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Subprime Mortgage Crisi

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Week I: Discussion Question What role did the Accounting profession play in the recent sub prime mortgage crisis? What could they have done differently? In the beginning of this decade, the US interest rates were at record lows, subprime lending accounted for 80% of loans being issued (Senator Dodd: Create, Sustain, Preserve, and Protect the American Dream of Home Ownership, 2007). In order to lore new borrowers, banks more often than not offered adjustable rate mortgages to their clients which provided them with lower payments compared to those offered by traditional mortgages. As subprime lending grew exponentially, investment firms and banks saw an opportunity to take advantage of the boom by securitizing the loans into new investment vehicles called Collateralized Debt Obligations (CDO)(Evans & Jain, 2010). As organizations grew their investments in CDOs, accounting professionals at these institutions played a role in misleading investors about their organization’s risks and financial health. As a way to minimize risk to their organizations, accounting professionals at a number of banks and investment firms used creative accounting maneuvers to move CDOs to Qualified Special Purpose Entities (QSPE). In doing so, they removed the liability of these assets from their organization’s books misleading investors about their organization’s health (Chasan, 2008). This kind of practice was used by several organizations including Citigroup Inc. which settled on July 29, 2010 a lawsuit by the Security and Exchange Commission (SEC) for misleading investors. “The SEC said the company repeatedly made misleading statements in calls with analysts and regulatory filings about the extent of its holdings tied to high-risk mortgages. The bank had said the exposure was $13 billing or less. The SEC said it exceeded $50 billion” (Rosen, 2010, para. 2).

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