Grant Avila

Jeremy Bustamante

The 2007–2009 Financial Crisis: An Erosion of Ethics:

A Case Study Edward J. Schoen1

Issues and Concerns

This case study examines five dimensions of the2007–2009 financial crisis in the
United States: (1) the devastating effects of the financial crisis on the U.S.
economy, including unparalleled unemployment, massive declines in gross
domestic product (GDP), and the pro-longed mortgage foreclosure crisis; (2) the
multiple causes of the financial crisis and panic, such as the housing and bond
bubbles, excessive leverage, lax financial regulation ,disgraceful banking practices,
and abysmal rating agency performance; (3) the extraordinary efforts of the
Federal Reserve, the Federal Reserve Bank of New York, and the Department of
the Treasury to stem the financial free fall triggered by the crisis and resuscitate
financial institutions,(4) the ethical implications of the unprecedented actions by
government institutions to rescue financial institutions and drag the country back
from the brink of global financial collapse, and the conduct of the various parties
contributing to the financial crisis, such as the shoddy behaviour of mortgage
brokers, the massive securitization of mortgages into overly complex bonds, the
excessive leverage of financial institutions, the disgraceful work of bond rating
firms, the abysmal risk management systems employed by financial institutions,
and the massive operations of the shadow banking and over-the-counter
derivatives markets; and (5) the major provisions of the Dodd–Frank Wall Street
Reform and Consumer Protection Act signed into law to in response to the
financial crisis and for the purpose of correcting the egregious conduct of major
financial institutions.

Objectives
The objective of the case study is twofold: (1) to enhance students’ understanding
of the 2007–2009 financial crisis in the United States, and (2) to provide a
convenient tool that assists faculty members to address the 2007–2009 financial
crisis in their classes and to enhance the student’s under-standing of ethics. The
case study examines five crucial dimensions of the2007–2009 financial crisis in the
United States: (1) the devastating effects of the financial crisis on the U.S
economy; (2) the multiple causes of the financial crisis and panic; (3) the
extraordinary efforts of government regulatory agencies to stem the financial free
fall triggered by the crisis; (4) the ethical implications of the conduct of the
various parties contributing to and ultimately rescuing the country from the
financial crisis, and (5) the major provisions of the Dodd–Frank Wall Street Reform
and Consumer Protection Act signed into law to in response to the financial crisis.

Area of Consideration
Excessive leverage (heavy borrowing) throughout the financial system and the
economy.

Alternative course of action

Excessive leverage
In order to hide their high leverage, ‘‘several investment banks artificially lowered
leverage ratios by selling assets right before the reporting period and
subsequently buying them back.
Recommendation
Banks should always consider the effects of over borrowing made by especially
those home owners and also prepare contingent actions on what the effect of
overleverage. Regularly control through securing of money to any debtors is one
of the best thing to do to avoid any discrepancies or crisis.