Research Proposal on "Ethics & Morals - Business"

Research Proposal 10 pages (2860 words) Sources: 8 Style: MLA

[EXCERPT] . . . .

Ethics & Morals - Business Ethics

Business ETHICS FAILURES and the CURRENT ECONOMIC CRISIS

Background, History, and Evolution of the Problem:

During the 20th century, the United States emerged as the most prosperous nation on earth with living standards and economic opportunities that were the envy of much of the rest of the modern world. For most of the century, the American middle class enjoyed the comforts of a lifestyle that exceed those that have ever been available to most people who have ever lived.

Just as many philosophers and social theorists have explained, the relatively widespread availability of modern convenience to the masses typically triggers a form of social status competition defined purely by relative wealth in comparison to others rather than defined by the objective value of highly prized trappings of financial success. In many respects, many people's personal identity and feelings of self-worth are substantially predicated on their ability to project an inflated image of their financial worth and perceived "class" designation.

During the same approximate time period, American consumers also developed a dependence on credit. Previously, credit extension was primarily a tool for commercial business and home mortgages; later it was incorporated throughout the automobile and other sales industries. Traditionally, most Americans supported their constant expenses with their income and resorted to using equity backed credit primarily for large, single- item expenses, such as college tuition and major purchases.

In the case of the former, government loans often provided substantial assistance at a reasonable fee; in the case of the latter, it enabled consumers to afford a second family vehicle or home improvement at a credit that was worth its price for the actual value it provided the consumer over the approximate period that the consumer would have had to save the money to make the same purchase outright. For the price of perhaps a thousand dollars in interest and processing fees over several years, the consumer could begin enjoying all the practical benefits of vehicle ownership for the better part of a decade or more while gradually acquiring more equity in it until it was fully paid off and owned by the consumer.

Big businesses grew at an accelerated rate throughout the last decade of the 20th century and deregulation of the investment and banking industries resulted in vast sums of money being wagered on complicated financial determinants every day. Many Wall Street executives earned tens of millions and more personally, from salaries, commissions, and bonuses linked to performance. At the same time, business remained strong in general, and other standard economic indicators like a high government surplus, low unemployment, and a strong real property market growth all coincided. Gradually, the increased focus on acquisitive success and the display of wealth throughout the middle class and the ever-increasing habit of the American consumer to rely on credit combined to form a volatile situation just waiting for a catalyst to ignite it.

That spark came in the form of ethical violations throughout the mortgage and loan industry and a large spectrum of the major investment securities industries.

The Contemporary American Consumer as the Ideal Lendee:

As Americans became ever more reliant on credit to maintain their expenses, the largest segment of consumers formed a reliable source of long-term payments that included substantial profits for lenders from interest and related financing fees. The more one relied on credit, the more important the stakes for maintaining a good credit rating.

Predatory lending practices, when they occurred, usually consisted of retail merchants charging unreasonably high interest rates, in conjunction with complicated contract terms beyond the comprehension of many customers. Quite often, unethical merchants eventually collected many times the actual retail price of the purchase, such as when consumers continued paying minimum payments and never paid down the principal for a decade or more.

However, these types of ethical violations were relatively isolated; nevertheless, more and more middle class Americans began relying heavily on credit to finance a lifestyle beyond their actual financial resources. Comparatively few middle class Americans committed their financial resources to building up their savings; many lived hand-to-mouth, paying for homes in neighborhoods that they could never have afforded without relying on high mortgages and financed credit for their vehicles and other purchases.

In previous generations, luxury cars and boats and mansions were owned exclusively by relatively wealthy people who could afford them. By the turn of the 21st century, middle class people across the country whose actual income corresponded more to the responsible purchase of Toyotas financed much more expensive vehicles, often secondhand, for the privilege of being associated with a Mercedes or a Lexus. Luxury car manufacturers all introduced "starter class" vehicles specifically targeted at consumers who could not actually afford their vehicles. Developers applied the same concept to "luxury homes" and developments while realtors performed their usual role in facilitating financially imprudent "upgrades" from affordable homes to unaffordable ones that flattered the self-worth of homeowners.

Still, as long the economy remained strong and incomes kept pace with inflation, millions of Americans who, if they were satisfied with whatever they could actually reasonably afford, should have been driving $15, 000 or $20,000 cars and living in homes valued approximately 10 times as much as their vehicles paid out all of their monthly salary on the price of financing the highest possible apparent social status they could afford.

Families with combined net incomes corresponded to modest homes and economy vehicles maximized their use of credit to live in a larger home and drive a starter series luxury car. Families who could have afforded one larger home and a fine late model passenger vehicle financed small mansions, sports cars, luxury vehicles, and second homes. By the 21st century, living responsibly within one's financial means was more the exception than the rule, particularly among the American middle classes.

The Concept of Mortgage Banking: During the 1970s, Salomon Brothers introduced a new concept to the financial industries, mortgage securities. Essentially, what Wall Street investment banks and securities firms began doing is trading mortgage obligations held by banks. Salomon Brothers had invented a way of combining hundreds and thousands of individual mortgage loan obligations into complicated packages that could be sold and traded at a profit just like traditional shares of companies (Markels, 2007a). In principle, there is nothing inherently unethical about this strategy. Mortgages represent professionally appraised equity and their default risk is usually very low because of the due diligence exercised by mortgage lenders and banks to minimize the risk of extending credit to individuals who, by standard credit rating criteria, pose a higher than acceptable likelihood of default. Therefore, it is essential to the market trading mortgage obligations that those instruments represent carefully vetted credit customers. Because mortgages on real property are so reliable, and because mortgagees are usually so vested in keeping their homes, the agencies whose responsibility it is to rate the relative reliability of securities represented on the market gave most mortgage- backed securities their highest or second highest rating (Lowenstein, 2007).

Within a decade or so of the introduction of this new mortgage-based profit generating mechanism, investment banks and security trading firms began looking for mathematicians and physicists, and before long, securities trading became reliant on highly complex mathematical formulas, algorithms, and matrixes that are incomprehensible to the vast majority of the professionals who make tremendously important financial decisions dictated by those formulas.

As is so often the case in big business, decisions and processes that lose money are subjected to intense investigation and analysis; conversely, large profits are rarely questioned (Svensson & Wood, 2008; Vecchio, 1997). Even if questions suggested themselves, corporate dynamics does not incentivize rocking the boat in ways that conflict with the profit margin (Mihaly, 2007; Stevens, 2008). As modern financial investment became completely dependent on computer technology in the last few decades of the 20th century and the 24-hour global market made possible by the Internet, the complexity of investment securities and trading criteria became even more complicated.

The Housing Bubble:

Gradually, the prevalence of mortgage security trading reduced the remaining stake that mortgage lenders had on the mortgages they wrote. Previously, mortgage lenders carefully avoided risky home purchasers because the companies who extended the credit to the homeowner stood to lose the value of the transaction, sometimes at considerable additional expenses instead of any profit, if the borrower defaulted and the home went to foreclosure. Specifically for this reason, prospective mortgagors carefully verified income information, credit history, and the financial assets claimed by borrowers.

Once mortgagors began relinquishing their interests in the long-term value of (and risks associated with) individual mortgages, their only remaining incentive for continuing to carefully evaluate the credit worthiness of new customers were the legal and ethical requirements to exercise due diligence in evaluating mortgage eligibility. Otherwise, (i.e. from a selfish point-of-view), mortgagors had no need to concern themselves with whether or not prospective home buyers represented bad risks of default; by that time, their mortgages will have been repackaged and sold several… READ MORE

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