The Great Recession was a period of significant economic stress that the United States faced during 2008 and 2009. The nation experienced massive job loss, a significant stock market swing, and the collapse of the housing market. But what does this have to do with ethics? If you’ve read the book The Big Short by Michael Lewis or seen the movie of the same name, then you’ll recall that one of the primary reasons for the collapse of the housing market was that many mortgages were extended to individuals who were terrible credit risks. These mortgages were known as “liar loans” because borrowers could put almost anything on a mortgage application, and lenders were not confirming the information. The lenders adopted these practices because they could easily sell these loans, and they were making a lot of money. They were willing to put aside ethics and overlooked their responsibility to verify the accuracy of the information on the loan applications they were approving.
Another factor was that all of these loans were being packaged together to be sold as a financial product called a collateralized mortgage obligation, or CMO. These CMOs were reviewed by many of the large credit rating agencies and given the highest credit ratings. In truth, the rating agencies were not fulfilling their obligation to thoroughly analyze these products because they were being paid millions of dollars by the financial institutions that were selling them.
As a result of the unethical behavior of executives and employees, there has been a strong drive to improve business ethics. Congress passed the Sarbanes-Oxley Act in 2002 to impose sanctions on executives who commit unethical acts in financial reporting and to protect employees who report fraud. In addition, business schools have increased their focus on informing students of ethical/unethical acts, and more individuals and organizations have filed lawsuits against companies involved in fraud, regardless of whether senior executives are aware of the unethical acts committed.1Eugene Brigham and Joel Houston, Fundamentals of Financial Management, 12th ed. (Mason, OH: South-Western, Cengage Learning, 2009).
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