Running Header: THE ETHICAL CRISIS OF 2007-2009
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The Ethical Crisis of 2008-2009
Christopher Cox
Business Ethics
April 21, 2017
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Introduction
In the third quarter of 2008 the largest financial crisis since the “crash of 29” shook
America and many other countries into a deep recession. Between September 2007 to the end of
2009 the unemployment rate climbed to 10% which is the highest in recent years since June 1983
(“The Recession of”, 2012). To grasp a better understanding of the number of individuals
unemployed is the equivalent of over eight and a half million citizens (“U.S. Recovers jobs”,
2014). Jobs weren’t the only thing affected; Income, government response, home values, and
stock values were suffering all the same.
There are many different opinions when determining who should be held accountable for
the financial crisis, but there is one entity that had more influence and enabled more unethical
dealings than the rest. This paper will focus on the belief that a particularly morally corrupt
government sponsored enterprises is to blame for implementing unrealistic quota expectations
which created a chain reaction that led to a devastating outcome. Most importantly this paper
will cover how these government sponsored enterprises had a devastating effect on the private
sector and the general public, why this bubble popped so quickly and how events like this can be
prevented in the future. Some key vocabulary will include: ethics of organizations, Personal
ethics, and moral courage. For the sake of brevity and complications associated with
understanding, in depth, the intricacies of the financial crisis of 2007, This paper will emphasize
three ethical/moral principles that were deliberately and habitually neglected within the
government. Throughout this review the reader will see how the reckless and unethical policies
enforced by the government was the root cause of the financial crisis.
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Government Sponsored Enterprise (GSE)
This section will cover the entities responsible for the economy’s downfall. One must
begin with how the mortgage purchasing agencies Fannie Mae and Freddy Mac are associated
with the government, how underwriting standards were affected by the policies imposed by the
government, and how the government influence directly contributed to the crisis. Understanding
these points are very important when distinguishing who assumes blame for such a complex and
ultimately misunderstood event.
Fannie Mae and Freddie Mac are “government-sponsored enterprises” who purchase
home mortgages which meet requirements demanded by the government. These enterprises were
key figures in the housing market before and leading up to the beginning of the financial crisis.
Originally these two agencies were acting conservatively by only purchasing prime mortgages.
These prime mortgages were traditionally a mortgage to a barrower who had a good FICO credit
score of 660 or greater and a 20% down payment (Peter Wallison Hidden, 2015)
In 1992 things started to change for the two leading mortgage purchasing agencies.
Because Fannie Mae and Freddie Mac are backed and regulated by the government, the
government indirectly influences underwriting standards of the agencies. So in 1992, congress
adopted a new set of rules for how the agencies would conduct their business which were called
“affordable housing goals” (Fannie Mae and Freddie, 2008). The fordable housing goals act
stated that for all mortgages that Fannie and Freddie buy, 30% must be made to people who are
at or below the median income in the places where they live (fhfa.gov, 2011). The unsettling part
arises when the Department of Housing and Urban Development was given the authority to
further adjust these rules. These rules demanded that by 2008 56% of the mortgages they bought
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had to be below the median income. Fannie and Freddie had to meet these standards in order to
stay in business even if it meant purchasing millions of risky mortgages (Peter Wallison Hidden,
2015)
To comply with quota enforced by the government, Fannie and Freddie were forced to
lax underwriting standards which meant lowering requirements for down payments and credit
scores. By 1995, requirements were lowered so much that they were purchasing mortgages with
only a required 3% down payment and in 2000 a 0% down payment (Peter Wallison Hidden,
2015). Countrywide was a major U.S. mortgage lending company that had a past for having
subprime mortgages on their books. When Angelo Mozilo noticed that Fannie and Freddie didn’t
care how risky the mortgage was and only cared about meeting the quota, he pounced at the
opportunity and quickly made Countrywide Fannie and Freddie’s biggest supplier of subprime
