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May 18, 2017 By Richard Bowen

The Ethics Merry Go Round

The McCuistion program, which airs in Dallas/Fort Worth on PBS station KERA, recently re-aired its program, Ethics and Transparency as Antidotes to Financial Fraud. Host Dennis McCuistion asked the guests what ethics and the lack of transparency may have done to contribute to the 2008 financial crisis?

One of his guests, Marianne Jennings, J.D.: Professor Emeritus Arizona State University Ethical and Legal Studies, author of The Seven Signs of Ethical Collapse; commended as a top 100 thought leader on ethics and one of the most influential people in ethics by Ethics Magazine, responded, ”I’m getting tired of doing this because it’s the same story over and over again. What happens is there are regulations and people find little loopholes.”

I was hooked- such a true statement. There is no question that the lack of ethics and transparency greatly contributed to our financial meltdown in 2008 and we aren’t learning anything new as the egregious lack of ethics still continues in the financial industry. Ms. Jennings commented that everything that is now regulated was at one time an ethics issue- and used a graph to firmly illustrate her point regarding social, regulatory and litigation cycles.

According to Ms. Jennings, people look for loopholes to get around rules and regulations, which while they maybe legal are not necessarily ethical. If you act fairly ethically and stay within the “wriggle room” parameters you’re fine. Step outside that and you enter the Awareness stage, and perhaps a major newspaper such as the Wall Street Journal catches it and reports on it. In the Activism stage, the pitchfork stage,  USA Today, reports on it, people are outraged, storm the castle and demand action be taken. In turn this leads to the Regulation stage and government sets regulations and more rules, with new loopholes, and the cycle starts all over again.

According to Ms. Jennings, as long as ethical issues are made within wriggle room parameters, proper disclosures made and transparency followed, all is fairly well. As she states, not all ethical issues are the same, there are layers of influence. If we treat all ethical issues equally, then one may erroneously think fixing the rogue players who exhibited unethical behavior will solve the problem.

However an individual may make an unethical decision because he or she was influenced by an organization’s culture, its expectations and what is rewarded. Ethical decisions are also driven by peer pressure within the industry which forces those organizations who want to continue to stay in business to go along to get along. What is really not acceptable then becomes an industry standard.

In the financial services industry this played a major role.  For example, the industry started widely accepting a borrower’s word as to his or her income and employment (a.k.a. “stated” or “no doc” loans) so these products became an integral part of doing business in the financial services industry. Those organizations that had misgivings but wanted to stay in business thus conformed to the new norm and embraced the new loan products.

After a while society goes along with the new norm, after all everyone else is doing it- why can’t we? Speeding, cheating on exams and taxes, the teenager’s “all my friend’s Moms let them do it” whine!!!!

Richard Ebeling, PhD: Distinguished Professor of Ethics and Free Enterprise Leadership at the Citadel, former President of the Foundation for Economic Education and V. P. Future of Freedom Foundation, the program’s second guest, says the financial industry has always been heavily regulated. When the Fed loosened its policies to keep interest rates low, there was no longer transparency and market forces were then not allowed to dictate interest rates and the Fed’s artificially low interest rates fueled the 2008 bubble.

Fannie Mae and Freddie Mac compounded the problem as they responded to Congressional pressure to loosen credit standards. By ensuring banks they could relax their underwriting standards and Fannie and Freddie would still buy the loans, market dictated risk parameters no longer applied and the banks were off to the races.

Dr. Ebeling believes it was our government agencies, like Fannie and Freddie, that helped undermine the financial market and threw sound ethical decisions out the window. His explanation fits Ms. Jennings layers of ethical issues. Eventually society starts accepting what is going on as everyone else is doing it too.

My soap box all over again. Ethics makes for good business. Yet even though it is talked about at length, codes of conduct are written, classes are taught, accountability-or-else mandates are made, there is still in the financial industry and in other business arenas as well a glaring lack of ethics and egregious lapses of conduct.

If we don’t solve the underlying problems, then ethics don’t matter because there is a payoff, with no consequences, for breaking them. Solutions become almost impossible. I’m with Ms. Jennings- ”I’m getting tired of doing this because it’s the same story over and over again.”

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Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.

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Comments

  1. Billy_Bob_Joe_Smith says

    May 18, 2017 at 8:40 pm

    ” For example, the industry started widely accepting a borrower’s word as to his or her income and employment (a.k.a. “stated” or “no doc” loans) so these products became an integral part of doing business in the financial services industry.

    I call BS!!!

    Under the Freddie Mac underwriting guidelines a two years proof of tax returns was and always was a first requirement prior to taking out a loan. Now how can a mortgage broker with IRS proven information screw up the given figures? No such grant to a borrowers word has ever been allowed, that’s total hearsay.

    Under our laws, no deceptive product or service would have ever be allowed to go on so long unnoticed; however it did.

    FBI mortgage fraud epidemic
    http://www.cnn.com/2004/LAW/09/17/mortgage.fraud/

    The overall scam was to trick borrowers into high commission false affordable loans and then leave the investors holding the bag when they foreclosed. Please rewrite this article with facts instead of spraying lavender over shit.

    • Richard Bowen says

      May 19, 2017 at 12:11 pm

      It is incontrovertible that the stated loans, aka “liar’s loans,” and no-doc loans became pandemic in the industry, with studies showing up to 90% of them were fraudulent and the cause of much of the catastrophic losses. But there were a few agencies like Freddie/FHA/VA that did not allow them.

      And there certainly was huge pressure in the industry to offer the products. I noted this in my sworn testimony quoted in the FCIC Financial Crisis Inquiry Report … “A decision was made [by Citi] that we are going to have to start buying the stated product if we want to stay in business. So we joined the other lemmings headed for the cliff.”

      I will not be rewriting the article.

      • Billy_Bob_Joe_Smith says

        May 19, 2017 at 9:52 pm

        My
        apologies, so well written I convinced myself, in anger, this article was
        written by Marianne Jennings herself.
        Overall, no inquiring borrower would have been able to determine
        if the loan was Freddie/FHA/VA , or a private loan.

        Self employed from my accountants proven taxes, my mortgage broker
        tricked me by stating the Gross income in which he doubled my income for
        approval. The lenders at the time also instructed the Title company that it
        wasn’t necessary to included the borrowers loan application at closing, so the
        borrower would end having no clue to discover what had taken place.

        My mortgage broker five years ago took pure pleasure in calling me
        a loser out in public for doing the right thing. My district attorney and
        the Department of Real-estate ( the do nothing agencies) during my discoveries
        in 2009 wanted nothing more than to argue my statues being expired.
        However, one of these agencies must of notified him with some worthless letter
        giving him the pure pleasure to call me a loser. To this day my mortgage
        broker continues his wealth of success accumulating rental properties while I’m
        left a life a construction life living in rentals.

        Please someone try on my shoes for a change. A $64k down payment plus his huge
        commission, $17k in material upgrades, and two years worth of nights and
        weekends remodeling while all was prearranged to become a lost.

        Thank you for speaking up at the FCIFC, unfortunately in my own
        experience it was another do nothing agency. However thank again for your
        efforts.

        • Richard Bowen says

          May 20, 2017 at 7:49 am

          Apology accepted.

          I know Marianne Jennings, have been on programs with her and was in the audience at the McCuistion taping. I have the highest regard for her.

          One of the reasons the stated loans became so popular in the industry is the lender or broker, working with or without the borrower, could basically state whatever income was needed to qualify for the loan (hence the term “liar’s loans”). That is why the incidence of fraud was so high.

          In fact from your description of your loan circumstances it appears you were approved as a stated loan.

          I get many calls and email from borrowers with tragic stories similar to yours, and that is why I continue my efforts to hold accountable those who knowingly originated and sold the fraudulent mortgages and thus caused the financial crisis.

  2. Swami_Binkinanda says

    May 28, 2017 at 2:16 pm

    The big poison pill to this article is the failure to address the points brought up in Barry RItholtz’ The Big Lie series. How can one make a call for ethics if the facts aren’t even addressed, nor even rightly characterized, as a result of intentional or unintentional ideological bias?

    http://ritholtz.com/wp-content/uploads/2011/11/big-lie.pdf

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Playing for High Stakes: The Principles and Practice of Ethical Leadership

Dark Citi: The Story of a Whistleblower

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