Responsible Leadership, and Failures that Led to the Financial CrisisLatries Giddings
Responsible leadership can be defined as the management of a corporation’s interactions with society aimed at addressing the corporation’s various stakeholder concerns and contributing to the multiple bottom lines of economic, social and environmental performance. (Christian Vogtlin, 2017). Throughout the movie The Big Short it is evident that individuals who represented the housing industry were divorced from the effects their actions had on society. In my opinion, this demonstrates one very significant fault of capitalism, the insatiable desire to generate a profit. Notwithstanding, its alternative is far more undesirable.
It was evident that the structure in which the industry was set up allowed for unethical behavior to flourish. In my opinion, there are some industries that should not be determined solely by demand and supply of the market while the governing authorities take a passive role. Healthcare, education and housing are among the industries that the government should have an active role. Throughout the movie there was an emphasis on generating profit for personal gain. It was also very evident that these individuals knew the ramifications of their actions on society. At various points in the process, if one group either the mortgage brokers, bankers or rating companies had looked beyond their personal interest it is reasonable to assume that the financial crisis could have been circumvented. As it related to the mortgage brokers because the number of loans they generated were directly related to their own bonuses, they felt compelled to issue increased numbers of subprime loans. As stated in the article Greed, Negligence or System Failure, Credit rating agencies and the financial crisis, a subprime mortgage is a mortgage that is given to an individual who would not normally qualify for a loan. Most subprime mortgages are given to homeowners who are not traditionally credit worthy. These individuals do not have a strong credit history. This introduces the first ethical breakdown of moral blindness. We are all of us born in moral stupidity, taking the world as an udder to feed our supreme selves. (George Elliot). Characterized by the intentional disregard of moral considerations in order to advanced one’s own self-interest moral blindness can be found throughout the movie. Even peaking to the point of fraud so that the system would not be disrupted. The Credit Rating Agencies (CRA) continued to give triple A rating despite evidence that the financial products were not as secure, reasoning that there would be a loss of business if this was not done. In fact, only minutes before Lehman Brothers ?led for bankruptcy Moody’s had the company rated at A2 (downgraded from A1 only days before) according to Greed Negligence or System Failure. The culture of the rating agencies had dramatically shifted over the years demonstrated by a direct quote from Mark Froeba who was a senior vice president at the time he left Moody’s one of the credit agencies showcased in the movie.
“When I joined Moody’s in late 1997, an analyst’s worst fear was that he would contribute to the assignment of a rating that was wrong, damage Moody’s reputation for getting the answer right, and lose his job as a result. When I left Moody’s in 2007, an analyst’s worst fear was that he would do something that would allow him to be singled out for jeopardizing Moody’s market share, for impairing Moody’s revenue, or for damaging Moody’s relationships with its clients, and lose his job as a result.”
Additionally, it was evident during the movie that there was a grotesque lack of quality controls. The mortgage brokers stated that if a sale was made on a Friday afternoon one of the major banks would back it by Monday midday. That was especially shocking since banks usually state if a transaction is completed after 2PM on any business day it is not processed until the following business day. Leaving the banks, a mere four hours to decide on a loan with information that is impossible to verify within that timeframe. One can assume that there was no standard that these loans had to meet in order to be approved by the banks. In the accounting industry, though not entirely devoid of moral foresight, quality controls measures are a set of processes through which business organizations seeks to ensure that product quality is maintained or improved, and manufacturing or servicing errors intentional or not are reduced or eliminated. It encompasses internal investigations as well as external investigations from outside agencies whose motives and performance metrics are not associated with the organizations that is being reviewed. This allows them to remain objective in their findings and lessens the likelihood of collusions since after a few years the external auditors are mandated to be alternated. The equivalent would have been the Security and Exchange Commission (SEC) but as stated in the movie by an individual that represented them, “we don’t investigate mortgage bonds.” Perhaps, the most signi?cant con?icts of interest involved the way the investment banks would procure ratings on their securitizations. In essence, banks would only do business with the CRAs that provided the favorable ratings that banks wanted to show investors.
There were many other examples of incidents and interests that should have been cause for concern one such was the market for insuring mortgage bonds which was twenty times larger than the actual market for mortgage bonds. This meant that if the market crashed which it did the ramifications would be amplified twenty times throughout the entire economy. This cause more pressure on the banks to keep up the numbers in order to continually generate profits. With all this, I think the greatest ethical oversight was allowing the individuals who unrestrainedly gained while creating this crisis to continue to operate in their post after the government intervention. There was no repatriation for the effects on society.
References.Investopedia. (2018). Quality Controls. Retrieved From:
https://www.investopedia.com/terms/q/quality-control.aspSelig Kevin (N.D). Institutions in Crisis, Greed, Negligence or System Failure? Credit Rating Agencies and the Financial Crisis, The Kenan Institute of Ethics at Duke University.
BIBLIOGRAPHY Vogtlin, Chritian. (2017). What is Responsible Leadership? Manage Magazine, Retrieved From: https://managemagazine.com/article-bank/leadership/what-responsible-leadership/