An Unsavory Rehash of the Ethical Failures
Painful as it is, let's take a look at some of the moral and ethical failures of the financial industry, focusing on those that led directly to the current financial crisis.
Ethical Failures in Subprime Lending
Back in the day, people obtained their mortgages from their local banker, whom they likely knew personally. The banker held the mortgage paper on his balance sheet, and hence cared very much whether the paper was good. That was inefficient, of course, so matters began to evolve rapidly. By the twenty-first century the system worked like this:
- Mortgage brokers developed to find borrowers. Because these brokers were paid on quantity (“How many mortgages did you bring me today?”), not quality (“How many good mortgages did you bring me today?”), and because they weren't carrying the paper on their own balance sheets, far too many of the brokers cared not at all whether the borrowers were engaging in thoughtful transactions or were being set up for heartbreak and penury. Once a mortgage was approved, the broker got paid and would never see the borrower again. To say that very large numbers of mortgage brokers behaved abominably is merely to state the obvious.
- Banks approved the mortgages after (maybe) reviewing the applications, but the banks had no intention of holding on to the paper. Instead, they needed to build leverage into their balance sheets, which meant getting this paper off the balance sheet as quickly as possible. (The ...