Question

Ethics Case  

The Subprime Mortgage Market Meltdown: How Did It Happen?

3.  What motivated the investment bankers to get involved in the subprime market? Did they behave appropriately? Why or why not?

4.  Should the borrowers (homeowners) share in the blame? If so, how?

5.  What about the investors in MBSs? What could they have done differently?

Answer 1

(3): The investment bankers were lured by the possibility of making more profits. Investment bankers created assets pooling mortgages together into a security. They made use of CDOs i.e. collateralized debt obligation and the investment bankers would buy mortgages from lenders and securitize them into bonds. These bonds were sold to investors through CDOs.

No, the investment did not behave appropriately and they were guided by one single objective i.e. maximizing their earnings and profits. They completely disregarded the high quantum of risks that buyers if CDOs were being exposed to and misled the buyers with regards to CDO as an investment class.

(4): Yes, borrowers (homeowners) do share the blame. This is because the borrowers took a highly risky position by buying houses that clearly they could not afford. They exposed themselves to an unwanted risky position which could have been easily avoided by them.

(5): Investors in MBSs were also to be blamed. They were hungry for big returns and hence did not properly assess the risk associated with the MBSs and the CDOs.

What they could have done differently? The investors in MBSs could have differently assessed the risks associated with the MBSs. They should have done a more systematic analysis of this investment option and should have asked questions as to why these securities were being sold at very low premiums.