Prime (green) ➯➯ Alt A / ARM (yellow) ➯➯ Subprime (red)
– Excellent credit history – Clean credit history – Blemished credit history
– Verified sufficient income – Lower income – Little to no verification of income
– Well documented papers – Less documentation – Little to no documents
– No risk – High risk – Highest risk
Looking at the lending continuum chart above and the probability of high risk with subprime loans, it is incomprehensible that leadership would decide to target this group to enlarge the company’s coffers. The reason can be directed at several general principles. First is the Goldman Rule to “pursue profitable opportunities regardless the effect on others” (Watkins, p. 363). Second is the culture in the financial world. As Milton Friedman pointed out, the responsibility of business is to increase profits (Friedman, p. 1). Third is the philosophy of “caveat emptor” or let the buyer beware. In other words, it is not the place of the lender to tell or explain the nuances of the loan, rather the borrower is the one responsible to know what can happen if the situation changes in the future. Last is greed, a disease that permeates the halls of financial institutions and produces symptoms such as ultra-competiveness; one-upmanship; lax or lack of ethics behavior and/or social responsibility (Watkins, p.364). That is not to say all leaders are painted with the same brush, however, most did very little to curtail employees’ actions.
Theil, Bagdasarov, Harkrider, Johnson, and Mumford espoused, “Government and public officials including the Securities and Exchange Commission and the United States Senate have questioned leaders over their dubious and, seemingly, misguided decision-making,” and, “wonder how such misconduct could occur even when organizational policies and guidelines exist to safeguard against unethical practices” (Thiel et al, p. 49).
President Obama stated in 2012 the housing bubble contributed to the subprime housing market and asserted the financial leaders, “were plainly irresponsible,” and had exhibited, “servicer misconduct” (Fox News Politics, 2012). It is still not clear the extent of top leadership’s knowledge of the subprime situation but there is no doubt they knew of the tremendous profits being made. Lower level brokers and lenders, the securitizers that bundled the loans, and rating agencies that overvalued the loans are all complicit in the subprime crisis. Even the borrowers were complicit as many lied on applications and “fudged” on their stated income (Gilbert, p.91).
With this many people on the front end of the mortgage process, all looking for a good deal of one kind or another, the opportunity to make unethical and morally unsound decisions was strong–the resulting consequences were dire.