Ethics is very important in any business class and applies to all of our lives daily. Start thinking about how U.S. companies handle themselves and conduct business. How do their actions affect other U.S. companies? Think back to 2008 when the economy tanked. Wall Street businesses and greed had a lot to do with the economic collapse and it impacted the entire country. There was a domino effect from the mortgage companies to Wall Street. There have been numerous other examples in the last several years.
Your assignment is to select a company or industry and research how their actions affected other companies in the U.S. Was their action ethical? Maybe there’s a good example of an ethical company that prides itself on being a good corporate citizen and is a positive influence on others? You get to decide.
Introduction
The contemporary economic and corporate systems are highly competitive, which demands, from firms or companies, to be highly innovative and competitive. Therefore, companies invest their resources, time-human-financial, to ensure survival and high profit. However, some of the companies, which do not have the capacity or will to realize the objectives conventionally, get indulged in such reckless and illegal behavior, which undermines business ethics and law. It must be recognized that the prime objective, of any firm, is to earn a profit and to realize this objective, it devises strategies and implements it with the help of various instruments and tools. The higher the profit, more flexible the capital structure of a firm, which allows it to exploit various kinds of opportunities that are yielded by the economic system. Therefore, profit is desired, and to an extent, it fuels greed (Steiner, Emeritus, & Steiner, 2011).
To keep this greed in check, as it affects both corporate and economic systems, governments devise policies and laws. Also, an efficient corporate system emphasizes on business ethics, which not only keep the greed in check, but also ensures that system is fair and it facilitates the economic growth, rather than destabilizes it. Economic and corporate systems do not only rely on firms to adhere to business ethics, but instead laws are devised to enforce business ethics (to an extent) and keep the corporate greed in check (Kimberly, 2017).
However, because of the loopholes, in legal and economic systems, some companies can exploit existing contradictions and benefit from it. Though, this creates various kinds of challenges for an economy and corporate system, which eventually amalgamated to give birth to a political-economic catastrophe. For instance, the 2008 economic crisis, which has been dubbed as the Great Recession, is a consequence of various contradictions and illegal behavior of many corporate entities. Though, the focus, of this paper, would be on Private Lending Industry, Fannie Mae, and Freddie Mac (Denning, 2011).
Fannie Mae and Freddie Mac
These are government entities, with different genesis. The objective, of creating these agencies, was different; however, their roles, in the economy, are quite similar. These government entities, which later become companies that resemble private firms, were devised to boost the housing market. We learn that Freddie Mae buys mortgages from financial entities, such as banks, whereas Freddie Mac buys it from other small financial entities (private lenders).
Fannie Mae was established in the year 1938, with the objective to buy Federal Housing Administration mortgages; however, later it became a government-sponsored enterprise. It was an anomaly in a sense that this enterprise was owned by private investors; however, its loans were guaranteed by the government (Amadeo, 2017).
Freddie Mac, which was established during the Vietnam War, can buy various kinds of mortgages; which gave it freedom to operate in various mortgage industries and not just in FHA. As Freddie Mac loans are not guaranteed by the government; therefore, to shift the risk of operations, it puts together similar kind of mortgages into mortgages backed securities. These securities are then sold to various parties, which include hedge funds and private investors (Amadeo, 2017).
The Role of Great Recession
As the companies were government-sponsored entities, which were operating in US corporate and economic systems; therefore, it was essential for them to be competitive and profitable. It was essential to maintain stock-prices. After the Dotcom 2000 bust, US Federal Reserve opted for an expansionary monetary policy. It is a policy, which increases the money supply in an economy and reduces the interest rate. This expansionary monetary policy reduced the returns on securities investment, and the market share of these entities dropped from 57% to 37%. To maintain the stock price, these entities adopted a reckless behavior. Fannie Mae loans were guaranteed, so it did not shy from buying the sub-prime mortgages and selling those in the secondary financial market (Min, 2011).
The government-funded bodies, Freddie Mac and Fannie Mae, bought qualified loans from the banks, which they insured and resold in secondary markets. It gave banks more capital to issue as loan and mortgages. As it was housing sector, which was primarily involved in this buying and selling of mortgages; therefore, most of the investment landed in the housing industry. Though it must also be recognized that as the bubble was already developing and Fannie and Freddie only accelerated the process of its expansion and burst. Also, as these government entities were not to be held accountable for reckless behavior, they kept less capital in order support their mortgages (Min, 2011)
Private Lending Industry
Private lending industry played the pivotal role in the making of economic crisis, now known as The Great Recession. The fact is that there no enough congressional laws to efficiently regulate the private lending industry. It allowed the private lending industry to act in a manner, which would undermine business ethics and laws, which are set to keep formal financial institutions in check. As the lending standards collapsed, the more freedom the lending industry had to operate in a manner, which was highly controversial. We also learn that because Conforming loans had strict rules attached to it; therefore, the private lenders opted for newfangled loans, as they seemed more profitable (greed). As the market share of the private lending industry started to grow, the contradictions also started to deepen (Steiner, Emeritus, & Steiner, 2011).
Interaction of Contradictions and Its Consequences
To remain competitive, Fannie and Freddie abstain from buying toxic mortgages or high-risk mortgages. As for the competition imposed by private lending sector or industry and to please stakeholders, government regulations were ignored, and sub-prime mortgages were acquired. Freddie Mac’s acquisition of loans was more toxic than Fannie Mae, as in many ways operations of Fannie Mae were regulated by its design. We learn that loans, of these two government-sponsored enterprises, were more toxic than most of the banks, which help us, understand the scale of recklessness. Therefore, when the housing bubble burst and many of the homeowners started to default, the crisis started to emerge (Denning, 2011).
Conclusion
There were various factors, which played a role in the making of this crisis (2007-8Great Recession). For instance, the government repealed Glass-Steagall legislation, which encouraged banks to take higher risk. Similarly, the government does not devise any effective laws to regulate the private lending industry, which grew in size and which market share increased dramatically. It pushed government-sponsored entities take controversial measures, such as buying of subprime mortgages. It must also be acknowledged that Fannie and Freddie were liable for any loss or there were no consequences for these enterprises if they ever indulged in questionable and hazardous behavior. For instance, the regulations, which regulated the financial or corporate behavior of these companies, were ineffective as they failed to stop these enterprises from acquiring high-risk loans.
Eventually, it was the obligation of US corporate system and government to keep the corporate greed in check, which they failed to do on several accounts. It is primarily because American political system is highly manipulable and Corporate America has manipulated it (repealing of Glass-Steagall Act) to benefit from it. Therefore, the emphasis should be on the laws and policies to regulate the system and avoid such economic catastrophes, rather than on a corporate system to implement business ethics. We have also learned, the hard way, which few companies and industries can give birth to the greatest economic crisis that may linger on for years.
References
Amadeo, K. (2017, July 5). Fannie Mae vs. Freddie Mac: Similarities and Differences. Retrieved from https://www.thebalance.com/fannie-mae-vs-freddie-mac-3305695
Denning, S. (2011, November 22). Lest We Forget: Why We Had A Financial Crisis. Retrieved from https://www.forbes.com/sites/stevedenning/2011/11/22/5086/#3803ee21f92f
Kimberly, A. (2017, November 9). Did Fannie and Freddie Cause the Mortgage Crisis? Retrieved from https://www.thebalance.com/did-fannie-and-freddie-cause-the-mortgage-crisis-3305659
Min, D. (2011, December 16). For the Last Time, Fannie and Freddie Didn’t Cause the Housing Crisis. Retrieved from https://www.theatlantic.com/business/archive/2011/12/for-the-last-time-fannie-and-freddie-didnt-cause-the-housing-crisis/250121/
Steiner, G. A., Emeritus, & Steiner, J. F. (2011). Business, Government, and Society: A Managerial Perspective (13 ed.). McGraw-Hill Education.
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