Subprime Loans: The Under-the-Radar Loans that Felled a Market
Role of Leadership Decision-Making
So, which of the ‘five culprits’ are to blame for the housing bubble? Is our problem unique to the U.S.? If so, what can we learn from other countries in our decision making process? Is our ‘ethical’ decision making process doomed for failure because of possible internal and external constraints and less defined mishaps? Thiel, Bagdasarov, Harkrider, Johnson, & Mumford state that today’s “organizations are defined by less structure and are generally more fluid and transitional” and that leader face more difficult challenges (2012, p. 50). But, what about the lending system itself? A subprime mortgage “is designed to essentially force a refinancing after two or three years” so the “market rested in part on the desperation of households[,]…appreciation of housing prices,…declining interest rates[,]…and less creditworthy homeowners…[who borrowed against] whatever equity they had in the house they already owned” (Watkins, 2011, p. 366). Mr. Watkins also highlights the Goldman rule “which is to pursue profitable opportunities regardless the effects on others” (2011, p. 363).
The organization makes ethical rules based on moral positions and legal doctrine. However, it is the leader placed in the position of authority who drives this effort home. In this case, the “money is the institution’s, but the decision is the individual’s” (Gilbert, 2011, p. 92). Did Americans bite off more than they can chew? Did lenders turn a blind eye to less qualified applicants? Did bundlers lean too heavily on irrational exuberance? Did rating agencies get greedy and overrate bad loans because they were bundled? Did investors rely too heavily on the strength of the American dollar or America’s credit score? Matthew Dalton reports that “Dutch banks routinely wrote mortgages that exceeded 125% of the value of the home—covering closing costs, taxes, renovations and even new-car purchases” (2011). Mr. Watkins details how aggressive some of the consumer lenders were in regards to acquiring subprime loans (2011). Mr. Watkins concludes that society, should not limit profitable opportunities, but that “excessive profit provokes excessive behavior” (2011, p. 370). But, there is one thing many fail to mention; the fact that the country was in a deep recession at the time the housing bubble burst. Leadership and ethical decisions play a huge part, but the ability to pay is the greatest factor of all.
Dalton, M. (2011). Mortgage burden looms over Dutch. The Wall Street Journal, Retrieved from http://online.wsj.com/article/SB10001424052970203752604576640662346325544.html
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
Rodriguez, K. (Photographer). (2011, February). Housing crisis [Web Graphic]. Retrieved from http://www.buckheadhighrisecondos.com/are-we-seeing-the-end-of-the-atlanta-condo-housing-crisis/
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