Suggested Improvements of SOX Legislation

One suggestion for improving SOX is to avoid conflicts of interest. SOX already prevents auditing firms from also providing consulting services. This is definitely a step in the right direction since Arthur Andersen was getting more revenue from consulting than from services (Bumgardner, 2003). But other conflicts of interest situations still exist. For instance, there is a problem with the newly created PCAOB. The five board members are not appointed by the President. The SEC does the hiring and firing. This possibly violates the doctrine of separation of powers (Sell Sarbanes, 2008). If the PCAOB is going to be an arm of the government, then it would be better if the President selected the members of the board.

            Another way to improve SOX concerns the five-year rotation of auditors. Currently, SOX requires the rotation of audit partners but they could still all be from the same firm. A better way for rotation would be to require rotation of the entire firm (Kessel, 2011, p.143).

            One area of SOX that has already been improved is protection for Whistleblowers. Whistleblowers are provided incentives and protection by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the SEC Office of the Whistleblower. The law prohibits employers from discriminating against a whistleblower. Whistleblowers can report their claim anonymously. The Dodd-Frank Act expanded the reach of the whistleblower protections provided by SOX to include employees of public companies as well as employees of its private subsidiaries and affiliates.

            Recently, whistleblower legislation has been enhanced. On March 4, 2014, in Lawson v. FMR LLC, the U.S. Supreme Court ruled that this whistleblower protection applies not only to employees of publicly owned companies, but also to employees of privately owned contractors and subcontractors of public companies. The recent legislation on whistle-blowing represents one battle won in the ongoing fight against corporate corruption in the United States. Sarbanes-Oxley revisions like the one proposed in 2012 where Congress was poised to pass legislation that would change Sarbanes-Oxley making it easier for private companies to go public are also a way to improve SOX (Geron, 2012). “The potential legislation, which would enable companies with less than $1 billion in annual revenue to comply with certain SOX regulations after they have had their IPO, has rare bipartisan support in a divided Congress (Geron, 2012).” Finally, more revisions to SOX to help smaller companies confront the costs of SOX compliance should be implemented.

Bumgardner, L. (2003). Reforming corporate America: How does the Sarbanes-Oxley impact      American businesses? Graziadio Business Review. Retrieved from


Geron, (2012). Retrieved from


Kessel, M. (2011). Sarbanes-Oxley overburdens biotech companies. Nature Biotechnology,

            29(12), 1081-1082.

Sell Sarbanes.(2008). Sell Sarbanes-Oxley: Editorial of The New York Sun. Retrieved from


Does SOX Implementation Present an Unfair Burden on Smaller Organizations?

Critics of SOX say it has placed an unfair burden on public companies to comply with Sarbanes-Oxley (Orin, 2008, p.143). Complying with sections 404 and 302 is costly. It is not unusual for companies to have accounting costs exceeding 1 million dollars (Kessel, 2011, p.1082). These costs become extremely difficult to pay for small companies like bio-tech companies. A bio-tech company may have $15 million in capitalization and no revenue. Small companies receive an unfair burden of the costs of SOX implementation. New laws may allow companies with less than 1 billion in market evaluation to opt out of SOX. Also there may be provisions to exempt companies for the first five years following their IPO (Kessel, 2011, p.1082). Those in favor of SOX say the benefits of the Act outweigh the costs. SOX has improved the reliability of financial reporting in public companies and left investors in a better position now than they were before SOX implementation. It has also created a heightened sense of awareness of ethical issues throughout the companies from the CEO, to the Board of Directors, to the auditor and all the way down to the employees. Critics of SOX want it revised or repealed because it is unfair to small companies.

The SEC has responded to these complaints by softening some requirements

and pushing back deadlines for others. However, it has insisted that the reasons

behind the Act are valid and that its provisions, on the whole, are in the best

interest of the country. Congress seems to agree, with no indication of repeal

(Sarbanes-Oxley, 2004).


Mason & Simmons (2014) describe two modes of stakeholder engagement, “Habermasian” and “Ethical Strategist.” They believed that Habermasian approach was purer in a moral sense because it required CSR decision-makers to place the importance of ethical purity over cost and alignment with strategy. In contrast, the “Ethical Strategist” approach believed there should be no distinction between morality and strategy (Mason & Simmons, 2014).

Akhigbe, Martin, & Newman (2010) found that the wealth effects of SOX were more favorable for large firms expecting to gain improvements in information asymmetry and less favorable for small well-governed firms that were likely to incur high compliance cost (Akhigbe, Martin, Newman, 2010).

Akhigbe, A., Martin, A. D., & Newman, M. L. (2010). Information asymmetry determinants of  Sarbanes-Oxley wealth effects. Financial Management (Wiley-Blackwell), 39(3), 1253- 1272. doi:10.1111/j.1755-053X.2010.01111.x

Kessel, M. (2011). Sarbanes-Oxley overburdens biotech companies. Nature Biotechnology,

            29(12), 1081-1082.

Mason, C., & Simmons, J. (2014). Embedding corporate social responsibility in corporate  governance: A stakeholder systems approach. Journal of Business Ethics, 119(1), 77-     86.

Orin, R. M. (2008). Ethical guidance and constraint under the Sarbanes-Oxley Act of 2002. Journal of Accounting, Auditing & Finance, 23(1), 141-171.

Sarbanes-Oxley. (2004). A guide to Sarbanes-Oxley section 404. Retrieved from


Social Responsibility Implications Regarding Mandatory Publication of Corporate Ethics

The Sarbanes-Oxley Act requires that each company write a Code of Ethics for senior financial officers to follow (Orin, 2008, p.158). Corporate officers shall be socially responsible to employees, customers, stockholders, and other stakeholders. Prior actions by corrupt corporate officers harmed not only the reputations of their companies but also hurt investors and employees. SOX regulation was aimed at preventing management from harming society anymore in the future. Was SOX successful? Some evidence exists that shows that SOX has been effective, namely the fact that there has not been any major corporate scandal since 2002 (Orin, 2008, p.158). Senator Sarbanes among others debated the issue of whether or not SOX has been successful at a recent forum in New York called COMMIT!Forum. Senator Sarbanes said,

SOX was necessary to create ‘an indispensible safety mechanism’ that

has helped boost investors’ trust in the financial statements they reference

when investing in public companies. The law has unearthed systemic problems and nipped accounting problems in the bud,” he said (Clancy, 2012).


Zhang, Zhu & Ding found that SOX has been successful in establishing an independent Board of Directors. Their study of over 500 companies representing 64 different industries showed that a greater presence of outside director and women directors has led to better CSR performance (Zhang, Zhu & Ding, 2013). Cohen & Krishnamoorthy agree that SOX has been effective but say that SOX may have caused too much focus by Boards of Directors on accounting rules. With so much of their attention on the details and the specifics of following SOX rules, they may have missed important clues about the upcoming economic trouble ahead such as the Financial Crisis of 2008. Focusing so much on SOX requirements made them less like to focus on corporate strategy and such things as staying attune with technological advances and with the business environment

(Cohen & Krishnamoorthy, 2013, p.76). This leads one to question what the real motive for social responsibility should be. Perhaps the real motive for social responsibility should be to obtain profits because profits allows the company to pay its employees and distribute dividends to shareholders so they are not hurt by poor business decisions and in turn, will keep investing in our economy. So if the best way to help society is to obtain profits, then perhaps SOX has hindered corporate social responsibility.

            On the other hand, it is known that SOX has helped society in many ways. Cohen & Krishnamoorthy (2013) say it has created a team mentality between management, external auditors, and the audit committee (Cohen & Krishnamoorthy 2013, p.80). Boards are now more devoted to more compliance issues and less strategy but this has caused a reduction in risk-taking among CEO’s (Cohen & Krishnamoorthy & , 2013, p.81). However, according to Wang, Davidson & Wang (2010), evidence exists that SOX reduces investment expenditures and increases management risk aversion (Cohen, 2007). Risk aversion can stifle competitiveness. Small companies may wish to stay private and not go public in order to avoid an IPO which comes with the requirements to follow all of the regulations imposed by SOX.


Clancey (2012). How SOX has reshaped corporate responsibility. Retrieved from


Cohen, J. R., Hayes, C., Krishnamoorthy, G., Monroe, G. S., & Wright, A. M. (2013). The

            effectiveness of SOX regulation: An interview study of corporate directors. Behavioral    Research in Accounting, 25(1),   61-87.  doi:10.2308/bria-50245

Zhang, J., Zhu, H., & Ding, H. (2013). Board composition and corporate social responsibility:

            An empirical investigation in the Post Sarbanes-Oxley Era. Journal of Business Ethics,       114(3), 381-392. doi:10.1007/s10551-012-1352-0

Orin, R. M. (2008). Ethical guidance and constraint under the Sarbanes-Oxley Act of 2002. Journal of Accounting, Auditing & Finance, 23(1), 141-171.

Cohen, D., Dey, A., & Lys, T. (2007). The Sarbanes-Oxley Act of 2002: Implications for
compensation structure and risk-taking incentives of CEOs. Unpublished working paper, NewYork University.

Wang, H., Davidson, W. N., & Wang, X. (2010). The Sarbanes-Oxley Act and CEO tenure, turnover, and risk aversion. Quarterly Review of Economics & Finance, 50(3), 367-376.

Key Ethical Components of SOX

Two key components of SOX are 1) a requirement to develop a Code of Ethics for senior financial officers, including enforcement mechanisms and 2) a requirement that outside auditors be rotated every five years (Orin, 2008). Other key components are criteria for director independence, composition and responsibility of the audit, compensation and nominating committees, code of conduct and ethics, disclosures pertinent to controls and procedures, internal control over financial reporting, and whistle-blowing (Kessel, 2011).

            In regards to internal control over financial reporting, the Audit Committee has assumed more responsibility for financial accuracy in post-SOX years. The Audit Committee now chooses the company’s independent auditor rather than the CEO. Post-SOX, the Board of Directors appoints the Audit Committee whereas pre-SOX, it would have been the CEO who chose the members of the Audit Committee. This prevents the situation of conflict-of-interest. For example, with the Tyco case, the company’s CEO, Dennis Kozlowski also became Chairman of the Board of Directors. This gave Mr. Kozlowski too much power in the company and he was able to use that power to his advantage while he actually embezzled funds from the company. In this case, the Board of Directors was criticized for not taking an active role in the oversight of financial operations. Post-SOX, the Audit Committee assists the Board of Directors with the oversight of financial operations. In addition, the Audit Committee’s primary duties and responsibilities are to monitor the integrity of financial reporting, monitor the independence and reporting of the company’s independent auditors, and to facilitate communication between the management, the independent auditors, and the Board of Directors.

            In meetings with the Board of Directors, both internal and external auditors discuss how well they are complying with the requirements of SOX. In particular, they must be sure the company complies with Sections 302 and 404 of SOX. Section 302 requires the CEO to sign off on the reliability of its internal auditing controls and the accuracy of its financial statements. Section 404 contains the detailed requirements for how management must conduct its assessment of internal controls. It also contains the standards external auditors must use in deciding whether they can sign off on that assessment. SOX created a new organization responsible for the oversight of these external auditing firms called the Public Company Accounting Oversight Board (PCAOB). Section 404 of SOX is one of the most expensive and time-consuming parts of the SOX legislation.

To comply with Section 404, companies have had to re-evaluate system processes having to do with financial data and with information technology. They must ensure the integrity of financial data and the security of the data. Internal controls to ensure the integrity and security must be well-established, documented and maintained. Also they must considered employees’ rights to such data. Employees’ rights and permissions must not be sufficient to allow material fraud or misrepresentation of financial data. They also have had to make sure that accounting procedures are followed consistently throughout the organization. In order to attest to these controls, management has to ensure that they can identify a problem, determine its severity, and communicate the scope of the problem to others (Sarbanes-Oxley, 2004)

Kessel, M. (2011). Sarbanes-Oxley overburdens biotech companies. Nature Biotechnology,

            29(12), 1081-1082.

Orin, R. M. (2008). Ethical guidance and constraint under the Sarbanes-Oxley Act of 2002. Journal of Accounting, Auditing &     Finance, 23(1), 141-171.

Sarbanes-Oxley. (2004). A guide to Sarbanes-Oxley section 404. Retrieved from


Historical Summary of Sarbanes-Oxley Act

As a result of corporate scandals like Enron, WorldCom, Adelphia, and Tyco, Congress succumbed to public pressure for our government to do something about the unethical behavior of corporate executives of publicly-traded companies. Hence, the Sarbanes-Oxley Act of 2002 was enacted. The goal of Sarbanes-Oxley (SOX) was to restore integrity and public confidence in financial markets. At the heart of some of these scandals was a flagrant disregard of Generally Accepted Accounting Practices (GAAP). For example, WorldCom improperly accounted for $3.8 billion in expenses to cover up a net loss for 2001 and the first quarter of 2002 (Washington Post, 2005). Also according to the New York Times, Enron overstated its profit by $ 586 million (Jelveh & Russell, 2006). These overstatements of revenue deceived investors and when the financial statements were restated, the stock values of these companies plummeted. When the companies went bankrupt, investors lost millions. In the case of Enron, some employees lost their life savings. The auditing firm for Enron, Arthur Andersen also went bankrupt. According to Forbes, Anderson was accused of shredding documents after the SEC launched an inquiry into Enron. Andersen was convicted of obstruction of justice and was ordered to cease auditing public firms (Patsuris, 2002).

Other scandals like Tyco came about as a result of the unethical and immoral behavior of its corporate executives. Tyco CEO Dennis Kozlowski and Tyco CFO Mark Swartz were found guilty of stealing more than $150 million from Tyco (USA Today, 2005). The Forbes Corporate Scandal Sheet says that the Rigas family was accused of collecting $3.1 billion in off-balance-sheet loans backed by Adelphia. Adelphia had overstated results by inflating capital expenses and hiding debt (Patsuris, 2002).). As the Wall Street Journal stated:

            A federal-court jury convicted 79-year-old John Rigas, Adelphia’s

founder and former CEO, of fraud and conspiracy for looting the company

of more than $100 million, hiding more than $2 billion in debt the family

incurred, and lying to the public about Adelphia’s operations and financial

condition. His son Timothy, the former chief financial officer, was convicted

of the same charges (Grant & Nuzum, 2004).


The media exploded with similar stories of corporate abuses of power. The Sarbanes-Oxley Act was introduced by Senator Paul Sarbanes, a Democrat from Maryland and Congressman Michael Oxley, a Republican from Ohio. President George W. Bush signed the bill into law on July 30, 2002.

Grant, P. & Nuzem, C. (2004). Wall Street Journal. Retrieved from


Patsuris, P. (2002). Forbes Corporate Scandal Sheet. Retrieved from


Jelveh & Russell, (2006). Retrieved from
Timeline of the Tyco international scandal. (2008). USA TODAY, a division of Gannet Co, Inc. Retrieved from 17-tyco-timeline_x.htm


BLOG 3: Where do we go from here?


Possible Answer: More regulation of the banking industry and investment industry and more financial oversight (SOX) in businesses.


What Measures Have Been Taken Since the Subprime Loan Financial Crisis to Assure This Will Not Happen Again?


            One measure that has been taken since the subprime loan financial crisis is the Basel 3 agreements to avoid future financial crises. These are regulations that permit banks to take risks but increase the capital requirements. Basel 3 seeks to limit the ability of banks to leverage capital. The idea is that larger capital provides a larger cash cushion for future losses (Watkins, 2011, p.370). It is doubtful that these requirements alone would be enough to avoid further losses though. Basel 3 may not be enough regulation but regulations like the upcoming FINRA regulations could be too much regulation. FINRA is the Financial Industry Regulatory Authority. In December 2013, FINRA proposed an electronic system that could regularly look into the brokerage accounts of investment firms and see customers’ investment portfolios. The electronic system is called “Cards” and the idea is that it would give FINRA the ability to find out more quickly which firms are placing investors at higher risk. FINRA is possibly an invasion of investor’s privacy. Also it causes too big of a security risk to have a record of each person’s investments across multiple stocks and assets all in one data file and stored in one place. Cards could possibly go to the Securities and Exchange Commission for final approval by next year (Zweig, 2014).

            Another measure needed is to increase Sarbanes-Oxley Act (SOX) regulations in businesses. SOX is aimed at curtailing corporate fraud and increasing oversight of corporate boards of directors. SOX requires companies to have a written Code of Ethics which has to be approved by the SEC.   These measures are good but too much government regulation can be bad.     So where do we go from here? Where we go from here has to be somewhere in-between Bush and Clinton’s laissez-fair policies and the overflowing of government programs we currently have under the Obama administration. Somehow we have to find common ground and that common ground needs to be in the middle. Thiel (2012) says we must have a stronger focus on ethical leadership in the future. “Corporate finance misconduct amidst the recent world financial crisis, such as the predatory subprime lending practices of Ameriquest, Goldman Sachs and IndyMacBank have left few wondering whether ethics leadership should be of greater focus moving forward (Muolo and Padilla, 2010; Palleta & Enrich, 2008).”

Muolo, P., & Padilla, M. (2010). Chain of blame: How Wall Street caused the mortgage and credit crisis. Hoboken, NJ: Wiley.

Paletta, D., & Enrich D. (2008, July 12). Crisis deepens and big bank fails.The Wall Street Journal. Retrieved November 7, 2011 from

Thiel, C., Bagdasarov, Z., Harkrider, L., Johnson, J., & Mumford, M. (2012). Leader ethical decision-making in organizations: Strategies for sensemaking. Journal Of Business Ethics, 107(1), 49-64. doi:10.1007/s10551-012-1299-1

Watkins, J. P. (2011). Banking ethics and the goldman Rule. Journal Of Economic Issues (M.E.Sharpe Inc.), 45(2), 363-372. doi:10.2753/JEI0021-3624450213

Zweig, J. (2014). Get ready for regulators to peer into your portfolio. The Wall Street Journal. May 3-4, 2014.


BLOG 2: Is the Great Recession over now? Will profit motives overpower social responsibility again anytime in the near future? If so, what do you think is going to be the next bubble to burst?


Possible Answer: We may be coming out of the Great Recession but it could be short-lived because it may just be a matter of time before another economic bubble burst such as a Student Loan Crisis.


Evaluating Subprime Loans with the Notion of Social Responsibility. Comparing and Contrasting the Resulting Consequences for These Actions


            The Global financial crisis was basically the culmination of multiple negative externalities all coming together at the same time creating a “perfect storm” of financial disaster. These negative externalities were a combination of the desperation of households, the appreciation of housing prices, and declining interest rates (Watkins, 2011, p.366). With the notion of social responsibility, many of the leaders in the banks, in the government and on Wall Street were following the Goldman Rule of pursuing profitable opportunities regardless of the effect it had on others (Watkins, 2011, p.363). Interestingly, this is the opposite of the Golden rule. It was an era of laissez-faire government. Laissez-faire means to let the people do as they think best; free from government intervention. Laissez-faire policies allow the pursuit of profits without restraint. Subprime mortgages were a way to pursue profits. It was a profit-making opportunity too hard to resist. The result was an increase in the opportunity cost for ethical behavior. Acting ethically, would result in a foregone opportunity to make more money. Ethical behavior to avoid hurting others would result in lower profits. The Goldman Rule suggests that lenders would be less likely to be ethical where the opportunity cost of such behavior is high. Banks provided subprime loans without regard to the effect on debtors. They did so assuming a continual rise in housing prices. The collapse in price precipitated the collapse in banking profits, prompting a call for “bailing out” the banks. Government bailouts rewarded banks for “bad” behavior (Watkins, 2011, p.363)

During medieval times, banking was considered unethical. Charging interest was seen as taking advantage of others. “In brief, interest placed the money tender above the social interest (Tawney, 1926). Today, Banking is a capitalistic activity. Bankers are in the banking business to make money. They make money from interest and fees. In a purely capitalistic society, there is little concern for the welfare of society, only concern for one’s self. “I work for nothing but my own profit which I make selling a product they need to men who are willing and able to buy it (Rand, 1957, p.451). In a country where we have property rights, there is incentive to work hard and build up a store of property. Milton Friedman said the only issue is how an individual allocates his property (Friedman, 1962). Friedman believed in free markets but the dominance of the market fosters a pecuniary mindset (Watkins, 2011, p.365). R.H. Tawney referred to “Acquisitive Societies” whose purpose is to promote the acquisition of wealth (Tawney, 1920, p.29). An acquisitive society makes each man the center of his own universe (Tawney, 1920, p.30). Prior to the Subprime Mortgage Crisis, one could argue that America was becoming an acquisitive society. It was a society dominated by self-interest. Since the collapse, Americans have become less interested in acquiring possessions than they were before the crisis. Also they have become more concerned for the well-being of others and for the community and world around them. As Americans, we have developed a greater sense of social responsibility. I believe the Great Recession is over but will profit motives overpower social responsibility again anytime in the near future? Some think the next bubble to burst with be the student loan bubble. Perhaps one could say the federal government is doing the same thing with student loans as the bankers did with housing loans because they are providing loans to people who can never pay the money back unless they get good jobs when they leave college. As we know, good jobs are hard to get these days even with a college degree. Is the current leadership in the government repeating the same mistakes of the banking industry? New legislation may be coming as early as the fall of 2015 that would increase the accountability of universities for the employability of its graduates. President Obama is trying to impose a new rating system for universities where prospective students will be able to tell if they are getting a good value for their money. Studies will be conducted to follow recent graduates to see if they were able to land a good job or not with the skills they learned from the degree they obtained in college. Hopefully, the increased accountability and oversight will be enough to prevent the burst of another economic bubble.



Friedman, M. (1962). Capitalism and Freedom. Chicago: University of Chicago Press.

Rand, A. (1957). Atlas Shrugged. New York: Random House.

Tawney, R. H. (1920).The Acquisitive Society . New York: Harcourt, Brace and World.

Tawney, R.H. (1926). Religion and the Rise of Capitalism. Gloucester, MA: Peter Smith.

Watkins, J. P. (2011). Banking ethics and the goldman Rule. Journal Of Economic Issues (M.E.Sharpe Inc.), 45(2), 363-372. doi:10.2753/JEI0021-3624450213


BLOG 1: What Caused the Great Recession in the United States?


Possible Answer: Housing Bubble Burst causing Subprime Mortgage Crisis


Summary of the Concept of Subprime Loans and the Risks They Pose to the Lender and Borrower


During the years leading up to the Global Financial Crisis of 2008, housing prices were continually increasing. At the same time, interest rates on mortgage loans remained low. In response, presidents like Bush and Clinton wanted to give as many Americans as possible the chance to own a new home and achieve the American dream. Hence, financial institutions started offering more flexible ways of obtaining a home loan. Some of these loans were called Subprime Mortgage Loans because the borrowers were at higher risk of defaulting than borrowers who received Prime Loans. Prime loans have the lowest interest rates and best terms while subprime loans usually have higher interest rates and worse terms. Typically, a subprime loan borrower had a worse credit history and insufficient income making it harder for them to pay back the loan. Also these borrowers were only required to put down a small down-payment and sometimes no down-payment at all. Therefore, subprime borrowers posed a higher credit risk to lenders. One type of Subprime Mortgage loan was called an ARM, Adjustable Rate Mortgage. These Subprime Mortgages offered low initial interest rates called teaser rates but they were adjustable rate mortgages rather than fixed rate mortgages. The adjustable interest rates were subject to increases causing the borrower to have larger monthly payments. If the borrowers cannot make the larger payments they would have to refinance at a lower interest rate or pay-off the loan (Watkins, 2011, p. 366). The borrower was betting the interest rates would not go up. The lender was betting that even if the rates did go up and the borrower could not pay back the loan, it would not create a bank loss because since housing pricing would keep appreciating, the lender could always repossess the house and sell it for more than its loan value. The problem with this logic is that no one thought of what to do if housing prices started dropping. However, this is exactly what happened. Interest rates started rising. The interest rate on the adjustable rate mortgages started increasing. Some borrowers saw their loan payment amount double. When this happened, many of them could not repay their loans and their houses went into foreclosure. With so many houses now on the market, the increase in the supply of homes available for sale caused the prices of houses to fall. Many of these loans were securitized and bundled together with other stocks, then sold on the stock market to investors. These were called mortgage-backed securities. Some of these investors, especially foreign investors had invested in U.S. stocks relying on the triple-A credit ratings from credit rating agencies like Moody’s Investors Service, Standard & Poor’s and Fitch Ratings.   Once the housing bubble burst and the value of these stocks plummeted, investors at home and abroad lost a great deal of money. The economic effects were so severe that it became known as the Global Financial Crisis of 2007-2008. This was followed by the Great Recession of 2008-2012.


Critique of the Role of Leadership Decision-Making in the Subprime Loan Financial Crisis


           Who was to blame for the Subprime Loan Financials Crisis? Many possible suspects exist. One could say it was the lenders because it was unethical for them to make housing loans to people who had little ability to pay the money back. Also, in many cases, the banks were too lenient in their loan approval process. In some instances, as long as the borrower had a decent credit rating, the loans was approved based upon a statement of income and the borrower did not have to provide proof of income. Companies like AIG also sold mortgage protection insurance to the banks so that if the borrower defaulted, the insurance would cover the loan balance so the lenders were not really worried about whether or not the borrower was going to be able to repay.   Also the bankers knew they could eliminate all risks by getting the loans off their books. This could be done by selling the loans to securitizers. Securitizers were investment banks like Lehman Brothers, Bear Stearns and Merrill Lynch and GSE’s (Government Sponsored Enterprises) like Fannie Mae and Freddie Mac. The securitizers combined these loans with other securities and they were sold on the stock market and regulated by the Securities and Exchange Commission (SEC).

The borrowers themselves could be blamed because they should have been more prudent in handling their financial affairs. After all, no one forced these borrowers to take out the loans (Gilbert, 2011, p.99). Also some of the borrowers had been dishonest when answering income questions especially if they really needed the loan. Sometimes, the borrowers were just refinancing their homes to get a second mortgage. In other words, they were just taking the equity out of their house. Due to a period of stagnant wages and rising prices just prior to the burst of the housing bubble, many people strained themselves financially in order to keep up their same lifestyle. Credit was easy to get so they had multiple credit cards and were already burdened with overwhelming debt before they refinanced their homes. They refinanced their homes in order to obtain more money but this just put them deeper in debt while the real problem of stagnant wages and increasing inflation still existed.


Gilbert, J. (2011). Moral duties in business and their societal impacts: The case of the subprime lending mess. Business & Society Review (00453609), 116(1), 87-107. doi:10.1111/j.1467-



Hello, my name is Darlene Casstevens. I am a Masters in Economics graduate from North Carolina State University. I teach Business and Economics part-time at Salem College and Surry Community College.