The subprime mortgage crisis in 2008 was the worst worldwide financial crisis since the Great Depression of the 1930s. This financial crisis was particularly severe in the U.S. and Europe.
As with any crisis the poor and displaced suffer the most. One would think understanding the economics of subprime mortgages would be basic.
If mortgages can be obtained at low rates never before available more people would take out mortgages, the additional demand would result in a general increase in housing prices, the rising house values would encourage others to invest with subprime mortgages.
This artificial stimulus would result in house values increasing exponentially.
Many companies had some responsibility for the crisis, from the large US investment banking companies like Goldman Sachs and JPMorgan Chase, who I believe initiated the subprime mortgage product. Mortgage companies who committed predatory lending and banks for not maintaining appropriate secure lending ratios.
Credit rating agencies like Moody’s and Standard & Poor’s who knowingly provided inaccurate credit ratings, and credit insurance companies who buy and sell packaged financial assets to spread and share the risk. I believe all took advantage of the subprime mortgage market to increase their profits without consideration of appropriate moral responsibility.
In addition, government regulatory agencies were involved for not assuring appropriately strict regulations and, in the U.S., Freddie Mac and Fannie Mae, U.S. government sponsored enterprises, that buy and sell mortgages and are charged by the government with promoting affordable housing.
I believe the combined lack of moral responsibility by the companies involved is a crime against humanity. I am only aware of one middle level manager who was convicted of a crime. In the long run during this time, it was the American public who paid for the crimes by their own financial losses and their taxes when the U.S. government rescued the companies that went bankrupt.
A stark example of the lack of moral responsibility is illustrated by a quote published in the French Magazine “Paris Match” credited to Lloyd Blankfein, the CEO of Goldman Sachs during the subprime crisis. The quote is” “We take money from the poor; they don’t have much but there are more of them.” CEOs are responsible for the morality of the company employees. In some of the company’s mid-level investment dealers received bonuses for exceeding the sales targets. The subprime mortgage crisis may not have been obvious when it was first initiated but was soon unmistakable as subprime mortgages increased.
After the subprime mortgage crisis, the G20 agreed to establish reforms for the global financial system and set up the Financial Stability Board to establish the suggested reforms. Mark Carney in his book “Value(s)” provides the reforms established by the UK based on the FSB.
The basics of the reforms are:
• Restoration of tighter liquidity standards
• Financial companies developing codes of ethics or business principles that reflect both the companies long term interests and the interests of society
• Changed bonus compensation rules for senior and middle managers where a significant portion of the compensation can be deferred for up to seven years and possibly forfeited or clawed back because of misconduct, errors in risk management or failure of longer-term performance
• Reinforcing senior management responsibility for establishing company culture and strategy
• Reinforcing senior management responsibility for training and performance of employees
• Requiring financial companies to provide details on breaches of conduct
• Financial companies need to openly share information on these reforms to increase public confidence
I believe, these reforms will prevent or significantly reduce similar marketplace financial crisis. Financial stress from outside forces such as pandemics and climate change could be reduced.
Ideally all G20 countries should adopt and implement these reforms. Some countries have already. Unfortunately, the US and Canada are not among them.
Bill Stollery is a retired construction manager residing in Penticton. Aspiring author – “How WE Can Save the World”