Ethical Lessons of the Financial Crisis by Flynn Eileen P.;

Author:Flynn, Eileen P.; [Flynn, Eileen P.]
Language: eng
Format: epub
Publisher: Taylor & Francis Group
Published: 2022-05-29T00:00:00+00:00

Ethical lessons from U.S. history

In the United States there are pertinent lessons that we can learn from our own history. When civil rights legislation was enacted in the 1960s this legislation did not eliminate prejudice but it improved the overall climate and created a better society. Today people of all races participate in business, government and the media; they decide where they want to live and what school or college they want to attend. Skin color is not a relevant consideration in choosing the CEO of a corporation or electing the president of the United States. The United States is better than it used to be because the ethical norm that all persons are created equal and endowed with certain inalienable rights is being upheld in law and in practice.

In the 1980s and early 1990s there was a crisis in the savings and loan industry (S&L) and the resolution of this crisis provides us with another example. The S&L crisis was similar to the financial crisis of 2008 in that it involved banks; the issues were different but the problems, though on a smaller scale, were similar. Savings and loan associations bankrupted themselves by contracting to pay higher rates of interest to depositors than were being collected from borrowers. Congress assisted the S&Ls in undermining their solvency by passing laws that allowed S&Ls to engage in unsound practices in their attempts to increase revenue through growing their lending businesses. Before Congress passed enabling legislation, S&Ls only lent to individuals who were buying homes and the amount of interest they could collect on the loans was limited. After the law was changed, S&Ls could lend to borrowers other than those who were seeking residential mortgages and charge high rates of interest. This change in the law allowed the S&Ls to get into trouble. S&Ls lent large amounts of money to developers of commercial properties, such as shopping centers, at high rates of interest, increasing, for a time, their revenues. These increased revenues allowed S&Ls to pay more to depositors than they traditionally had paid; this caused the depositor base to grow. When many shopping centers defaulted, however, the S&Ls had to deal with large losses, undermining their ability to keep up with payments to depositors. Accounting gimmicks by bank management and, in some cases, outright fraud, caused S&Ls to get into a situation in which they did not have sufficient cash flow to meet depositor demands and pay their operating costs. Between 1980 and 1995 more than 5,000 S&Ls, commercial banks and thrift associations failed. To deal with this crisis the Financial Institutions Reform, Recovery and Enforcement Act was signed into law in 1989. This law changed the ways S&Ls were regulated and outlawed the practices that resulted in bank failures. The Act also created the Resolution Trust Corporation to resolve insolvent S&Ls. The cost to American taxpayers was more that $190 billion. The positive outcome that followed was that the nation moved from economic crisis to recovery. An expensive lesson

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