...facts in this case with more current information. Do these new facts reflect any changes in the ethical culture of the financial industry since the 2008 meltdown? 1. Are subprime loans an unethical financial instrument, or are they ethical but misused in a way that created ethical issues? We believed subprime loans are ethical tools that were misused. Subprime loans involve “lending to borrowers, generally people who would not qualify for traditional loans, at a rate higher than the prime rate” (Ferrell et al 385) meaning that it is a financial instrument in which borrowers benefit from accessing capital that otherwise would have been denied to them, and financial institutions benefit from charging a higher interest. What made subprime loans so attractive was the fact that it enabled low-income individuals and minorities (no qualifies for regular loans) to have access to homeownership. In the right hands, in the right time, a subprime loan could signify an important tool for different minorities to improve the quality of their lives by obtaining financing for more than just home mortgages but also school tuition, for example (Iacono). However, as the Countrywide Financial case illustrates, there is wide misuse of this tool by institutions that engage in indiscriminate lending for the sake of short-term profits at the risk of major financial downturn, as in the 2008-2009 financial crisis. (Ferrell et al 388) Moreover, while lending money to low-income and minority families...
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...COUNTRYWIDE FINANCIAL: THE SUBPRIME MELTDOWN I. Problem Statement After buying out Countrywide Financial and resolving the issues against former CFO David Sambol and former CEO Angelo Mozilo, what should be the next steps that Bank of America must take to salvage Countrywide Financial from onslaught of criticisms and lawsuits that already arose and would potentially arise against it? II. Analyzing Case Data In the mid-2000, season where real estate prices were booming and confidence levels were high, even clients who could have qualified for regular loans chose to take out subprime loans to finance their real estates. Just like most businesses, Countrywide did everything to expand their profitability. They gave false assurance to home buyers. So, even consumers with good credit rating get attracted to these mortgages without fully recognizing the possible consequences. The construction industry also used flipping to expand its profit. Speculators also bought existing homes with no intension of keeping them, waiting until the value increases, and selling them at a profit. High demand also caused an increase of the cost of materials. Realtors, on the other hand, were motivated to push sales through because of commissions they could earn, pushing them to take much riskier transactions. Even real estate appraisers began to inflate the value of homes to ensure that loans would go through. Without being foreseen by anyone, US economy began to slow down. People started working...
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...Table of Contents Case Summary 2 Affected Stakeholders 3 Ethical Dilemma 4 Why would a $500,000 salary cap prompt personnel to leave for other banks? 5 Was stripping of Lewis’ chairmanship a significant move on the part of BoA shareholders? 6 How could Thain justify spending $1.2 million on his office when Merrill Lynch was on the verge of bankruptcy? 7 What did Ken Lewis hope to gain by claiming that he was “pressured” into completing the Merrill Lynch deal? 9 Of all decisions made by Ken Lewis in this case study, which one do you think did the most damage to his reputation? And why? 10 What should Lewis have done? 12 Conclusion 13 References 14 Case Summary Bank of America (BoA), founded in 1998 is an American multinational banking and financial services corporation. They were notably a key player in the global financial crisis that struck in 2008. Ken Lewis, a former CEO acquired Countrywide Financial and Merrill Lynch. To his dismay, the acquisitions turned out to be disastrous as the first week of January 2009 enlightened the problems that existed within Countrywide Financial and Merrill Lynch; they were bankrupt with assets in their balance sheet that set a new mark for toxicity in the financial market. This required attention and direct aid from the Federal Government itself. However, following this month BoA fell by 65 percent. Just a month after the first quarter of 2009, Ken Lewis was made CEO and stripped off chairmanship by the shareholders’...
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...Ethical Business Practices Lead to Labor Union Free Organizations UMUC October 30, 2011 The headlines read, “Wal-Mart greenwashing: Workers pay the price”. This articles discusses how Wal-Mart advertises that their Love, Earth jewelry line is made in conditions that favor workers and the environment, when in all actuality the metal comes from mines that are not environmentally friendly, the product is not gold its anatomy is greenwash, and the workers receive insufficient pay, strip searches are conduct upon exiting the building, discouraged from attending night school because it interferes with work, and work in very un-sanitized conditions. The unethical treatments don’t stop there, the supervisors contently looks over the shoulders of the employees to ensure they are constantly working and not stealing any of the materials (Miami NewTimes, 2011). Then again on the internet we read, “Countrywide Financial faces unethical business practices prosecution. The article goes on to talk about how Countrywide is accused of using misleading marketing to sell mortgages packed with hidden fees and risky terms to dominate the US home loans industry. They used unfair and deceptive lending practices to steer borrowers into loans that they could not afford. They did this by putting borrowers in homes they could not afford by exaggerating their income. Since the managers of Countrywide decided to make unethical business decisions over 35% of the mortgage loans approved were in default. Their...
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...allow profitable pursuits without restraint. Subprime mortgages offered an opportunity to tap a new source of profits, namely, the increase in housing prices. Many financial institutions engaged in unscrupulous actions to convert household wealth into corporate profits. Efforts to reign in the industry remain wanting. Keywords: acquisitive society, banking ethics, banking profits, Goldman Sachs, subprime crisis JEL Classification Codes: A13, B25, B26, D63 The bailout of the banks violates the legitimacy of markets, the ethos that profit represents the reward for success, loss the punishment for failure. The outrage over bailouts combined with insulating people from the effects of the crisis has fostered an anti-interventionist reaction and a resurgence of neoliberalism. Insulating people from the effects of the crisis has largely left intact the habits of thought and the basic institutional structure. The continued reign of pecuniary values leaves intact the Goldman Rule: pursue profitable opportunities regardless the effects on others. The Goldman Rule rests on the assumption that increases in profitable opportunities increase the opportunity cost of ethical behavior. Ethical behavior refers to self-imposed actions to avoid taking advantage of others that result in lower profits. The Goldman Rule suggests that financial institutions...
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...Running head: CAPSTONE PAPER CAPSTONE PAPER Theoretical and Practical Change in Strategic Organizational Leadership By: John King BSM 3-200 MGT 499 Capstone: Strategic Organizational Leadership Executive Summary The rationale or objective of this Capstone Paper is not to support or defend a particular type of strategic organizational leadership; but, to explore and analyze the theoretical and practical changes that cause organizational leadership to alter its goals and effectiveness, by way of strategic variables or necessity. The understanding and significance of theoretical and practical change in organizational leadership is fundamental to the nature and trends of business and government goals and their effectiveness. Organizational leadership is a planned social process that a person or persons in charge, lead or organize groups of people to achieve a common objective. This process may be orchestrated on a large or small scale and for profit or power. This strategic process is not normally the vision of a manager initially, but the dream or idea of the true leader. The strategies used by the leader of an organization often establish the culture of the organization (Flamholtz, & Randle, 2008). Theoretical and practical change in organizational leadership appears to be involved heavily with organizational culture or behavior. The history and background of organizational leadership has...
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...Summary. 3 Ethical Dilemma. 3 Affected Stakeholders. 4 ANSWER FOR QUESTION 1. 4 ANSWER FOR QUESTION 2. 5 ANSWER FOR QUESTION 3. 6 ANSWER FOR QUESTION 4. 7 ANSWER FOR QUESTION 5. 8 ANSWER FOR QUESTION 6. 8 CONCLUSION. 9 REFERENCES. 10 BANK OF AMERICA’S MOST TOXIC ASSET (CASE B). INTRODUCTION. Summary. Ken Lewis was a Chief executive officer of Bank of America, he was appointed as American Banker’s "banker of the year "after purchasing Countrywide Financial and Merrill Lynch. The bank acquisition of Merrill Lynch in 2008 made Bank of America the world's largest wealth management Corporation and a major player in the investment banking market. The deals were applauded and made Ken Lewis even more worth being named as American Banker’s “banker of the year” During first week of January 2009 both Countrywide Financial and Merrill Lynch were bankrupt with assets in their balance sheet which set a new standard for toxicity in financial market, resulting in forfeiture for the bank and requiring financial assistance from the Federal Government. Bank of America was forced to welcoming U.S. taxpayers as the company’s largest shareholder. BOA stock was down by 65 percent and almost 90 loss within a year, the shareholders decided to remove Ken Lewis as Chairman and allowing him to remain CEO for a limited time. A $500,000 salary cap had to be introduced by Obama administration for all executives of the banks who were receiving bailout dollars Ethical Dilemma. This...
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...Bank of America’s CEO and Chairman Ken Lewis, in an effort to purchase Merrill Lynch at the cost of $50 billion misled shareholders by not disclosing all the facts pertaining to the merger. CEO and Chairman Ken Lewis could not have known the controversy and ramifications that would follow his deception or neglect. Or, as he stated himself, there was no intent of deception. The ethical issue here is whether or not Ken Lewis intentionally deceived the shareholders of Bank of America in order to acquire Merrill Lynch. Many question the ambitions of CEO Ken Lewis who had already acquired Countrywide Financial after their failure and now he is acquiring Merrill Lynch. It is reported that Lewis’ investment in Countrywide Financial was $2 billion and his takeover of Merrill Lynch was $44 billion. Reports say that over the last five years Mr. Lewis has spent $100 billion on acquisitions. (Bill Taylor) These acquisitions included MBNA, LaSalle Bank, Fleet Boston and U. S. Trust. It appears that Ken Lewis has built himself a nice little empire. The question here is whether Mr. Lewis acted unethical in his acquisition of Merrill Lynch. Did Ken Lewis bite off too much at the expense of others? We would need to look deeper into the circumstances surrounding his acquisition of Merrill Lynch. Merrill Lynch was a failing company and as part of Bank of America’s agreement to save it, the CEO of Merrill Lynch asked for bonuses for himself and other top management persons. At least 700 of Merrill...
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...study standards of conduct, such as philosophy, theology, law, psychology, or sociology” (Resnik, 2011). Considered by many economists to be the worst financial crisis since the Great Depression, the financial crisis of 2007 was primarily due to the collapse of the housing industries subprime mortgage market. Residential mortgage-backed securities are commonly issued bonds that are backed by thousands of residential real estate mortgages. The Goldman Sachs case was comprised of subprime mortgages. Most business organization possess a mission statement, a code of ethics or rules to follow to be able to limit the ethical issues that may arise within the Institution, Goldman Sachs did not have any of these. In exploring ethical behavior in the banking and financial institutions whose sole existent is to increase profits through the sale of consumer loans. In 2005, the banking industry started issuing subprime mortgage loans to consumers regardless of their income qualification. “The collapse in prices precipitated the collapse in banking profits, prompting a call for bailing out the banks. Government bailouts effectively rewarded financial institutions for “bad” behavior” (Watkins, 2011). Bottom line, financial institutions were being rewarded for unethical behavior when they should have been punished. When the financial crisis erupted in 2007, Goldman Sachs gave into pressure from federal regulators to convert themselves into bank holding...
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...Angelo Mozilo, founder and Chairman of Countrywide Financial Corporation, the driving force behind the company’s zeal to become the largest real estate mortgage originator in the United States. The same zeal leads to the company’s collapse and led to an extraordinary collapse of the US housing market. Mozilo and partner, David Loeb, founded Countrywide in 1969 in New York with the strategic intent of creating a nationwide mortgage-lending firm. The company opened a retail branch in California in 1974 and, by 1980, had 40 offices in eight states. In 1981, the pair launched a securities subsidiary, which would, specialized in the sale of mortgage-backed securities (MBSs). By 1985, Countrywide’s annual loan productions topped d $1 billion. This all took place on the backs of a booming U.S. housing market bubble which began in 1994 and ended in 2006. By the time of David Loeb’s death in 2003, the company’s annual mortgage originations reached to more than 2.5 million. The company’s financial services division originated more than 2.2 million loans totaling $408 billion by 2006. By 2007, the company had 661 branches in 48 states. Bank of America purchased the company in July of 2008 in a $4 billion all-stock transaction. How It All Started Because we live in a capitalist society, money is the driving force behind all of our daily living activities. Without money, it would be difficult to purchase much needed necessities such as food and clothes. One of the main necessities...
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...Mini Case Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Michelle DellaTorre, a professional tennis player who has just come to the United States from Chile. DellaTorre is a highly ranked tennis player who would like to start a company to produce and market apparel she designs. She also expects to invest substantial amounts of money through Balik and Kiefer. DellaTorre is very bright, and she would like to understand in general terms what will happen to her money. Your boss has developed the following set of questions you must answer to explain the U.S. financial system to DellaTorre. a. Why is corporate finance important to all managers? Corporate finance enables managers to know what strategies or tools would be best for adding value to the organization. b. Describe the organizational forms a company might have as it evolves from a start-up to a major corporation. List the advantages and disadvantages of each form. The organizational forms a company might have as it evolves are sole proprietorship, partnerships, and corporations. The advantages of a sole proprietorship are that it is easily and inexpensively formed, there are fewer government regulations, and it’s not subject to corporate tax code. The disadvantages are it is difficult to obtain large amounts of capital, it has an unlimited personal liability for the proprietor, and the life of the business...
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...At least Bank of America got its name right. The ultimate Too Big to Fail bank really is America, a hypergluttonous ward of the state whose limitless fraud and criminal conspiracies we'll all be paying for until the end of time. Did you hear about the plot to rig global interest rates? The $137 million fine for bilking needy schools and cities? The ingenious plan to suck multiple fees out of the unemployment checks of jobless workers? Take your eyes off them for 10 seconds and guaranteed, they'll be into some shit again: This bank is like the world's worst-behaved teenager, taking your car and running over kittens and fire hydrants on the way to Vegas for the weekend, maxing out your credit cards in the three days you spend at your aunt's funeral. They're out of control, yet they'll never do time or go out of business, because the government remains creepily committed to their survival, like overindulgent parents who refuse to believe their 40-year-old live-at-home son could possibly be responsible for those dead hookers in the backyard. It's been four years since the government, in the name of preventing a depression, saved this megabank from ruin by pumping $45 billion of taxpayer money into its arm. Since then, the Obama administration has looked the other way as the bank committed an astonishing variety of crimes – some elaborate and brilliant in their conception, some so crude that they'd be beneath your average street thug. Bank of America has systematically ripped off...
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...episode of the fifth season of the television series The Office. One of the female purchasing officer has been sleeping with a vendor in order to get discount for the entire purchasing department, and Outback Steakhouse coupons. When this is discovered, the head of the company turned a blind eye because it is good for the balance sheet (Wikipedia, 2011). Having good ethic provides a clear conscience, and if there was an ethical problem, shared the advantage gained by cheating with the entire team will once again clear the conscience. Ethic in finance is important because it will provide a clear picture of the company. The leader of the company cannot see where the company can go if they do not know where the company is. However, accountant in a non-public company works for the leader and this agents’ fiduciary duty lies only with his or her principal. In this case, if the leaders asked the accountant to keep two set of books in order to make the company look more appealing before a public offering, then the accountant can justify this action as ethical. I included a quote below, where the environment of business promotes questionable behaviors in some firms. Unethical behaviour in business more...
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...firms overlooking ethical behaviors as actions that should be placed at the core. Instead some firms have seen value in disregarding the role of ethics and seeking strategies based upon stakeholder greed for profit and larger market share. This lack of ethics and social responsibility only leads to a great downfall and loss to the community. For example a firm that is no longer doing business because it failed to include the role of ethics in strategic decision-making is Countrywide Financial. The firm simply disregarded the wellbeing of the economic environment and its threshold for creating new loans in order to keep the greed machine working long enough to benefit a few select stakeholders and their agendas (Lecker, 2011). The firm’s founder Angelo Mozilo’s behavior was dubious at best suggesting the firm functioned upon core cornerstone values like accountability and ownership of actions when really leadership was only seeking these actions as pretense to create false social responsibility (Lecker, 2011). Instead leadership was hiding a big scam, a secret that would create one of the worst financial recessions since the Great Depression. In short the role of ethics in this strategy was simply nonexistent. Aguinis and Glavas (2012) see the role of ethics as a guiding force within the business to uphold a sense of responsibility and transparency about business actions. To not have openness means the company has something to hide in their actions. Ethical choices and social...
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...The problem to be investigated in this assignment is the ethics of institutions. Are businesses operating in an ethical or unethical manner? Goldman like many other operations use behaviors that were unethical and grossly unfair to clients. Shaded areas are areas to be defined by the individual interpretation itself. Many say money is the root to all evil and as this case dictates, true. Ethics should always be at the forefront of any organization. Operating a business requires adequate consideration to a number of issues outside the traditional scope of making money, of which ethics is mostly certainly one. As a business grows, so does its significance. Businesses impact lives and the environment in which they strive to exist. Jobs, wealth and inspiration of entrepreneurship is created when businesses are birthed. This is why business ethics are important because they not only affect the business itself but its employees as well; individual names and faces are linked to businesses and how they are ran. There are many benefits to operating a business in an ethical way: long-term success, profitability, good client relationship, corporate growth, competitive edge and trustworthiness. The initial intent of Mr. Goldman was to be trustworthy and build his company with good business ethics but mishaps set in. Discussion Question 1: Go back through the case and make a list of each action or practice that could be called a gray area: 1. Goldman’s initial investment strategy...
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