...Citigroup and Subprime Lending Unit 7 Case Study Pg 714 -716 1. Are there moral concerns associated with subprime lending? Are those moral concerns based on utilitarianism, rights, or justice considerations? Before we discuss the first question let’s get a working description of what subprime leaning is. A subprime lender is financial entity that has an inclination to lend to consumers that are not qualified for traditional loans due to their poor credit status and history of repayment difficulties. Lending to subprime candidates helped lead to secondary mortgage market issue sin 2008 (“Subprime lender,” 2011). A subprime loan is a loan with elevated fees and interest, given to someone with a lower credit score (“Subprime loan,” 2011). A major profit source for CitiFinancial and the Associates was subprime lending, this is lending to people who did not meet the customary credit requirements of banks. In the 90’s this lending had provided access to credit to many people who would not have qualified for prime loans because of their credit history. In one study the researchers found that 35 percent of the subprime borrowers were over 55 years and African Americans were twice as likely to borrow in the subprime market as in the prime market (Baron, 2010). There were a few forms of subprime lending that CitiFinancial and the Associates dealt with. One of those forms was home equity loans marketed to borrowers to consolidate their bills. Another aspect of subprime...
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...1. Yes there are moral concerns with subprime leading; they are loans lenders provide to those who have been disqualified from borrowing with prime loan companies (Thibodeaux, n.d.). There is a need for them but care must be taken not to take advantage of those individuals that get them. The moral concerns are the fact that predatory lenders seem to target those groups that are vulnerable and in need of housing and money to make ends meet. Let me make this perfectly clear that there is a place for subprime loans, they give the person that had some issues earlier on in their life to be able to acquire money for bills and buy a home for their family however, using immoral acts as forcing insurance that they may not want and charging very high interest rates are not call for. The moral concerns are based on utilitarian, which chooses the action that yields the greatest good (Baron, 2010). Moral good should be judged on consequences (is harm done by forcing single premium insurance and very high interest) the consequences are evaluated by human well-being (is customer better off before or after the loan) evaluation of individual preference (did the consumer have a choice) the action was aggregate and yielded good (was the customer gaining more from the loan or in the end losing more) the morally justified maximizes aggregate well-being (giving the customer a choice to take insurance and charging a reasonable interest rate). 2. CitiFinancial should stop the practice that the Associates...
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...crisis? What could they have done differently? In the beginning of this decade, the US interest rates were at record lows, subprime lending accounted for 80% of loans being issued (Senator Dodd: Create, Sustain, Preserve, and Protect the American Dream of Home Ownership, 2007). In order to lore new borrowers, banks more often than not offered adjustable rate mortgages to their clients which provided them with lower payments compared to those offered by traditional mortgages. As subprime lending grew exponentially, investment firms and banks saw an opportunity to take advantage of the boom by securitizing the loans into new investment vehicles called Collateralized Debt Obligations (CDO)(Evans & Jain, 2010). As organizations grew their investments in CDOs, accounting professionals at these institutions played a role in misleading investors about their organization’s risks and financial health. As a way to minimize risk to their organizations, accounting professionals at a number of banks and investment firms used creative accounting maneuvers to move CDOs to Qualified Special Purpose Entities (QSPE). In doing so, they removed the liability of these assets from their organization’s books misleading investors about their organization’s health (Chasan, 2008). This kind of practice was used by several organizations including Citigroup Inc. which settled on July 29, 2010 a lawsuit by the Security and Exchange Commission (SEC) for misleading investors. “The SEC said...
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...purchase Merrill Lynch (MER), and American International Group (AIG) was saved by an $85 billion capital injection by the federal government.[1] Shortly after, on September 25th, J P Morgan Chase (JPM) agreed to purchase the assets of Washington Mutual (WM) in what was the biggest bank failure in history.[2] In fact, by September 17, 2008, more public corporations had filed for bankruptcy in the U.S. than in all of 2007.[3]These failures caused a crisis of confidence that made banks reluctant to lend money amongst themselves, or for that matter, to anyone. The crisis has its roots in real estate and the subprime lending crisis. Commercial and residential properties saw their values increase precipitously in a real estate boom that began in the 1990s and increased uninterrupted for nearly a decade. Increases in housing prices coincided with the investment and banking industry lowering lending standards to market mortgages to unqualified buyers allowing them to take out mortgages while at the same time government deregulation blended the lines between traditional investment banks and mortgage lenders. Real estate loans were spread throughout the financial system in the form of CDOs and other complex derivatives in order to disperse risk; however, when home values failed to rise and home owners failed to keep up with their payments, banks were forced to acknowledge huge write downs and write offs on these products. These write downs found several institutions at the brink of...
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...Subprime Loans - The Under-The-Radar Loans That Felled a Market The problem to be investigated is the ethical challenges for both lenders and borrowers that were the result of the exponential growth in the subprime loan market. The subprime mortgage market grew from $34 billion to $401 billion between 1994 and 2004 (Jennings, 2012, p. 434). The U.S. subprime mortgage crisis, fueled by record mortgage delinquencies and home foreclosures, and the subsequent collapse of mortgage-based securities followed by collateralized debt obligations (CDO’s), led to the financial crisis in the late 2000s. This paper will explore the impact of the subprime mortgage crisis on society and will discuss the roles government, corporations and individuals played. This paper will also offer suggestions on responsible behavior to prevent a recurrence. – Good introduction The History of Subprime Mortgages-- Good -- use one section heading for each question asked in assignments like this that have questions. The deregulation by the Federal Government of the banking industry starting in the 1980s is identified by many experts as responsible for setting in motion the events that resulted in the subprime mortgage crisis. A collision of unintended and intended consequences – regulation, greed, uninformed consumers. Subprime loans have been around for a long time. However, they were never meant for borrowers with less than stellar credit nor as primary loans – good point. ARM, balloon payment...
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...Introduction The banking industry has always been susceptible to economic fluctuations. The subprime mortgages crisis, that started to be felt in 2007 and is still going on, is not an exception. Although it had consequences all over the world, the main effects were seen in American financial markets, followed by the European ones. The top ten banks of the world also suffered the consequences; these can be seen in the changes occurred among these leading institutions in terms of market capitalization and also total assets. After several years of believing in free markets, capitalism and no government intervention, the whole scene has changed. During this period, the governments, acting together with their respective central banks, assumed a more interventionist role, trying to regulate the economic fluctuations triggered by the crisis. It is interesting to analyse the effects all these changes had (and still have) on the banking industry. In the following paper, I am going to present a ranking of the world leading banks (by market capitalization and total assets) and analyze the results in order to observe the impact of the financial crisis on these banks’ drivers. Context From World War II until the late 70’s, banking was a stable activity that was not so sensitive to economic fluctuations. From there on, deregulation and liberalisation transformed banking into an unstable activity, completely responsive to changes in the economic environment. Technological change created...
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...Economic effects of subprime lending A subprime lending is an option for individuals that have difficulty meeting mortgage payment schedules or for individuals who have low credit scores and considered risky borrowers. For example, an applicant with a low credit score of 500 will have a very difficult time locating a loan. Subprime lending comes with a high cost to borrowers. Lenders see bad credit applicants as riskier than applicants with better credit scores. Borrowers in turn pay for this risk by accepting loans with a higher interest rate. Subprime lenders offered the realization of the American dream of home ownership to borrowers who would otherwise be denied credit. Interest only loan options were offered, and combined with the mortgage-backed securities (MBS) added so much liquidity that in turn created a housing boom. Over time borrowers end up paying higher interest rates with zero payment application against their loan amount. Unemployment setbacks that ultimately resulted in defaults, added to the economic crisis. Consequently, more homes were placed in a market that is already saturated with newly constructed homes. This created less demand resulting to more houses that builders were unable to sell. Controls of banking rules and regulations during the 1980’s were relaxed, and monitoring policies for these were not the highest priority. Jimmy Carter’s “Depository Institutions Deregulation and Monetary Control Act of 1980” was a window for financial institutions...
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...Citigroup: Restoring Ethics and Image Before Growth Charles Prince, CEO of Citigroup, is facing a daunting challenge as the head of the largest financial services organization in world. He has joined a company that has experienced significant regulatory scrutiny and that has been linked to the biggest scandals in corporate history. Unfortunately for Prince, the problems are pervasive throughout most of Citigroup’s diverse service offerings. In March 2005, Prince announced his strategy to transform the financial giant and to provide a new direction for the future. He called it the “Five Point Ethics Plan” to: improve training, enhance focus on talent and development, balance performance appraisals and compensation, improve communications, and strengthen controls. Due to the size and complexity of the organization, there were significant unresolved questions. How could the plan be effectively revealed? Would the plan be strong enough to change the culture of the entire organization? How should the corporate communications department handle both the initial and long-term communication of this plan to major stakeholders? About Citigroup Incorporated in 1998, Citigroup Inc. is a diversified global financial services holding company providing services to consumer and corporate customers. The company has approximately 141,000 full-time and 7,000 part-time employees in the United States and 146,000 full-time employees in more than 100 countries outside the United States. All of Citigroup’s...
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...Deal Fees Under Fire Amid Mortgage Crisis --- Guaranteed Rewards Of Bankers, Middlemen Are in the Spotlight By Liam Pleven and Susanne Craig The Wall Street Journal, January 17, 2008 (Copyright (c) 2008, Dow Jones & Company, Inc.) To understand a root cause of the financial crisis shaking global markets, take a look at Kevin Schmidt's paycheck. Mr. Schmidt arranges mortgages in Shreveport, La. He earns his money upfront, taking a percentage of each loan once papers are signed. "We don't get paid unless we can say YES" to loans, his firm's Web site says. The problem, which Mr. Schmidt says he sees clearly: Brokers have little incentive to say "no" to someone seeking a loan. If a borrower defaults several months later -- as Americans increasingly are doing -- it's someone else's problem. At every level of the financial system, key players -- from deal makers on Wall Street and in the City of London to local brokers like Mr. Schmidt -- often get a cut of what a transaction is supposed to be worth when first structured, not what it actually delivers in the long term. Now, as the bond market wobbles, takeover deals unravel and mortgages sour, the situation is spurring a re-examination of how financiers get paid and whether the incentives the pay structure creates need to be modified. This week, Congress asked three prominent executives to testify about their pay packages. Upfront commissions and fees are well established on Wall Street. Investment banks get paid when billion-dollar...
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...caused this major economic upheaval in the world? Observing the economic scenario of the recent past, we would get some unpleasant answer as it would show nothing but the quicksand of capitalism, the dominating economic policy of present world. According to the expert’s observation and, of course, based on the data of the happenings within the financial sectors, to find out the immediate causes of current global economic downfall, we need to go a little back in past and understand what was happening in the housing sector of America for past many years. Background and causes The immediate cause or trigger of the crisis was the bursting of the United States housing bubble, which peaked in approximately 2005–2006. High default rates on "subprime" and adjustable rate mortgages (ARM), began to increase quickly thereafter. An increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became more difficult. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher. 01. Growth of the housing bubble Between 1997 and 2006, the price of the typical American house...
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...returns. Third is an apparent lack of appreciation for the principles of supply and demand. The principle states that excessive supply will reduce the price and demand for a product to the advantage of the buyer, while a lack of supply will increase demand and price of a product to the advantage of the seller. Causes Economists stress the importance of tracing the root causes of the financial crisis in order to provide a systemic solution to the present financial crisis. Most references present the cause of the financial crisis to be the “subprime mortgages.” However, subprime mortgages by itself did not cause the housing bubble to implode; many other factors contributed to the implosion. Traditionally, a lending institution, such as bank, would grant a loan based on the capability of the borrower to pay and on his/her ability to guarantee the loan with a fixed asset or collateral. The borrower mortgages the fixed asset to the lending entity, who in turn gains the right to “foreclose” a mortgaged asset and to...
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...Banking Industry and the Economy Ja’Net McQueen Slater Strayer University Birmingham, AL Instructor: Dr. Lisa Kincaid Research and Communication- RES 531 April 18th, 2010 Context of the Problem Today the economy is at its worst than it’s ever been before since the 1940s. Unemployment is at a record high as well as companies that are continuing to close down due to financial issues. The housing markets, auto industry, banking industry, & loss of jobs are all major things that are being affected by the way the US is spending money. The housing market and banking industry are both some of the main things that are having a major affect on the U.S. and to how this affects all other aspects of daily living. Some people may ask, “How did we get this way”? Over the past 180 years the United States grew to a huge, integrated, industrialized economy that makes up over a quarter of the world economy. The main causes were a large unified market, a supportive political-legal system, vast areas of highly productive farmlands, vast natural resources (especially timber, coal and oil), an entrepreneurial spirit, a commitment to investing in material and human capital, and at times a willingness to exploit labor. In addition, the U.S. was able to utilize these resources due to a unique set of institutions designed to encourage utilization and extraction. The economy has maintained high wages, attracting immigrants by the millions from all over...
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...Shawn Mutchler Clara Gerl Comp I 01 September 2013 Unethical Mortgage Lending and the Collapse of the American Economy Living in an era of economic uncertainty is an abysmal proposition that many of us thought improbable. However, we find ourselves in the midst of the worst financial quagmire since the Great Depression of the 1920’s. Across the United States, businesses are down-sizing and even closing the doors of peripheral branches. In realizing that there is no way to return to a period of economic prosperity America once enjoyed, it is important to look at the causes of its demise. While there are myriad causes for America’s financial collapse, it is important to focus on the role of ethics, or the lack thereof, in America’s current financial dilemma. Unethical practices, particularly in mortgage lending have helped to directly contribute to the collapse of the American economy. When discussing unethical behavior and the financial collapse of America, few topics receive more attention than the mortgage lending industry, and in that industry, most of the focus falls on subprime lending. Before looking at subprime lending, however, it is central that we look at the evolution of mortgage lending. Because the approach to mortgages has changed, we must take a glance at the past methodology of mortgage lending. As recently as the past twenty years, borrowers seeking mortgage loans would go to their local banker to apply for a mortgage. This banker was oftentimes known on...
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...Th Fi ncial Cris he inan sis: 2007 2 7-2009 gar N g A. Norton, Jr. Illin nois Sta Uni ate iversity y Cover page im mage ©2010 Pho otoDisc, Inc. Copyright © 2010 by John Wiley & Sons, Inc W c. All rights rese erved. No part of thi publication ma be reproduced stored in a ret is ay d, trieval system or transmitted r in any form o by any means, electronic, mec or , chanical, photoco opying, recordin scanning ng, or otherwise, except as permi itted under Sections 107 or 108 o the 1976 Unit States of ted Copyright Ac without either the prior writte permission of the Publisher, o authorization t ct, r en f or through payment of th appropriate pe he er-copy fee to th Copyright Cle he earance Center, I Inc., 222 Rosewo Drive, ood Danvers, MA 01923, website www.copyright A e t.com. Requests to the Publisher for permission should be r addressed to t Permissions Department, Joh Wiley & Son Inc., 111 Rive Street, Hobok NJ 07030the hn ns, er ken, 5774, (201)74 48-6011, fax (20 01)748-6008, we ebsite http://www w.wiley.com/go/ /permissions. To order book or for custom service, pleas call 1(800)-CA ks mer se ALL-WILEY (2 225-5945). Printed in the United States of America. e o ISBN 978- 0-470-56516-2 The Financial Crisis: 2007-2009 Objectives Understand the major influences that led to the 2007 2009 Financial Crises Describe the role that agency cost issues played in the financing of mortgages to developing...
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...THE SUBPRIME LENDING The term "subprime" refers to the credit status of the borrower, which is being less than ideal. Subprime lending is a general term that refers to the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history. According to the U.S. Department of Treasury guidelines issued in 2001, "Subprime borrowers typically have weakened credit histories that include payment delinquencies i.e. non-payment of the mortgage, and possibly more severe problems such as charge-offs, judgments, and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories." This is when the borrowers have a poor credit history that is they are bad borrowers. Subprime lending is also called B-Paper, near-prime, or second chance lending, as the borrowing is done to customers with a poor credit history or no credit history without any security in return of the money lending. Subprime lending encompasses a variety of credit instruments, including subprime mortgages, subprime car loans, and subprime credit cards, among others. A subprime loan is offered at a rate higher than A-paper loans due to the increased risk. Subprime lenders To access this increasing market, lenders often take on risks associated with lending to people with poor credit ratings...
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