Muhammad Osama

I17-0890
BBA-B
Business Ethics
ASSIGNMENT No 4
27 May 2021
Sir Danyal Hassan
What were the causes of the 2008 financial Crisis?
In the year 2008, there was a huge financial crisis in the United States, which was also called the
global financial crisis. The magnitude of these financial crises was so high that they were felt
across the state too. This was all caused by the unethical practices by the financial institutions
including banks, audit companies. One of the main reasons was the banks as they were using
unconventional ways to increase their sales and profit. The first step was the permission to use
deposits to invest in derivatives, but it was also prohibited to invest in risky investments. After a
few years, there was federal legislation that overruled state law and allowed banks to engage in
some form of gambling.
The financial industry was provided with relief by the regulatory authorities which encouraged
them to involve in more risker investment on the deposits by people. They were involved in
hedge funds that were backed by mortgages and thus creating a big loop of loans that were deep
down backed by only one mortgage. This created a bubble that was further backed by another
mortgage and so on. The investor who was buying the hedge funds was also insured by an
insurance company to make his investment risk-free and the insurance company was allotting
insurance based on the rating which was given by the audit firms to the bonds. The American
and European economists who were blinded by the greed for excessive money were the most
responsible people behind the crisis.
As the derivatives were backed by both real estate investors and insurance companies it was
known as very profitable so there was a huge demand for these derivatives and to meet that
demand banks required more and more mortgages and thus the broker offered more and more
home loans to almost every person available to meet the mortgages demand. Then subprime
mortgages came in which were also known as interest-only loans. People use these as an
investment to build home and later sell them in profit, but the people who were taking loan did
not pay attention that after 3 years interest rate changes and as it happens people start getting
bankrupt as they cannot meet their dues and hence the asset bubble which was created by the
banks burst and cause the financial crisis.
As mortgage brokers’ compensation was higher for originating subprime loans than conventional
loans, they frequently pushed borrowers into more costly and risky mortgages and failed to
disclose either their compensation differential to the borrowers or the differences in risk posed by
the subprime loans. it shows that brokers generated subprime loans to gain huge compensation. It
all shows their greed and personal interests. Although some economists were aware of such
malpractices and were talking about the potential of a financial crisis based on the facts this lack
of interest was involved.
Also due to lack of knowledge by liable consumers in financial sophistication, they were forced
to believe in rising housing prices, which would permit them to refinance all their subprime
mortgages. Lenders who encouraged consumers to commit to subprime loans without fully
disclosing the risks involved and properly assessing whether they could successfully repay the
loans acted unethically. As result mortgage brokers, received higher compensation for initiating
the riskier loans, acted dishonestly in the absence of awareness for the repayment of the loans.
Mortgage lenders earned higher interest on subprime loans and higher compensation upon selling
the mortgage loan to banks securing the mortgage loans, acted deceptively in the absence of lack
of awareness from consumer shows that it was an unethical act.