PBS Frontline: Inside The Meltdown Case Study Example

Abstract

Essential financial strategies are essential in the performance of an organization. In order to ascertain that the ideologies implemented in any corporate practice are worthwhile, any management needs to take into account ethical measures. The financial crisis experienced in the period between 2008 and 2009 is a worthwhile example of the effects of unethical business practices in the corporate field. Through the film Frontline: Inside the Meltdown, Michael Kirk seeks to explain the events contributing to the collapse of major companies such as Lehmann Brothers. In addition to that, some organizations that took a major blow as a result of the incident are discussed. This paper seeks to explain the impact of unethical corporate practice in the sustainability of the market sector.
Ethical corporate practice is essential in the sustainability of the enterprise environment. In fact, lack thereof jeopardizes the performance of the market sector and can lead to accumulation of massive losses if improperly handled. The film, Frontline: Inside the Meltdown, seeks to establish the impact of unethical corporate practice on the global economy. Precisely, detailed stories of the Lehman Brothers and Bear Sterns, the action of AIG propping out of their initial financial commitment leading to a $700 billion bailout. Additionally, the film evaluates some of Henry Paulson’s flaws, the Treasury Secretary, and Ben Bernanke, the Federal Reserve chairman in dealing with the issue. For a fact, the economic crisis experienced in the first quarter of the twenty first century could have been avoided if proper measures based on ethics were applied. This paper evaluates the ethical issues presented in the film with regard to the housing bubble and seeks to determine a rational alternative to these issues.
Primarily, Bear Sterns ran out of business because it took part in multiple derivative transactions that encompassed subprime investments. When other banks and financial institutions realized the extent of “toxic waste” caused by these investments, they stopped loaning the firm. Lack of access to this loans lead to illiquidity of the organization. As a result, it had to sell some of its assets to make up for its liabilities. Soon enough, its liabilities surpassed its assets making it solvent. Based on this argument, it is worth appreciating that Bear Sterns acted unethically and out of its self-interests at the expense of the consumer. In fact, pooling mortgages and using it to back securities as collateralized debt obligations is an unworthy financial risk and strategy. In simple terms the bank was too generous in offering loans as mortgages that it did not anticipate the vulnerability of this strategy. Consequently, loaning agencies had flawed strategies that led them into acting unethically with regard to the welfare of the consumers.
Credit default swaps give a provision for the transfer of credit risks from one party to another. With this in mind, it is worth appreciating their impact in the development of the recession. Primarily, they magnified the crisis in the sense that most of the major parties involved bought swaps to secure their debts. In an event of collapse, the number of parties involved is heightened. As a result, the severity of the recession was more collateral. In the imminent collapse of Bear Stearns, the Federal Reserve Bank availed a $30 billion loan to help in buying out the company. In simple terms, the Treasury Department ensured that the organization did not completely fail. However, this action raises concerns on the reasons why the Lehmann Brothers was not rescued as the latter. It is worth acknowledging the fact that the problem with this institution was based on insolvency as opposed to Bear Stearns and AIG’s liquidity problems. The company would most likely fail even if the necessary finances were issued. As result, the risks associated with its resurrection were more than the benefits of its operation.
In the film, it is explained that major banks issued mortgages to consumers hoping that home values would heighten and they would profit from the same (Frontline: Inside the Meltdown, 2009). It was rather unreasonable for the banks to issues these derivatives in spite of the knowledge on the impacts of their actions. Aside from that, insurance companies like AIG traded credit default swaps and increased the vulnerability of the financial strategies employed. In the long run, innocent investors who did not take part in these transactions were affected due to the incompetence and improper speculations of some finance handlers. Precisely, the central bank was compelled to offer capital injections so as to sustain the economy and to minimize the price inflations in the housing industry.
The primary ethical issue from this case include the incompetence of the banks in offering loans in terms of mortgages. This is largely attributed to the fact that these initiatives were not intentioned to benefit the lives of the consumers but to profit the organization. Aside from that, the government was compelled to use tax payers’ money to bail out organizations such as AIG from imminent collapse. Arguably, these issues would have been avoidable if proper investment channels were followed. Bear Stearns could have issued rational mortgages that that could be handled effectively. This would have averted the need for collateralized debt obligations (CDOs) (The Economist, 2013). Additionally, the shadow banking system utilized during this period was a cause of the financial crisis. It is essential for corporate establishments to embrace the fact that long term investment are more essential as opposed to short term profits.
These resolutions avert not only the possibility of preventing the collapse of the companies but also the non-existence of the recession experienced. As a result, these initiatives are constructive and are based on the best interests of the global economy and the average consumer. It is irrational to compromise the sustainability of average consumers due to personal gains. The initiates employed by Bear Stearns, Lehmann Brothers, AIG and other financial institutions that contributed to the development of the housing bubble were unethical and selfishly selected. It is imperative to eliminate possible risks emanating from unethical corporate practice through acceptable business practices.

References

The Economist, (2013). Crash course. The Economist. Retrieved 4 January 2016, from http://www.economist.com/news/schoolsbrief/21584534-effects-financial-crisis-are-still-being-felt-five-years-article
Frontline: Inside the Meltdown. (2009). Documentary film.