Role of the Leadership Decision Making, the Failure at Social Responsibility in Subprime Loan Crisis, and the Findings

To pass the ethical muster, he continues and quotes the Gospel of Luke, “From everyone to whom much has been given, much will be required; and from the one to whom much has been entrusted, even more will be demanded” (Bernanke, 2013). During the medieval times, charging interest was considered a punishable sin and a disgrace (Watkins, 2011, p.364). On the other end of the spectrum, the Goldman Rule says, “pursue profitable opportunities regardless of the effects on others” (Watkins, 2011, p.363). 

In this blog, we shall scrutinize how leadership decision-making processes contributed to the financial crisis. We shall also examine the subprime loans from the lens of leadership ethical duties.

Leaders in organization with an authority and responsibility, who do not make decisions ethically, fail morally (Gilbert, 2011, p. 98). Policy-makers decision to issue subprime loans to borrowers with poor credit had harmful consequences that affected both the lending institutions and the borrowers. Their poor decisions hurt the company, and thus failed in their corporate social responsibility (Gilbert, 2011, p. 99).  

Corporate and financial misconduct in the financial crises of predatory subprime lending practices of Ameriquest, Goldman Sachs, and IndyMac Bank, begs a question; should ethics in leadership be of greater focus moving forward (Muolo & Padilla, 2008)? Government and public officials have questioned organizational leaders for their misguided unethical decision-making (SEC, 2010). They wonder how such gross misconduct could occur even when organizational policies and guidelines existed to safeguard against unethical practices (Thiel, Bagdasarov, Harkrider, Johnson, & Mumford, 2012). According to Robert Khuzami, Director of the SEC’s Division of Enforcement, if a firm violates the fundamental principles of honesty and fair dealing, they must pay a heavy price (SEC, 2010).  Goldman Sachs settled to pay $550 million in SEC charges related to subprime mortgage fraud (SEC, 2010).

The subprime loan financial crisis is a collective creation of the world's central banks, homeowners, lenders, credit rating agencies, underwriters, and investors. Their failure in their moral duties is to be blamed for the harmful consequences (Gilbert, 2011, p. 104). Other reasons for this catastrophe are outlined in the Financial Crises Inquiry Report (Angelides et al., 2010). The findings were as follows:

• The Federal Reserve board’s failure in setting prudent mortgage-lending standards
• Failures in financial regulation and supervision by Federal Reserve, the SEC, the policy makers and regulators
• Failures of corporate governance and risk management at the financial institutions
• Government’s inconsistent handling of major financial institutions
• Excessive borrowing, risky investments and lack of transparency
• Treasury Department, the Federal Reserve Board, and the Federal Reserve Bank of New York were ill prepared for the events of 2007 and 2008
• A breakdown in accountability and ethics, lenders made loans that they knew borrowers could not afford
• Failures of credit rating agencies

           The grouped unethical and immoral decisions and actions of many individuals all caused the financial crisis (Gilbert, 2011, p. 104). Subprime loan financial crises were a result of human mistakes, misjudgments, misdeeds, and poor decisions made by people in leadership positions. There should be tough regulation along with stiff penalties for the ethically and socially irresponsible officials.

References

Angelides, P., Thomas, B. Hon., Born, B., Georgiou, B., Graham, B., Senator, Hennessey, K. & ...Wallison, P. J. (2011). The Financial Crisis Inquiry Report. Retrieved July 6, 2013, from http://cybercemetery.unt.edu/archive/fcic/20110310173545/http://c0182732.cdn1.cloudfiles.rackspacecloud.com/fcic_final_report_full.pdf

Bernanke, B. S. (2013). At the Baccalaureate Ceremony at Princeton University, Princeton, New Jersey. Retrieved July 4, 2013, from http://www.federalreserve.gov/newsevents/speech/bernanke20130602a.htm

Gilbert, J. (2011). Moral Duties in Business and their Societal Impacts: The Case of the Subprime Lending Mess. Business & Society Review (00453609), 116(1), 87-107. doi:10.1111/j.1467-8594.2011.00378.x

Muolo, P., & Padilla, M. (2008). Chain of Blame [electronic resource] : How Wall Street Caused the Mortgage and Credit Crisis / Paul Muolo, Mathew Padilla Hoboken, N.J. : John Wiley & Sons, c2008. Retrieved from http://search.ebscohost.com.proxy1.ncu.edu/login.aspx?direct=true&db=cat01034a&AN=nu.10249111&site=eds-live; http://site.ebrary.com.proxy1.ncu.edu/lib/ncent/Doc?id=10249111

SEC. (2010). Goldman Sachs to pay record $550 million settle SEC charges related to subprime mortgage CDO. [Press Release]. Retrieved July 5, 2013, from http://www.sec.gov/news/press/2010/2010-123.htm.

Thiel, C., Bagdasarov, Z., Harkrider, L., Johnson, J., & Mumford, M. (2012). Leader Ethical Decision-making in Organizations: Strategies for Sensemaking. Journal of Business Ethics, 107(1), 49-64. doi:10.1007/s10551-012-1299-1

Watkins, J. P. (2011). Banking Ethics and the Goldman Rule. Journal of Economic Issues (M.E.Sharpe Inc.), 45(2), 363-372. doi:10.2753/JEI0021-3624450213