Companies and Ethical Conduct
Companies are required to conduct their operations in an ethical manner that not only promotes the interests of stakeholders but also protects the economy's wellbeing. Several regulations have been enacted to ensure that every firm meets its mandate as required; these rules guide the behavior of organizations to ensure that no institution engages in unethical behavior. Failure of a business to function in accordance with the law may have a negative impact on the economy since it may result in a financial crisis, as happened in 2008. The film – Inside the Meltdown – illustrates that the economic crisis was instigated by some financial institutions (Such as Bear Stearns Companies, Inc.), which were involved in some unethical conduct such as the formulation of credit default swap policies as well as issuing loans without requesting for adequate collateral.
Key Issues Brought Out in the Movie
According to the film, the financial crisis in 2008 started in the spring of 2008, due to the burst of the housing bubble. Two years before the burst, the real estate value of homes appreciated, thus attracting the attention of investment banks. However, after the burst, the housing market crashed and the sale of homes reduced to 8.6%, the home mortgages also became unstable, thus, signaling the certainty of the occurrence of an economic meltdown. To counter the looming danger Henry Paulson (the then Secretary of the Treasury) and Ben Bernanke (the then Chairman of the Federal Reserve) organized a meeting with the legislators. They were drawn from the Senate and the House of Representatives. The purpose of the meeting was to agree on the most favorable moves in avoiding the economic crisis.
Investigations and Bailouts
Over the past few months, the parties in the meeting had decided to bail one bank that was almost becoming bankrupt but had also let another bank go insolvent. Also, three of the largest companies in the United States had been nationalized, within those months the parties had also watched in amazement the worrying (downward) trend in the credit market. One of the banks that were adversely affected by the burst was the Bear Stearns Companies, Inc. – an investment bank in New York. Even though the bank’s shares were deemed to be performing quite well in the stock market (at $171 per share), the price had decreased to $60 per share by September 2008 (Sexdester, 2017). Bear Stearns had also carried out investments in the subprime mortgages, which were later referred to as ‘toxic assets.’ The bank purchased a lot of mortgages to enhance its success that they then used as securities for providing loans to the members of the society. This trend was contrary to the traditional practice of banks whereby a borrower had to provide adequate reasons (including issuing the bank with collateral) to prove that he/she would pay the loan within the set time frame. The continuous increase in house prices convinced everyone – including the financial institutions and stock brokers – that it (the mortgage investment) was a worthy project. Unfortunately, in the year 2007, the house prices stopped escalating, and most of the value of most of the investments started decreasing. Since Bear Stearns had incurred a lot of debts as it sought for finances to invest in the subprime mortgages and was also involved in high-risk securities, there was a need for it to take a loan that would enable it to retain its financial net worth. The societal members’ level of confidence in the bank had also significantly reduced, and most of the investors were reluctant in awarding it any loan. Some of the lenders called now and then to demand their own loans while others dictated that the bank provides them with collateral. Investigations on the bank’s mode of operations revealed that the bank had lost billions in the subprime mortgages scheme and that other losses had also been accrued through its credit default swaps policy – a case whereby the bank had promised buyers that it would purchase the bonds it had sold to them in case the insurance failed. It was also noted that the bank had some dealings with the Wall Street (and other nations all over the world), which meant that letting it go down would also affect the global economy, hence, there Federal Reserve had to bail it (Bear Stearns) out. However, since the Federal Reserve did not regulate the bank, the loan was awarded through JPMorgan Chase. Additionally, it was also revealed that 30% of the Bear Stearn’s stock was held by its employees, who had opted to sell it at $30. The economic crisis was further fueled by the losses incurred by Fannie Mae and Freddie Mac mortgage firms, which held an estimated five trillion dollars (Sexdester, 2017). Though the Federal Reserve and the Treasury were reluctant in nationalizing these businesses, they were eventually forced to do it as a measure of preventing further losses. The price of the Lehman Brothers investment bank also decreased to 18%, an occurrence that also demonstrated the occurrence of an economic meltdown. The crisis also affected the American International Group, Inc. (AIG) – the world’s biggest insurance firm. During the meeting, Paulson requested the lawmakers to approve the use of $700 billion on the purchase of the ‘toxic mortgages,’ which had caused the failure of the financial institutions. However, the move was opposed by the policy makers who opted for a capital injection program. Unfortunately, by the time the proposal was adopted, the financial crisis had already spread to other nations such as the UK, Iceland, and even China.
Perceptions and Lessons
There is a major illustration of bias that can be identified from the movie. The Federal Reserve and the Treasury stepped to bail the Bear Stearn’s bank when it seemed to be going down. Unfortunately, the same devotion was not showed when Lehman Brothers’ bank seemed to be going down. Instead, Paulson insisted that Fuld – the CEO of the Lehman Brothers Investment Bank – ought to have sought for a buyer who would be willing to purchase the bank before it was declared bankrupt. One could not concur with Paulson’s move since both banks are investment banks, which implies that they operate under the same conditions and, hence, it would be fair if the same treatment was met with them.
The film enables us understand how the financial industry is run, which is important in changing one’s perceptions towards the industry. One may not necessarily figure out the essence of regulating the financial institutions. However, as brought out in the film, the investment banks (which are not governed) were a primary cause of the crisis. Regulation is crucial as it makes a financial institution to thoroughly examine the potential of a borrower so as to ascertain that the loan would be paid back in real time (Farr, 2013). However, in the case of Bear Stearns – an unregulated investment bank – the mortgages were bundled into securities that were later sold to investors, which was a primary source of the economic crisis. Therefore, the movie plays an integral role in making one understand the importance of regulation in the enhancement of economic stability.
Conclusions
To sum it all, Inside the Meltdown actually demonstrates the reasons behind the 2008 economic crisis. As brought out in the film, some of the financial institutions were involved in unethical dealings such as the award of mortgages to people who the banks were not sure whether they (the people) would be in a position to repay the loans at the appropriate time. Besides, some banks such as the Bear Stearns bank adopted some uncouth measures of wooing clients – such as offering them credit swaps – which eventually made them incur a lot of losses. Therefore, it is important for the financial institutions to be regulated (for instance by the Federal Reserve) to ascertain that they do not engage in activities that may lead to an economic crisis.
References
Farr, J. (2013). Analysis of a meltdown: Why everyone should see inside job. Retrieved June 14, 2017, from Huffpost: http://www.huffingtonpost.com/john-farr/analysis-of-a-meltdown-wh_b_835099.html
Sexdester. (2017). PBS frontline inside the meltdown. Retrieved June 14, 2017, from You Tube: https://www.youtube.com/watch?v=5oLmvw0f-l0
