Too Big To fail, Too Big To Jail

Too Big To Fail, Too Big To Jail
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Introduction
The year 2008 remained edged in the history of the world. It is the year that the global economic crisis hit the world hard. It almost took the entire world back to the days of The Great Depression. During The Great Depression, giant companies were forced either to close shop or reduce significantly the number of their employees. There were massive layoffs and the profits of most companies dipped. The economic crisis of the year 2008 was no different only that it affected the entire world. As the world was grappling with the economic turmoil, America was having a lot on her plate. She was also dealing with a financial crisis in the banking sector. This was a crisis too serious that it almost brought the entire sector on its knees. This discussion takes an in-depth look at what may have caused the financial crisis in the banking sector in America. Among issues of consideration are some of laws, rules and regulations that were flouted. In addition, the discussion shall also look at the moral and ethical issues arising from the conduct of the banks.
Background Information
In the year 2008, a financial crisis was experienced in the banking sector, which saw giant companies such as Lehman Brothers and AIG collapse. It is however believed that what happened in the year 2008 was a culmination of something that began in the 2006 carrying out to 2007. The housing sector in America has been faulted for what seemed like the second wave of The Great Depression. From early 90s the cost of housing began to rise drastically. This was attributed to a number of factors including speculation, lending generously and interest rates that were very low. The bubble that characterized the housing sector would finally be burst in the year 2006, and the ripple effect would be felt in all other sectors. The banking sector, however, was most affected because it was sole financier of the housing sector in the entire America. There was an entire web of interdependence that had been developed. The aim of the complex interdependent system was mainly put in place as a measure to reduce the high risks that were involved. This interdependence and interlink age of organizations is what would eventually lead to a spread of the crisis to the entire financial sector and the economy as well.
Causes of the Crisis
Perhaps before focusing on the laws that were broken in banking crisis, it may be prudent to establish the root cause of the crisis. As aforementioned, the housing sector is believed to have played a significant and contributory role to the crisis. The sector is believed to have created a bubble by raising the cost of housing drastically (Koslowski, 2011). This was contributed by the interest rates that were extremely low. As a result, majority of citizens in America found it attractive to take up mortgages as they seemed affordable. The Federal Reserve played a role as it allowed for more credit in order to sustain the very low rates of interests.
Subprime mortgages had also become common, another factor that contributed to the creation of the bubble in the housing industry. Subprime mortgages, therefore, became very popular due to their affordability. Due to the affordability, many customers came on board. It was interesting to note that even those mortgages that would in ordinary circumstances be considered highly risky were also given consideration. They were not only considered but were also given their loans at a reduced price than would ordinarily be the case previously (Lewis, 2011). It is important to note that subprime mortgages are considered as high risk. As a result, there are various parameters that are always put in place to ensure that the risks are properly covered. During this period, majority of these parameters were ignored and this saw an increase of the lending rate from 7% in the previous year to more than 20%. Unknown to many, this was time bomb that was awaiting explosion.
Speculation especially among buyers in the housing sector is also believed to have contributed significantly to the creation of the bubble (Koslowski, 2011). More than half of the buyers in the market were driven by speculation. The decisions they made in relation to purchases of houses were not informed by real and hard facts. Most of them, therefore, ended up biting more than they could swallow.
What then followed towards the end of 2007 and spilling to 2008 was that the bubble that had been created eventually burst. To begin with, there was a stagnation and in some case a decline in the total wages earned by employees in the American workforce. The implication of this was that with the rise in the cost of housing, majority of Americans could not afford. The other aspect was that due to the fact mortgages were affordable previously; there was an influx in the housing sector. The rate of demand fell below the supply leading to a crisis. These and several others factors led to sharp decline in the cost of housing. The direct implication went to all the people who had mortgages. They could no longer service the loans that they had taken up with financial institutions. The interests rates of the mortgages were also revised upwards making it even more difficult for mortgage holders to repay. There was massive default to pay the mortgages. What would then follow is collapse of major lending institutions. This is especially those institutions that had offered subprime mortgages. Majority of people who had taken up these types of mortgages could not keep up with the drastic changes. They simply defaulted. This led to the collapse of major lending institutions.
Laws Broken
An analysis of the 2008 financial crisis reveals that majority of institutions flouted rules and regulations. There was negligence and malpractice on the part of the managers and directors of the financial institutions. Negligence is perhaps one of the issues that come out very clearly. Banks and other lending institutions were reckless and negligent in the manner in which they lend money. For instance, the subprime mortgage which is known to have high risks. Yet, lending institutions ignored the strict and stringent parameters that have been put in place to cushion the industry. By flouting the parameters, they attracted a high number of borrowers. This increased the risk of lending which would later come to haunt them. The increase in the number of borrowers was mainly formed by the low rates of lending which made the mortgages highly affordable. Speculation among the buyers played a contributory role. Yet, the negligence and reckless that was exercised by lending institutions forms the bedrock of the entire crisis.
From the various reports that have been tabled since the crisis was contained, a lot of people point their fingers in the direction of the industry regulators. They argue that there was a huge failure on the part of both the big bosses in the housing and financial sectors to put proper measures in place. The key players in the industry, driven by their quest to make huge amounts of profits ignored the set rules and regulations.
Too Big to Jail
It has been noted with serious concern that despite serious implications caused by the crisis, not much has been done to bring those culpable to book. It was expected that after the report of the cause of the crisis was tabled, heads would roll. Unfortunately, the same heads that were responsible have remained intact, holding their high and might [positions. It is not clear why the Federal Reserve and the government in general has not taken step to institute criminal proceedings against such individuals. The crisis that almost halted the economy of America was masterminded by the negligence and recklessness of a number of people. Why have they never been apprehended? That remains the big question even as America’s economy recovers albeit slowly back to normalcy.
Dick Fuld is one of the people who is believed to have a serious bearing as far as the financial crisis in America is concerned. He was the Chief Executive Officer of Lehman Brothers up to the time the firm collapsed. Lehman Brothers was one of the lending institutions that was largely involved in offering subprime mortgages. One of the biggest mistakes that Lehman Brothers under the watch of Dick Fuld made was that they ignored all the rules of giving subprime mortgages (Lewis, 2011). The company would at some point come up with their own subprime mortgages which did not ...