SUMMARY OF FACTS

Many economists believe that the biggest economic crisis of all times is still on its way. This film
opens our eyes to what is really going on globally when it comes to the financial situation.
The story began on September 11, 2001 when the terrorists struck down the World Trade
Center towers. They knew exactly what they were doing by attacking the very symbol of the
global economy. Their timing was also well thought out; the Dotcom bubble had burst and the
United States was already slumping slowly into a recession.
In the spring of 2001 the Federal Reserve began lowering interest rates to save companies on
the brink of bankruptcy and keep unemployment down. This move fostered a bubble that
threatened to explode soon. They knew that that was bound to happen; interest rate cant be
kept low for too long, otherwise people will end up doing things they will later regret.
This financial storm began when congress started pushing the idea of home ownership for all,
even those who werent able to make down payments. To many, it seemed like a smart move:
there had just been a terrorist attack and after all, nothing feels safer than owning your own
home.
Low interest rates and cheap loans encouraged people who already owned their homes to buy
bigger properties. Then the housing prices went up and many were encouraged to take out
second mortgages to fund consumption. Cars, clothes, and vacations were at the top of their
lists.
Two government sponsored enterprises Fannie Mae and Freddie Mac appeared on the
scene and helped create the mortgage system. At the same time they increased their
commitment to minority markets.
Then when the poo hit the ceiling, the governments solution consisted on granting some of the
biggest financial stimulus packages and bailouts ever seen in history.
The governments strategy never really solved the problem. It was like giving alcohol to a drunk:
it doesnt help him get sober; it just sets him up for a bigger hangover. This is what happens

when the government tries to protect investors and consumers from facing the consequences of
their own decisions.
When a few experts predicted the 2008 financial crisis, they were laughed at viciously. Many
stated that the predictions were too gloomy. We all know who was right then. The truth is that
change is still possible, but it needs to be done soon because time is of the essence.

ESSENTIAL ETHICAL ISSUES

Personal Ethics
It has been said, over and over again, that the cause of the crisis was greed, defined as a
selfish and excessive desire for more of something (such as money) than is needed.
The list of trampled virtues also includes temperance and, specifically, the ability to restrain the
desire for success, wealth or social recognition, which thus become obstacles to proper
professional conduct, and cowardice, complicity and lack of strength: for example, some
managers, despite realizing what was happening, evaded some difficult decisions that might
have jeopardized their career or their remuneration. And there were also behaviors of pride,
arrogance and hubris among financiers, but also among economists, regulators and
governments; all convinced that their knowledge and skills were superior, that they had no
reason to submit to the supervision of others, or that they were above the law. In short, they
placed a high value on honor, glory, wealth, fame and everything else that could have been
achieved through professional excellence, but also through lies, and showed that they were
more willing to lie than to restrain their desires or reorient their values (Torres 2009).
And all this led to situations of injustice (Hawtrey and Johnson 2009), specifically commutative
justice (Pieper 1966): withholding information, misleading advertising, multiplication of
unnecessary operations (churning) to generate higher commissions, manipulation of stock
recommendations, etc. Or in omitting the consideration of the common good: for example, moral
hazard problems, when financial institutions take advantage of the limitation of their risks,
thanks to the legal provision of limited liability or the existence of guarantees that limit their
losses (Sinn 2008). Prudence or practical rationality is the main virtue of the banker (Termes
1995), but it is difficult to exercise it in an environment of high growth, low interest rates and
extraordinary opportunities for profit, leading to higher leverage and a reduction in the
perception of risk; all of which constitute the perfect environment for poor management. There
are many manifestations of such recklessness. Complacency, for example, is common in the
boom phase (Lo 2008),7 and herd behavior, which can be rational, can also increase volatility.
This volatility can then spread to other markets, leading to panic, attributable once again to herd
behavior.
Prudence or practical rationality is the main virtue of the banker (Termes 1995), but it is difficult
to exercise it in an environment of high growth, low interest rates and extraordinary
opportunities for profit, leading to higher leverage and a reduction in the perception of risk; all of

which constitute the perfect environment for poor management. There are many manifestations
of such recklessness. Complacency, for example, is common in the boom phase (Lo 2008),7
and herd behavior, which can be rational, can also increase volatility. This volatility can then
spread to other markets, leading to panic, attributable once again to herd behavior.
The ethics of organizations
The crisis we are looking at is often presented as a crisis of leadership or governance in
organizations as varied as commercial and investment banks, hedge funds, monolines, rating
agencies, supervisory bodies, central banks and governments.11 For example, there have been
cases of bad governance and lack of professional competence on the part of directors, senior
managers and analysts in organizations of all kinds. Often, the role of assets analysis and
valuation, and even buying or selling decisions, was entrusted to young professionals with no
experience in finance, who used sophisticated models based on overly simplistic assumptions,
but nobody dared criticize them because nobody had better models.12 Furthermore, their
superiors did not know what their subordinates were doing, they did not understand the models
they were using, and they did not exercise adequate oversight. In other words, there was a lack
of an understanding of the mechanisms of structured products combined with the economic
knowledge to put them in context and the management skills to run the organizations that
marketed them (Jay 2009a).
It is likely that many of the inappropriate behaviors in the recent crisis are related to the
existence of perverse incentives. For example, the attempt to align the interests of managers
and analysts with those of shareholders has led to compensation systems that emphasize shortterm results, which may have led to undesirable behaviors such as excessive risk-taking and
manipulation of financial results or the stock price.17 In any case, the design and
implementation of these remuneration systems was also reckless and a sign of bad
governance, precisely because those undesirable results were not anticipated.
RESOLUTIONS AND COURSES OF ACTION
This crisis vividly demonstrates why there is an ongoing need to develop a strong culture of
ethics in the financial industry. As the markets continue to evolve into a global network, it is vital
that all investment professionals feel ethically responsible for the integrity of the capital markets.
Small lapses of this responsibility by many can bring these markets to severe crisis. Only with a
strong, systematic emphasis on professional conduct on an institution-wide basis can individual
behavior be effectively changed.
Reactionary regulatory action can hinder market efficiency and cannot, by itself, protect
investors from future turmoil. To protect against future market crisis, regulation must be coupled
with a strong culture of ethics adopted by individuals and firms aimed at protecting both the
client and the integrity of the marketplace as a whole. Investment firms and industry groups
have a responsibility to continuously train professionals for, and promote adherence to, strong
ethical codes and professional standards that help maintain the integrity of the capital markets.
The recent crisis demonstrated that the competitive nature of the financial markets that
underlies the new product development process must be balanced by principled conduct rooted

in the ideas of ethical behavior and market integrity. Certainly innovation is not inherently bad,
but the resulting products do impact salespeople and purchasers of these securities. Closer
attention must be paid to proper analysis and disclosure at all levels.
Governments and regulators face stark choices (a) how to modify financial behavior, (b) how to
improve the management of banks and markets, (c) how to wield the blunt, inaccurate toolkit of
regulators and d) how to revive to shut failing institutions. In some areas of regulation, such as
capital regulation, the assumption is made, wrongly, that regulation can be achieved by
formulae based upon historical data and the application of mathematics by intelligent people
with good personal hygiene. I do not deny that regulation will use formulae, data and
mathematics. These may be necessary, but that is not the same as sufficient. Moreover rule
based systems lead to arbitraging and gaming the system. Thus there is no alternative but to
have hands on supervision with careful attention to emerging risks. The supervisor needs a
great deal of courage to resist the calls that will come to move with the times. In fact the industry
has criticized the major tools that were needed in the crisis and had hoped to water them down:
capital, liquidity and leverage to name three.
Sources:
http://www.alba.edu.gr/uploads/speech.pdf
https://cfainstitute.org/ethics/codes/Pages/crisis_and_ethics.aspx