Free Empire State College Case Study Example

Type of paper: Case Study

Topic: Banking, Finance, Investment, Company, Stock Market, Mortgage, Business, United States

Pages: 4

Words: 1100

Published: 2020/11/26


Dr. Thomas Kernodle and Dr. Gina Torino

Nightmare on Wall Street

In any business activities, utmost disclosure of information to the parties is paramount for mutual benefit by relevant parties. Individuals must apply due diligence in assessing the facts and figures of the transaction in order to avoid undue advantage over the other party. Unfortunately, conflict of interest has in most cases gripped many financial deals leading to unforeseen collapse and economic injury to the stakeholders. Conflict of interest occurs when one party fails to disclose all information pertaining to an individual agreement with the intent to incur self-gains at the expense of others. The unethical practice is usually carried out as greed disguised as an enlightened self-interest. The case of Wall Street financial institutions portrays the economic impact of conflict of interest in the business context. The problem erupted between 2006 and 2008 when mortgage-backed securities were traded to provide loans for customers without much concern about their capability to repay the money.
The approach was seen as easier compared to banks loan procedures thus attracting many investors including banks. Unfortunately, the issue of information asymmetry between the borrowers and lenders resulted in system collapse, rendering the borrowers to financial debt. Surprisingly, the federal government had fallen into the trap such that Fannie Mae and Freddie Mac had ventured into mortgage-backed securities. The ultimate cause of the market fail was due to demand influx of for houses that burst exposing the investors to low returns.
The concept of enlightened self-interest states demonstrates that if a party pursued a certain issue for helping others, they believed that they would consequently gain from the course of their action. However, in the business perspective, the opposite may happen, and the positive venture may naively end up ruining the facilitator. Such circumstance affected the JP Morgan bank when they acquired Washington Mutual and Bear Stearns’ to salvage their collapse (The Economist: par.8). Bear Stearns company contravened on the policy of due diligence and instead ordered its employees to process bulk loans without considering the creditworthiness of the individual and financial institution investors. Further, Consequently, Bear Stearns subjected the investors to financial risk that could reduce the country’s economic performance. Similarly, JP Morgan faced the lawsuit for their inherent reluctance to carry out their supervisory role on the performance of Bear Stearns.
The same aspect faces Washington Mutual whose management failed to question or undertakes concerned position in safeguarding the credibility of mortgage-backed securities. Other companies such as Merrill Lynch were sold to the Bank of America had committed similar business crime of overrating their Mortgage backed securities and failing to conduct an extensive assessment on their records (A Nightmare on Wall Street). Further, Merrill Lynch had exaggerated their financial statements in order to obtain huge mortgage-backed securities. Consequently, the Bank of America had subconsciously inherited similar problems from the company and therefore owed its investors the assurance of safeguarding their shareholding from unscrupulous dealers. Other institutions that faced similar suit include Lehman Brothers that underwent insolvency due to an outburst of home demands and Wachovia that underwent acquisition agreements with Well Fargo (Lowenstein, p.3). The government had been in the dark as the unscrupulous collusion deals happened at the expense of innocent citizens. In business law, demonstration of negligence for any enterprise must be backed up by evidence that would incriminate the management or any stakeholders. The Justice Department had pursued the issue for a long time and, therefore, all culprits were caught up at the same time. All organizations faced similar suits since they had inherently acquired the oversight role through acquisition.
The companies shared a similar action of withholding information and exaggerating their financial statements with self-interest to accumulate high returns on their investment. Additionally, the institutions have a joint function of investing in securities market in anticipation of high returns to shareholders and investors. However, some institutions such as Bank of America and JP Morgan have joined as accomplices through salvaging the financial solvency of the institutions.
Most of these institutions are managed by men thus the essence of gender- sensitivity has been overlooked. Naturally, women are presumed to be cautious in their undertaking by concentrating more on subjective facts rather than the ultimate objective. In the securities market, the presence of women would be of great importance in emphasizing the importance of due diligence in the decision-making process. Moreover, women have good management practice and therefore insolvency would have been avoided. Fostering gender sensitivity in the management level increases the chances for comprehensive deliberations on investment that uphold emotional intelligence for all stakeholders.
One of the approaches that the firms ought to have adopted was to uphold the international accounting standards that require companies to publish their financial statements for review by investors and other stakeholders. The action would have enabled the acquiring firms to scrutinize the statements for consideration on the viability of the investment. In addition, abiding contractual agreement would have been essential for strengthening the commitment for assuming liability on either party in cases of undue diligence. For instance, had JP Morgan legally contracted with Washington Mutual, they would have used the agreement as an exhibit to exonerate themselves from the criminal act.
In another perspective, the firms ought to have conducted feasibility study on mortgage-backed securities and project the period it would take at a given discounted rate to attain net present value. Based on net present value of mortgage securities, it would have been easy for the companies to avoid insolvency or loss. Finally, ensuring the unpredictable mortgage securities could have cautioned the firms from accumulating huge debts and facilitate compensation for the invested funds.
In an effort for firms to shield their success from financial uncertainties, certain policies need to be entrenched in the ethical code of performance in line with the firms’ mission and objectives

Diversification of investment

In investment, pooling of risk is a cautionary measure for mitigating unforeseen hazards. The strategy could occur through diversification of borrowers for both low-income and high-income earners that would counter an unexpected financial or market loss. Diversification would assist the firm to reduce excess defaults from mortgage borrowers thus sustaining its profitability trend.
All potential mortgage loan applicants should undergo scrutiny to ensure that the information declared reflects their capacity to repay the loaned amount. An absolute threshold value should be set as collateral to identify borrower’s commitment to invest the money in viable projects.

Financial statement disclosure

Financial statements for firms act as a reflection platform to evaluate the company’s performance trend in trading. The firms should endorse the general acceptable accounting standards that utmost declaration of firm’s earnings and value for shareholders. The approach will be a key determine factor for assessing the success rate of a security investment and help reconsider its market viability in the future.
Conclusively, Conscious fraud and negligence are the key factors that expose a firm financial success to viability. All trading partners bear unlimited liability for their actions whose impact affects currently and future market performance in trade.

Work cited

Lowenstein, Roger. The end of Wall Street. Penguin, 2010.
"A weekend of high drama reshapes American finance." The Economist (2008): n. pag. Web. 23 Feb. 2015.
Ivry, Bob, Bradley Keoun, and Philip Kuntz. "Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress - Bloomberg Business." N.P., 28 Nov. 2011. Web. 24 Feb. 2015.
"A Nightmare On Wall Street: case study." (2008): Web. 23 Feb. 2015.

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Free Empire State College Case Study Example. Free Essay Examples - Published Nov 26, 2020. Accessed February 24, 2024.

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