The sharing below is an additional sharing about mindsets. Indeed there will be times where we may fail in our attempts, but never fail to make an attempt & Choose to accept the false boundaries and limitations created by your past. Have a blessed day ahead:)
When the Lehman brothers an investment bank with a 158 year long
history collapsed on Monday, September 15 2008 after failing to find
a suitable buyer to bill them out, it shocked the world and the
numerous individuals that had their hopes build on it went bankrupt
overnight. Hours later last Monday, Merrill
Lynch announced that it would be bought by Bank of America for $50 billion
in order to save itself from a similar fate (Abrams, 2008).
In response to the historic demise of these two
great banking institutions, following on the heels of Bear Stearns’
government-sponsored rescue by JP Morgan, the market plummeted, hitting its
lowest point since 9/11. In response, 10 major banks agreed to create an
emergency fund of $70 billion to $100 billion that financial institutions could
use to protect themselves from the fallout of these unprecedented financial
firm failures.
On September 17, the Federal
Reserve announced that it would take control of the struggling
insurance giant AIG, lending it $85 billion in order to stay afloat. A
committee of state insurance regulators is being formed to oversee the break-up
of the company’s far-flung empire of assets. This bailout followed the federal
government-assisted rescue of mortgage lenders Fannie Mae and Freddie Mac,
which received an infusion of billions of dollars of tax payer funds to avoid
closing their doors.
The landscape of Wall Street was starting to look
like a war torn zone. Three of the five investment banking titans Bear Stearns,
Merrill Lynch and Lehman Brothers, no longer existed, and the two left
standing, Goldman Sachs and Morgan Stanley, had lost significant value and
faced constraints on borrowing.
On Monday, September 22nd, 2008 the final two contenders caved in
both Goldman Sachs and Morgan Stanley required extensive assistance from the federal government to be
classified as bank holding companies. The move would subject them to tighter
federal regulation and would extensively limit the amount of money that can be
borrowed in proportion to capital reserves.All five former investment banking giants have been laid low by the
capital markets crisis stemming from exposure to sub-prime mortgage debt and
the complex securities backed by it. Speculations signalled that this would be
the end of the Wall Street era (Pat, 2009).
The final damage of this
sub-prime mortgage crisis caused more than 26
million Americans to be out of job About four million families have lost their
homes to foreclosure and another four and a half million have slipped into the
foreclosure process or are seriously behind on their mortgage payments. Nearly
USD $11 trillion in household wealth has vanished, with retirement accounts and
life savings swept away. Businesses, both large and small have felt the sting
of a deep recession. There is much anger about what has transpired, and
justifiably so. Many people who abided by all the rules now find themselves out
of work and uncertain about their future prospects (U.S Financial Crisis
Inquiry Commission, 2011).
The Subprime Mortgage Crisis:
To
help us understand better about the subprime mortgage crisis, its occurrence was
based on three fundamental conditions:
Firstly
with the existence of previously over
finance borrowers and investors, subprime borrowers were eager to use
mortgage loans to finance home purchases. On the other hand a worldwide savings
excess created large numbers of investors eager to earn the relatively high
interest rates promised on U.S. subprime mortgage securities.
Secondly
the catalyst of advances in technology allowed subprime mortgage securitization
applied latest technology of security design and financial risk management.
These allowed the expansion of a wider range of similar tools to earlier
classes of high-risk securitization raging from credit card loans to natural
disaster catastrophic bonds.
Thirdly when a benign and ever encouraging
regulatory system and environment the various US mortgage lenders; Fannie Mae,
Freddie Mac & First Alliance Mortgage Company impeded the origination of subprime loans.
To make matters worse the existing system of commercial bank capital
requirements provides banks with strong incentives to securitize many of the
subprime mortgage loans they originated from (Dwight, 2008).
With these factors intertwine and progressing at a
humongous pace the financial bubble was destined to burst. From an initial idea
of building that American dream and creating that opportunity of homeownership
it spun out of control which eventually spiralled to a world financial crisis.
Inaccurate Credit ratings
Credit
rating agenciesare now under
scrutiny for having given investment-grade ratings toMortgage backed- securities (MBSs) based
on risky subprime mortgage loans. These high ratings enabled these MBS to be
sold to investors, thereby financing the housing boom. These ratings were
believed justified because of risk reducing practices, such as credit default
insurance and equity investors willing to bear the first losses.However, there are also indications that
some involved in rating subprime-related securities knew at the time that the
rating process was faulty (Elliot, 2008).
An
estimated $3.2 trillion in loans were made to homeowners with bad credit and
undocumented incomes (e.g., subprime orA+mortgages) between 2002 and 2007. They
were the party that performed the alchemy that converted the securities from
F-rated to A-rated. The banks could not have done what they did without the
complicity of the rating agencies." Without the AAA ratings, demand for
these securities would have been considerably less. Bank write-downs and losses
on these investments totalled $523 billion as of September 2008 (Elliot, 2008).
The
ratings of these securities were a lucrative business for the rating agencies,
accounting for just under half ofMoody’s
total ratings revenue in 2007. Through 2007, ratings companies enjoyed record
revenue, profits and share prices. The rating companies earned as much as three
times more for grading these complex products than corporate bonds, their
traditional business. Rating agencies also competed with each other to rate
particular MBS and collateralized debt obligations (CDO)
securities issued by investment banks, which critics argued contributed to
lower rating standards. Interviews with rating agency senior managers indicate
the competitive pressure to rate the CDO's favourably was strong within the
firms (Buttonwood, 2007).
Critics allege that the
rating agencies suffered from conflicts of interest, as they were paid by
investment banks and other firms that organize and sell structured securities
to investors. Between Q3 2007 and Q2 2008, rating agencies lowered the credit
ratings on $1.9 trillion inmortgage backed
securities. Financial institutions felt they had to lower the value of their MBS
and acquire additional capital so as to maintain capital ratios. If this
involved the sale of new shares of stock, the value of the existing shares was
reduced. Thus ratings downgrades lowered the stock prices of many financial
firms (U.S Securities and Exchange Commission, 2008).
(MBS credit rating downgrades, by quarter.)
Why are leaders responsible for the ethical climate of their environment?
Successful organisations or governments today are helmed by sturdy board members senior executives, ministers and politicians but it takes more than just good leaders to steer the ship to port. In fact it requires an overall team effort and implementation, which means despite the rank and file, everyone is important towards achieving the end result but as leaders they would need to lead the way.
Lee (2000) mentions that leaders are born and not made, these are unique individuals that command the respect of others and possess a sphere of influence that make others want to be part of them. We can see prominent leaders today like Steve Jobs from Apple Inc and President Barack Obama that carries a charismatic persona which sees thousands of ardent supporters rooting for them. The making of a leader depends on the individual’s characteristics and attitudes that we as individuals can associate and identify with closely. It is a wave of positivity that intrigues many to command that respect given to a leader. (Lee 1999).
Leadership is the doing process whereby one individual influences other group members towards attaining defined group or organizational goals (Greenberg & Baron, 2000). Board members and senior executives are the group of individuals that influence and set the culture that dwells within the organization. In short, the goals, vision, mission, directions and paths are weighed upon these individuals to be carried and role modelled out with reverence.
Ethics concerns with the study and identification of the behaviours, actions and standards that an individual ought to pursue. It is the assessment of moral standards and is developed actively through the use of theories and experiences. Therefore, it has relevance to the way people behave in organisations (Trevino & Nelson 2006).
There are two approaches to ethics, namely the values approach and the compliance approach. The values approach looks at being proactive and inspirational, it emphasises expected behaviours and high standards. The compliance approach on the contrary is reactive and punitive, it emphasises on required behaviour and obedience towards the law (Trevino & Brown 2004). Leaders could sometimes be seen applying these two approaches interchangeably, depending on the growth and status of the organisation
As leaders live up to the values of being an ethical individual this constitutes to the substantive basis towards ethical leadership. The biggest challenge would not just be being an exemplary steward but to transform these attitudes into behaviours despite the pressure and contention to do otherwise (Daft 2005).
In the business landscape it is challenging to ensure that ethics and values stand out amidst the fierce rivalry, competitions, meeting the quarterly key performance indexes (KPI) and profits. As moral managers, leaders too, face an uphill task of putting ethics as their forefront leadership agenda. Through the understanding of the leader’s scope of work, with work teams under them, immediate subordinates and peers, they have to role model through visible actions, recognise rewards and disciplines and constantly communicate ethics and values (Ponnu & Tennakoon 2009).
The Key Players:
The
earlier paragraph explains to us how leaders possess this sphere of influence
which could cause radical changes. Whether the decision is ethical or
non-ethical people will still believe and follow the leader. One of the
greatest examples is Adolf Hitler; he brought the Nazi regime into power and
made the German folks into believing his beliefs.
As
we draw back to the subprime mortgage crisis a few leaders and men were closely
linked to cause of the financial crisis. Under the Clinton administration it became federal regulatory policy to
force the nation's financial institutions to abandon traditional lending
standards for home mortgages, on the grounds that those standards were racially
discriminatory, as African Americans and other minorities could not qualify for
mortgages to nearly the same degree as whites and Asians (Ferrara, 2012).
This overregulation reached the point of forcing
lenders to discount bad credit history, no credit history, no savings, lack of
steady employment, a high ratio of mortgage obligations to income, undocumented
income, and inability to finance down payment and closing costs, while counting
unemployment benefits and even welfare as income in qualifying for a mortgage.
The other man George W Bush
was also part of the puzzle. Under the Bush treasury supported a cheap dollar
policy, falling for the Keynesian fallacy that a low dollar helps the economy
by promoting exports.That cheap
dollar monetary policy further inflated the housing bubble because it generated
flight into real assets to escape the depreciating greenback. Because real
estate is an especially long-lived asset, its market value is especially
boosted by low interest rates.
When the Federal Reserves finally
realized it had to rein in its loose monetary policy, or risk soaring
inflation, skyrocketing housing prices slowed, flattened out, and then tipped
into decline. The steep decline in housing prices produced chaos throughout the
financial industry in the U.S., and ultimately the world, as widespread
financial assets based on housing collapsed in value (Jon, 2008).
Ben Bernanke the Federal Reserve
Chairman has also been in the lime light along with his predecessor Alan
Greenspan for making the wrong decisions and the cover ups over the US
financial crisis. Reports have shown evidence about Bernanke’s biggest blunders
he has made mounting up to the Bubble burst. He mentioned in March 2007, saying subprime was
contained but in fact it was escalating beyond controls. Then in July 2008, he
claimed that Freddie Mac and Fannie Mae were in good financial control, but the
truth was that they were on the verge of bankruptcy (Barr, 2011).
As these three men were being
highlighted they had accomplices like the CEO’s of the 5 big investment banks
and also the American International Group (AIG) to go along with. The fact that
they were mentioned because they were the country’s leading frontman. The hopes
and trust of the people were place in their but it seems that their actions and
plans seems to be a cover up for each wrong moved made. So was it a brilliant
plan that these men were implementing or was it just a cover up for the ugly
truths they have made?
Extension Portion: A brief introduction
to Fannie Mae and Freddie Mac
Fannie
Mae was introduced to the world in 1938 and is the name given to TheFederal National Mortgage Association. It was founded following
the financial worries that the Wall Street Crash of 1929 created as part of TheNew Deal, which was a series of economic programs
implemented in the United States between 1933 and 1936.Despite being publicly traded since the late 1960’s,
Fannie Mae is a government-sponsored enterprise that’s key objective was to
‘expand the secondary mortgage market by securitizing mortgages in the form of
mortgage-backed securities (MBS)’.The Federal Home Loan Mortgage Corporation, otherwise known
as Freddie Mac was established in 1970. As another GSE, the objective of this
organisation was to ‘buy mortgages on the secondary market, pool them, and sell
them to investors as mortgage-backed securities on the open market.’ This process
was to increase the amount of money available for lending and therefore allow
more people to get mortgages.
The hands that was played
Initially,
Fannie Mae and Freddie Mac were able to increase home ownership rates in the
United States due to the funds that they were able to free up using
mortgage-backed securities. This gradual increase suited the people of the
United States, and tied into the concept of the American dream. This period of
time is clearly demonstrated in the cartoon as the ‘elves’ are preparing their
presents for everyone in the workshop. The atmosphere is a happy one that
depicts the positive emotions of the time and the growing economy.
In order to
achieve this however Fannie Mae and Freddie Mac used many of the privileges bestowed
upon them as the result of their GSE status. One key privilege that they had
was that the treasury was allowed to buy up to $2.25 billion of securities from
each of the organisations in order to support liquidity. Fannie and Freddie's
GSE status created certain perceptions in the marketplace, the first of which
was that the federal government would step in and bail these organizations out
if either firm ever ran into financial trouble. This was known as an
"implicit guarantee". Fannie and Freddie's GSE status created
certain perceptions in the marketplace, the first of which was that the federal
government would step in and bail these organizations out if either firm ever
ran into financial trouble. This was known as an "implicit
guarantee". Another benefit of their status was also that they were
exempt from state and local taxation. Despite representing numerous
organisational bodies, the ‘elf’ at the end of the production line in the
cartoon also represents the government’s willingness to approve and support
Fannie and Freddie in their efforts. In particularly he represents the
Department of Housing and Urban Development (HUD) that was responsible for
monitoring, limiting and enforcing their general housing missions. This
competitive advantage that being a GSE gave Fannie Mae and Freddie Mac allowed
them to be extremely profitable for over 20 years. Over this time-frame several
arguments arose about whether this was in the interest of the companies
associated or the U.S homeowners that may not have got a mortgage under normal
market conditions. The cartoon represents this debate through the use of a
Christmas setting. Despite the good intentions that drive the giving of goods
on a special day, it is also renowned for being pressure-bomb due to the stress
level and complications involved. Regardless
of what was the main drive behind the growth of Fannie Mae and Freddie Mac,
they were ultimately put in a situation that would allow them to monopolize the
U.S secondary mortgage market due to their GSE status and their ‘implicit
guarantee’. This would later greatly contribute to the infamous credit crunch
of 2008.
Fannie Mae and Freddie Mac grew very large in terms of assets and mortgage-backed securities (MBSs) issued. With their funding advantage,
they purchased and invested in huge numbers of mortgages and mortgage-backed
securities, and they did so with lower capital requirements than other
regulated financial institutions and banks.
Figures 1 and 2, below, produced by the companies' former regulator, the Office of Housing Enterprise Oversight, show the incredible amount of debt issued by the
companies, their massive credit guarantees, and the huge size of their retained
portfolios (mortgage investment portfolios). U.S. Treasury debt is used as a
benchmark.
Figure 1
Source:
Office of Federal Housing Enterprise Oversight
Figure 2
Source:
Office of Federal Housing Enterprise Oversight
The growth of these two organisations was to bring much heat from their rivals.
This was mainly due to the benefits that both Freddie and Fannie received as
part of their ‘GSE package’. Much to the dismay of their competitors Freddie
and Fannie were able to retain this status despite being red flagged by many of
their critics. They were able to do this by hiring legions of lobbyists and
funding non-profit organisations in order to influence members of the U.S
Congress.
Eventually, Wall Street rivals began to create new types of mortgages in
order to be able to gain a competitive edge with Freddie and Fannie. In turn
this spurred them to establish a liquid and expanding market in mortgage
products tied to short-term interest rates. These adjustable-rate mortgages were sold to borrowers as loans that the
borrower would refinance out of long before the rate and/or payment adjusted
upward. They frequently had "exotic" characteristics such as
interest-only or even negative-amortization features. As
Fannie Mae and Freddie Mac saw their market shares drop, they too began
purchasing and guaranteeing an increasing number of loans and securities with
low credit quality.
The web grew as other parties got hungry for a piece of the cake.
Investors, funds and governments from all over the world were tied up in this
ever growing ‘web of money’. The scale of the crises that would ensue worldwide
is also demonstrated in the cartoon through the concept of Santa Claus
distributing his presents world-wide down every chimney of every family.
It was not until 2006 that the penny dropped. The party would soon be
over when house prices stalled and then fell, crashing to the ground.
I refer to
the comment which you have mention in your comment which we do not really get
what you were exactly referring too; “The only thing you forgot to mention was
how the banks after lending credit to would be F rated people….”??? We hope to
hear from you soon as you repost your queries. Have a good day ahead.
Hi Bway
Junkie,
If may
refer to ‘40041500another perspective’, I guess this fellow reader has answered
your perspective in why the people are not to be at blame. Yes we agree to a
certain extend it takes two hand to clap but we have to keep in mind who the
masterminds were. If the masterminds had not tossed the baits would the people
have bite on it? Secondly what’s really shocking is that the masterminds which
were none other the government, leaders of the banks already knew what the end
result would be like and they allowed for it to happen. But anyway we thank you
for giving us a good perspective from your angle. Hope to hear from you soon.
Have a blessed day aheadJ
Greenberg, J & Baron, R 2000, Behavior in Organizations: Understanding and managing the human side of work, 7th edn, Upper Saddle River: Prentice-Hall.
Ponnu, CH & Tennakoon, G 2009, ‘The Association between Ethical leadership and employee outcomes- the Malaysian Case’, Electronic Journal of Business Ethics and Organization Studies, vol. 14, no. 1, pp. 21-31.
Trevino, LK & Brown, M 2004, ‘Managing to be ethical: Debunking five business ethics myths’, Academy of Management Executives, vol. 18, no.2, pp. 69-81.
Trevino, LK & Nelson, KA 2006, Managing Business ethics: Straight talk about how to do it right, 4th edn, John Wiley, New York.
U.S Financial Crisis Inquiry Commission. (2011). Final report of the National Commission on the causes of the Financial and economic crisis in the United States. Pursuant to Public Law 111-21. Retrieved from http://www.gpoaccess.gov/fcic/fcic.pdf.
U.S Securities and Exchange Commission. (2008). SEC Approves Measures to Strengthen Oversight of Credit Rating Agencies. (Publication No. 284). Retrieved from http://www.sec.gov/news/press/2008/2008-284.htm. ___________________________________________________________________
Hi folks here is an update from
our first blog. We have found an article that might quite answer the thought
that is flowing through most of your minds. Is too much really too good or is
it just a flop. Entitled in the blog are some personal replies we have
commented for some of you whom have posted us a few questions. Once again we
thank you for being an avid reader and supporter on our web blog and we hope to
bring your more post and sharing along the way as journey through the semester.
Through this article that was
published on the New York Times, it shows how studies were done to show the
effects of consumer’s paralysis and how overwhelming choices drive consumers
away. Empirical studies have found that people, regardless of intelligence, do
not always choose well. Often they prefer to let inertia take over, unable or
unwilling to choose for themselves. Well in fact we would like to highlight how
three experiments were done when too many choices were being given to
individuals like ourselves as consumers.
Case-study 1:
In Sweden, where personal
savings accounts were carved out of the social security system in 1998, 9 out
of 10 new entrants to the work force let their investment portfolios go to a
default fund set up by the government, rather than choose one themselves.
Case-study 2:
Too many options may drive
consumers away. In one experiment, Iyengar of Columbia University found that
people who had been shown a selection of six jams in a store were about 10
times as likely to buy a jar as those exposed to a range of 24 flavors.
Case-study 3:
In another study, she found that
people who chose one chocolate from a selection of 30 expressed more regret and
uncertainty about their decision than those who chose among six kinds. That's
because, with 29 other options, there is a bigger chance of losing out on
something better.
Case-study 4:
In one experiment, Thaler and Shlomo Benartzi of
the University of California at Los Angeles, asked employees in one company to
select among three 401(k) retirement savings portfolios. Unknown to the
employees, one portfolio was their own. The other two reflected the average and
median choices of all the workers in the company. Yet only one-fifth of the employees
preferred their own portfolios to the medians. "Apparently people do not
gain much by choosing investment portfolios for themselves," Thaler wrote.
Take a look at the video below,
though this video share with us viewers about the trade secrets in a
supermarket but we want you to take a good look of the array of choices we are
exposed to just by visiting a supermarket today. How confused we are or how
troubled we are in making just a simple purchase on a fizzy drink!
The second video entitled here is
called the paradox of choice which some of you may be looking for, from the
very man who wrote it Barry Schwartz:
We hope this update
would have answered most of your questions and we look forward to hear more
from you folks so stay tune for more updates. Below are our replies to the few
individuals who have pop us a question.
51487735 LONER
Hi 51487735Loner from
one and all at JARSolutionz we thank you for reading and providing insightful
details from a businessman perspective. Well yes we do agree that as a business
entity it is important to stand out from your competitors. To stand up and
shine at the occasion, it is necessary to be different but not necessarily
providing extended choices. Well as much you touch base from a businessman
perspective, I guess as a business person you need to know what your consumer
need or want in your targeted market segment. Therefore, providing more choices
may sometimes do more harm than good, in short detrimental spiral effects.
If we may refer to
the link which you have provided:
What could be
understood from Cathay’s offering is that they streamline their Asia Miles
points to four different categories; first class, business class, premium
economy class, economy class. This offering of choice actually helps consumers
avoid the hassle of decision making. In fact it is rather straight forward, if
you fly in a particular class you earn X number of Miles points and yes at the
same time they use the technology of internet to market their system. Therefore
through this system Cathay has indeed help consumers understand their system by
minimising their offering of choices.
40040157 CYNICAL
Hi Cynical we had
great fun reading your comments and you have set us thinking certainly. If we
may refer to your comment, you mentioned about nobody dictates the right choice
and the choice made does not necessarily suit the consumer. Yes certainly
nobody dictates our choices as consumers. As a consumer we perceive what suits
us best and that’s the most important. What may suit you may not suit me.
Next you mentioned
through globalisation we boost our choices and if we make a wrong one we could
always make another. Well we back to differ, if we lose a customer because of
the wide array of choices we offer which cause such confusion, we may be losing
much more money. It actually cost more opportunity cost of losing a customer
then winning one. Coupled with you mentioning that today’s consumers are well
informed and educated, what are your chances of retaining your customers if you
don’t ever streamline your offerings/choices today? Now that we may understand
what consumers want, we are not saying that we do not give them a choice but we
streamline the choices, helping them to affirm their decisions, thus answering
the question of consumer paralysis.
Hey international
blogger thank you for providing your thoughts about our article. You mentioned
that the more products there are on the market, the better it is for consumers
as prices will be kept low. Well having a wide array of choices does not
necessarily mean prices will be kept low; we reckon you may be giving the
example of bulk offering which gives a comparable low pricing or better offers.
We have to be very careful between array of choices compared to bulk discount
because having a large array of choices for example cheese do certainly keep
each branding competitive on how they market their prices but that does not
mean they mark down their pricing.
Let’s look at the
offering of cheese by Park &shop:
If we take a look at
PHILADELPHIA CREAM CHEESE and Boursin cream cheese both are of the same
category, so if we adopt your theory of saying more choice would mean cheaper
pricing, we guess your deduction may be out of line. Boursin in this case has a
strong competitor-ship of not only Philadelphia cheese but also rival
competitors like Arla and Laughing Cow brands but their pricing of their
product still maintains the highest. Therefore we hope that our explanation
would help you see in better alignment how too many choices may cloud a
consumer’s decision and not give bulk discounts instead J
Hey MusicLover
interesting question which you have highlighted. We think it would be hard to
limit the choice in a free market concept. If you would to recall the above
article which we recommend:
As mention in the
article, free marketers believed that wide choices is the positive notion for
us consumers but certainly the experiments conducted from the range from a
simple food choice to a financial choice decision; certainly proves that
too many options would certainly drive consumers away.
Hi 40038229 we heard
your call for a reference to understand more about Consumer’s paralysis. The
link mentioned above would certainly address your dire thoughts about the
topic.
