Ethics and Economics - Assignment Example

? Ethics and Economics Introduction The global financial crisis that took place due to the fall of the Lehman Brothers in 2007-08 was one of the biggest economic problems that the world had witnessed since the time of the Great Depression of the 1930s. The incident jerked the strong financial base of the world. Though there were several reasons for the occurrence of the incident the root cause would be the escalating greed among the people who are in power. The top executives of the investments banks and other financial institutions had repeatedly promised that the companies were stable financially (Fox, 2009). The main problems that the United States faced was the decline in the standard of the financial health, liquidity crunch and also the increasing amount of leverage in forms of home loan mortgage, the collateralized form of debt obligations, the freeze in the credit markets as well as the credit default swaps. On the 15th September 2009, Lehman Brothers reported their situation of bankruptcy to the US regulatory and compliance officials. The consequences of this were the immediate collapse of the investor confidence in the stock markets and the collapse of the securities market. This had its effect on the investors of the entire world and thus the financial condition of the entire world worsened. Background of the Event The collapse of the Lehman Brothers started with the repeal of the Glass-Steagall Act in the legislature in Washington D.C. The legislation arrested the unhealthy rivalry among the investment banker and the commercial banks of the United States. The act also enabled each of the sectors of the industry to focus on their activities (Sloan and Boyd, 2008). When the Act was implemented in the US economy, the Lehman Brothers became leading player in the field of housing market. The US housing market bubble followed this incident between the years 2006 and 2008 and the company earned a lot of profit from the housing mortgage business. The stock prices of the company also showed an upward trend and had a record market capitalization figure. However, the burst of the housing market bubble was waiting. March 2007 witnessed a sudden decline in the stock markets and the defaults on the mortgage lending rose exceptionally high. A large number of hedge funds experienced loss due to the event. The company took various steps relating to investments in mortgage backed assets which were not conducive to the company as well as the investors. It did not bring into public notice the wrong steps that it took and the bleak circumstances it was heading towards. The calculatingly company made manipulation in its financial statements made false claims to the public. The accounting software that the company had been using could misrepresent the actual data and manipulate the procedure of accounting and it took place in legal terms and so it did not face any compliance problem. This continued till September 2008 when the company announced its financial distress because internally the fundamentals of the company had been destroyed completely. These series of incidents led to the Financial Crisis that the entire world witnessed. Ethical Issues behind the Collapse of the Lehman Brothers The collapse of the Lehman Brothers occurred due to a plethora of ethical issues on part of the top executives of the company. From the video it is clear that there were unethical moves on part of the executives who had led to the incident (Romereports, 2009). Michel Camdessus, the former MD of the IMF, claims that extreme greed of the top executives of the company for money has led to such an unfortunate incident. It was the result of the wrong steps that a number of people took. However, there are mainly three aspects to it. First of all, the CEO of Lehman Brothers, Richard Fuld, had repeatedly lied about the activities of the company. He believed in the business model in which aggressive leverage of the securities had to be undertaken which exposed the business to a lot of risks. The CEO should have adopted an alternative model of business on the forecasting of the event. Thus the company entered into extremely risky ventures till the last instance. Along with this the CEO continuously hid the fact about what he was heading towards. If he had been ethically sound he would have communicated the entire thing to the investors which in turn would be appreciated by the investors as an honest step. Unfortunately he did not do so in order to save his own image and to retain his wealth. Thus admitting the present situation and the truth would have been an ethical action on his part. An unethical step was also taken by the CFO Erin Callan when he approved of a settlement that was detrimental to the finances of the company and its investors. He had wrongly represented the financial condition of the company. The introduction of Repo 105 was also a wrong step in order to misguide the investors of Lehman Brothers. It was chiefly done to create a false image by eliminating the essential assets from the balance sheet of the company. Every company should engage their best possible efforts to produce the correct financial records. This action was also morally incorrect for the company (Henning, 2013). The consultancy firm Ernst and Young was equally responsible for the happenings of the incidents. Since Lehman Brothers was a very well known company in is field and had records of proper compliance, the auditing firm relied on the works of the accountants of Lehman Brothers and exhibited negligence in their auditing exercise (Koller, 2012). This was the reason why the flaws that remained in the Balance Sheets of the companies were not detected at the right time. This is an example of lack of responsibility of a corporate professional. Certain professionals in the Ernst and Young were aware of the wrong doings but they did not inform it to the concerned authority. Hence this group of people also led to the massacre. These three incidents concerned around the ethics of the professionals who were involved in it. Lessons from the Ethical issues of the Lehman Brothers The incident of Lehman Brothers has taught the world a very important lesson. Human beings should have a control of greed. Extreme greed causes disequilibrium in the entire financial system and hampers the well being of the common people. It was observed that 10% of the people have 90% of the wealth of the United States. Thus it is an instance of the concentration of the wealth in the society and a case of inequity in the allocation of resources. If the distribution of wealth had been done in a proper manner, the world would not have been curse with poverty. Thus unethical practices in everyday businesses lead to the concentration of wealth in the hands of a few. This has to be eradicated with the proper implementation of the compliance norms and monitoring of the regulatory boards of the United States. The business managers should also make sure that profit maximization is not their sole motive for running a business. The managers should ensure the welfare of the society. The common people should invest with wisdom in the stock markets (Fried, 2012). Any kind of speculative motive for self interest would hamper the balance and would make a lot of people bankrupt. The US Government has also taken necessary steps like passing of the Dodd-Frank Act in the post crisis to address the compliance issues and to make the regulations of the companies more stringent. The regulatory bodies also looked into the matter regarding the trade of speculative instruments in the securities market. References Fox, J. (2009). Three Lessons of the Lehman Brothers Collapse. Retrieved from http://content.time.com/time/business/article/0,8599,1923197,00.htm. Fried, J. (2012). Who Really Drove the Economy into the Ditch? New York, NY: Algora Publishing. Henning, P. J. (2013). Since Lehman’s Collapse, Companies More Forthcoming on Compliance. The New York Times. Retrieved from http://dealbook.nytimes.com/2013/09/16/since-lehmans-collapse-companies-more-forthcoming-on-compliance/ Koller, C. A. (2012). White Collar Crime in Housing: Mortgage Fraud in the United States. El Paso, TX: LFB Scholarly. Sloan, A. & Boyd, R. (2008). How Lehman lost its way. CNN Money. Retrieved from http://money.cnn.com/2008/07/02/news/companies/lehman_sloan_boyd.fortune/index2.htm Romereports. (2009). Ethics and The Global Financial Crisis. 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