The Subprime Lending Fiasco
In 2007, the subprime mortgage crisis began in the United States due to the inflation of subprime mortgage loans from the majority of the banks in the country. Not only did this crisis lead to an economic downturn in the financial markets in the United States but also the whole world since it attracted the attention of Russia, the European Union, and the International Monetary Fund.
Generally, the self-interests of different parties played a crucial role in the subprime crisis. According to Brooks and Dunn (2014), a lot of financial intermediaries who were involved in delivering the mortgages took advantage of American citizens to generate profits. Therefore, the purchased mortgage-backed securities depreciated with time leading to massive losses by the lenders. For instance, the lenders sold the loans to investment banks who invited other interested parties; thus, developing a financial crisis over the years.
The crisis had a significant impact on American citizens due to the tremendous fall of house prices. The crisis led to the downfall of the Lehman Brothers who were among the pioneers in the mortgage investments since the lenders had no money to lend. Also, many people lost their homes due to the incline in interest rates believed to control inflation. The U.S. experienced a state of economic stagnation due to an increase in unemployment rates and decreased demand for goods and services (Brooks & Dunn, 2014).
In conclusion, the subprime lending fiasco led to the development of new regulations to secure mortgage lending. The investment banks learned ethical lessons from the crisis such as basing actions on realistic expectations, full risk assessments and balancing schemes of compensation based on financial incentives and ethical considerations. To avoid the crisis, legislation controlling the financial institutions should have been established.
References
Brooks, L., & Dunn, P. (2014). Business & Professional Ethics for Directors. Executives & Accountants. 8th Edition. Retrieved from https://books.google.co.ke/books/about/Business_Professional_Ethics.html?id=ZS4aCgA AQBA&redir_esc=y