known as subprime mortgage loans. A subprime mortgage loan is a type of loan granted to individuals with Subpar credit, and they don’t qualify to take out a conventional mortgage loan. A conventional mortgage is a mortgage loan provided to individuals with average or above average credit. Conventional mortgage loans usually have lower interest rates than subprime mortgage loans because subprime mortgage loan borrowers have a higher default rate. Which means they have a higher probability of not paying their loan back, due to this they suffer the penalty of having to pay a higher interest rate on the loan they receive than a conventional loan borrower. Subprime mortgage loans were considered high risk because of the high default rate. Although, WaMu provided these subprime mortgage loans to an abundance of individuals all over the United States. The more loans WaMu issued the more risk they were taking on because if a significant amount of borrowers defaulted around the same time WaMu was out of luck. At the time of Washington Mutual issuing the loans prior to the financial meltdown of 2008 “ WaMu was the sixth largest bank, with $300 billion in assets, $188 billion in deposits 2,300 branches in 15 states, and over 43,000 employees”( Wall street and the financial crisis).
The reason WaMu issued subprime mortgage loans at such a high rate was because they would package them up and sell them to investment banks on Wall Street such as JP Morgan, Merrill lynch, Lehman Brothers, Etc. Investment banks would then take the subprime mortgage loans and develop poor quality financial products with them. For example a financial product developed by investment banks was a Mortgage backed security ( “MBS”). Essentially “mortgage-backed securities are bonds that are backed by pools of mortgage loans” ( Pimco). In layman’s terms a mortgage backed security is an investment, and basically when an investor purchases a mortgage backed security they are purchasing the rights to a homeowners mortgage loan. The investor in the MBS receives the payments from that loan each time the borrower pays off the loan including the interest accumulated over the time of the loan.
For example a tangible situation where a financial product was developed by an investment bank, say a mortgage lender such as countrywide lends $1M to 1,000 borrowers which is $1B total. The time period to pay off the loan for each borrower is 10 years. Each year of the loan the borrower pays off 10% of the loan, except in the tenth year. Which means each borrower pays $100,000 per year for 10 years to pay off their mortgage and in year 10 they pay $1M. Guys on wall street in investment banks like JP morgan would come along buy the whole set of the loans just issued by countrywide for slightly more than $1B and countrywide agrees to it. So now all the borrowers of the mortgage loans are paying off these loans to JP morgan instead of countrywide. JP morgan would then repackage the $1B worth of loans and package them into a pool of loans called a Collateralized Debt Obligations (CDOs). After putting them in a CDO the guys from JP morgan would then take this pool of loans and split it up into 1 million shares and sell each share for $1,100. These shares are the mortgaged backed securities of the loan. The investor in this $1B loan pool would receive $100 per share per year for nine years and on the tenth year the investor would receive $1,000 per share. This means the investor would gain a profit of $900 per share which is very profitable. Keep in mind, some investors purchased thousands of these shares. The investment bank would profit by $100M because each share of the CDO was sold that means 1M shares were sold at $1,100 making the investment bank have a revenue of $1.1B.

Through my research and evaluation process I also discovered another cause of the financial meltdown of 2008, inflated credit ratings provided by rating agencies such as moody’s and the S&P 500. Rating agencies essentially assess the risk of investments closely by rating them. A rating indicated how safe an investment is AAA+ being the best AA is slightly lower than triple A, single A is still low risk and BBB, B, or CCC are low grade investments and are highly risky for investors. Investors base their investment decisions based on these ratings therefore if a financial instrument is improperly rated it can be catastrophic for investors. Although, employees at S&P 500 and Moody’s were paid top dollar to rate toxic CDOs with subprime mortgages AAA+ when in most cases they weren’t even qualified to be CCC. Can you imagine if a surgeon had to operate on a family member and he cheated his way through medical school? That is exactly how unsafe these mortgage backed securities were to investors, that dumped millions upon millions of dollars into these poorly rated investments, these investments consisted of subprime mortgages. Various credit agencies such as moody’s and the S&P rated these terrible investments and basically made dirt look like gold. These credit rating were also helped by insurance entity AIG which insured these investments to make them look even safer, and when these investments defaulted AIG didn’t have the capital set aside for all their losses. Essentially they were making terrible investments look like top of the line investments and these investments were seen as so great that even pension funds and 401k plan companies had a stake in them. Essentially a 401k is a retirement plan for that is set up for the benefit of organization’s employees. The companies in charge of the 401k takes a portion of an employees salary or pay check and invests it for them to ensure that they have money set aside for retirement. Establishments that invests 401ks on the behalf of the employees are only allowed to invest in safe investments, therefore they were defrauded by rating agencies to invest in these risky mortgages that looked safe. Also another way to persuade these establishments to buy more of these risky investments was insurance on the investment. Which made these investments that already looked safe look even safer. These 401k establishments held teachers, cops, engineers, etc. 401k plans, and decided to put money into these risky investments. This means the workers that retired in the wake of the financial collapse retired broke. Some didn’t retire because they knew they would be broke, which is sad. Its absurd how various investment bankers and employees at credit rating agencies bad incentives had the power to cause the U.S. economy to almost collapse. This speaks volumes about the grip that financial institutions have on the United States.

A counter argument to the causes of the financial crisis that I conveyed is presented by Brian S. Wesbury through a ted talk. Wesbury states that the causes of the financial crisis were “ Low interest rates by Alan greenspan and the federal reserve in the early 2000s prior to the financial crisis of 2008” ( Wesbury). He states that due to low interest rates it incentivized people to take out loans to buy more than they usually would buy, and big institutions such as investment banks are just like people in this case. The investment banks borrowed more money than they should have to purchase bad investments and paid a hefty price. Wesbury also uses a great analogy by comparing low interest rates to green lights, he states that low interest rates were a green light for everyone to borrow as much as they wanted and to buy as much as they wanted. He states that due to low interest rates mortgage loan borrowers were encouraged to buy homes they couldn’t afford. He says low interest rates also “ made investment banks make bad decisions” ( wesbury). In other words Wesbury is blaming the government and the federal reserve for low interest rates and not the bankers.
Another counter argument presented in my research by former republicans in the huffington post stated that during the height of subprime lending, the lending industry, conservative commentators and Republican politicians celebrated subprime mortgages as the triumph of the innovation that comes from unfettered capitalism. Subprime mortgages, they said, made homeownership possible for millions of American families who could never own their own home under the dreary, stultifying rules that Democrats proposed.” ( Huffington post). Also Robert M. Crouch former chairman of the mortgage bankers association testified at a congressional hearing on behalf of the Mortgage Bankers Association on November 5, 2003. Crouch said that “through innovations in the mortgage finance industry, and through various financing and risk enhancing tools created for the specific purpose of extending credit to our more needy communities, credit-impaired individuals now have ample opportunity to obtain loans through this ‘non-prime,’ or ‘sub-prime’ market.” The growth of the subprime market, Crouch said, “disproportionately benefited low-income and minority borrowers, as these groups are much more likely to rely on subprime credit. One clear and visible outcome has been an increase in homeownership rates for low-income and minority borrowers” ( Huffington post). Also another banker named William M. Dana “testified at a congressional hearing on March 30, 2004, on behalf of the American Bankers Association. Dana said that “the ABA believes that the development of the subprime market has been a positive development for American consumers.” Market innovation “has made credit available to many consumers who had previously been left out of the marketplace,” he said. “The development of the subprime market has assisted those borrowers tremendously.” ( Huffington post).
In response to these farcical statements I will begin by stating that the financial crisis was fueled by a lack of ethics. Wesbury stated that due to low interest rates investment banks borrowed more money than they should have to basically put into bad investments. Wesbury is basically pointing the finger at the federal reserve and the government and not the lack of ethics by investment bankers. Through watching the Ted talk it makes me question Wesbury’s ethos. How can he point the finger at the government when WaMu the sixth largest bank in the United States prior to the financial crisis of 2008 increased its subprime mortgage loans “ from $4.5 billion in 2003 to $29 billion in 2006” ( Wallstreet and the financial crisis). How can Wesbury say that when the president of WaMu stated that WaMu’s home loan business was the “ worst managed business” he had ever seen ( Wallstreet and the financial crisis 3). You mean to tell me that $24.5 billion was caused by low interest rates by the federal reserve? Or was it a lack of ethics by the bankers? Its simple that the answer was greed and lack of ethics by not only WaMu but other mortgage lenders such as countrywide. The unethical behavior by WaMu’s employees caused them to fail, not low interest rates.

The collapse of Washington mutual was considered the “ the largest bank failure in history”( Wall Street and financial crisis 2). This goes to show how one banks search for profit fueled by greed led to “ the origination and securitization of hundreds of billions of dollars in high risk poor quality mortgages that ultimately plummeted in value, hurting investors, the bank, and the U.S. financial system”( Wall Street and the financial crisis 3). WaMu’s stock price slipped to pennys within a year of its failure.

In response to the claim presented by Robert M. Crouch former chairman of the mortgage bankers association. Robert stated that “disproportionately benefited low-income and minority borrowers, as these groups are much more likely to rely on subprime credit. One clear and visible outcome has been an increase in homeownership rates for low-income and minority borrowers” ( Huffington post). He almost acts as if people were running in the doors of these mortgage companies to receive these subprime mortgage loans, he makes this comment dismissing the fact that investors were persuaded and pestered to take out these subprime loans. In fact has Crouch heard of a teaser loan? Well I have, in fact many people have. A teaser loan is “An adjustable-rate mortgage loan in which the borrower pays a very low initial interest rate, which increases after a few years. Teaser loans try to entice borrowers by offering an artificially low rate and small down payments, claiming that borrowers should be able to refinance before the increases occur” ( Investopedia). In other words if a homeowner wanted a mortgage that didn’t qualify and knew they couldn’t make payments the bank or mortgage lender would offer them a teaser loan. A teaser loan allows the borrower to pay a very low rate on the loan but after a few years that low rate will go up. This is one of the reasons so many loan borrowers defaulted at the same time because they had teaser loans that were provided to them within the same period of time. Therefore, I have to say Crouch’s argument is erroneous because his employees had to foresee the outcome of issuing all those bad mortgages. Subprime mortgages only benefited those that sold them the quickest, not the investors and definitely not the homeowner. Montana Senator Jon Tester stated in a court hearing that he has heard stories of his constituents losing jobs, losing their child’s tuition, homes, retirement money, etc. due to the subprime mortgage market. Also due to these complex financial instruments U.S. taxpayers had to provide a $700B to banks to aid the wounds of the financial crisis. So, the question I would present to Robert M. Crouch is how did he come to the conclusion that subprime mortgages provided a benefit to the low income class? I don’t agree with Crouch’s statement in the slightest way and in hindsight I hope Crouch can come to a realization that his conclusion is jerry built.
I have trouble acknowledging William Dana’s comment that “the ABA believes that the development of the subprime market has been a positive development for American consumers.” Market innovation “has made credit available to many consumers who had previously been left out of the marketplace.” He also states that “The development of the subprime market has assisted those borrowers tremendously.” ( Huffington post). Assisted those borrowers in what regard? Subprime mortgage loans had a massive default rate. What is the point in staying in a home that you can’t afford how is that benefitting a homeowner and or a family? You mean to tell me there is a benefit in living in a home with a family and your mortgage will adjust to rate you can’t afford in a few years and you have no knowledge of this? Sure, that sounds like a huge benefit. Also Dana talks about “market innovation” you mean to tell me convincing low income individuals to take out subprime mortgage loans that have all types of hidden gimmicks in them is “market innovation.” So issuing an abundance of subprime mortgage loans to sell to investment banks which then distribute those same loans to investors is market innovation? The problem that has yet to be addressed by bankers such as Dana is the lack of ethics at the institutions that they govern. The bottom line is they knew that it was only a matter of time before the tsunami of loans they issued would come back to haunt them but they didn’t inform the investors, or homeowners. They got away like culprits.

In essence, the financial crisis was fueled by greed which then lead to a lack of ethics. We need to look at the financial crisis as a crisis of ethics and professionalism. This crisis wasn’t a mishap. At every stage prior to the financial crisis there was a misinterpretation of risk. The culture of Wall Street has always lacked ethics since the times of Charles Ponzi. he culture on Wall street is to make money bottom line, it doesn’t matter if you do it the good way or the bad way as long as you don’t get caught. The causes of the financial crisis don’t surprise me because its just fraud on a huge scale. The same greedy culture has been around wall street and financial institutions for decades, this culture of greed has bred the Bernie Madoff’s and the Jordan Belfort’s. This same culture caused taxpayers to help pay for the $700 billion bailout, due to high risk lending and flawed securities made by investment banks. About $182 Billion of that amount went to the insurance company of AIG. According to the AIG bailout oversight hearing, after the bailout of AIG by the U.S. government executives of AIG held a week long conference in california and ended up paying $500,000 in one week of the bailout money. Again the $700 Billion is from U.S. taxpayers money, this money was provided by hard working low income middle class citizens. “This bailout was provided by the hard working class of the U.S. and $500,000 went towards a stay at a hotel of executives of a company that played a huge role in the financial crisis”. (AIG court hearings). AIG spent $23,000 at the spa and another $1,400 in the salon. They were getting their manicures, pedicures, and facials with American’s tax money. After AIG made that trip they received $35 billion more taxpayers money. This is farcical, There should be financial reforms put in place to prevent this sort of behavior, and in my opinion investment bankers and workers at financial institutions that receive commission should not be compensated as much for their sales on financial securities. The reason I say this is because the job shouldn’t be about the money. Money is the wrong incentive, investment banking and finance should be a career that doesn’t pay as high in commission and ethics will become better in the workplace because the employees will have a passion about it. They wouldn’t just be doing it for the money, if they thoroughly enjoyed it. The key to life is happiness, and money cannot buy happiness.