Utilize the following reading material below:

After carefully utilizing the reading material above, what ethical issues did the banks and lenders face? What if any responsibility did the individual have?

Summarize accordingly

In the summer and fall of 2008, the U.S. financial system, and financial systems around the world, appeared to be on the verge of collapse Troubles in the financial sector spread to other industries, and a severe global recession ensued in this section we outline some of the main causes and consequences of that crisis In the classic film It's a Wonderful Life, the central character is George Bailey, who runs a financial institution called the Bailey Building and Loan Association In a key scene in that movie, a bank run is about to occur, and depositors demand that George return the money that they had invested in the Building and Loan George pleads with one man to keep his funds at the bank, saying You're thinking of this place all wrong, as if I have the money back in a safe. The money's not here your money is in Joe's house. That's right next to yours--and then the Kennedy house, and Mrs. Maklin's house, and a hundred others. You're lending them the money to build, and then they're going to pay it back to you as best they can What are you going to do. foreclose on them? This scene offers a relatively realistic portrayal of the role that financial institutions played in allocating credit for investments in residential real estate for many years. Local banks took deposits and made loans to local borrowers However, since the 1970s, a process called securitization has changed the way that mortgage finance works Securitization refers to the process of pooling mortgages or other types of loans and then selling claims or securities against that pool in a secondary market. These securities called mortgage-backed securities can be purchased by individual investors, pension funds, mutual funds or virtually any other investor As homeowners repay their loans those payments eventually make their way into the hands of investors who hold the mortgage backed securities. Therefore, a primary risk associated with mortgage-backed securities is that homeowners may not be able to, or may choose not to repay their loans Banks today still lend money to individuals who want to build or purchase new homes, but they typically bundle those loans together and sell them to organizations that securitize them and pass them on to investors all over the world Prior to the 2008 financial crisis, most investors viewed mortgage-backed securities as relatively safe investments Figure 2.2 illustrates one of the main reasons for this view. The figure shows the behavior of the Standard & Poor's Case-Shiller Index, a barometer of home prices in ten major US cities in each month from January 1987 to February 2013. Historically, declines in the index were relatively infrequent, and between July 1995 and April 2006 the index rose continuously without posting even a single monthly decline When house prices are rising the gap between what a borrower owes on a home and what the home is worth widens Lenders will allow borrowers who have difficulty making payments on their mortgages to tap this built-up home equity to refinance their loans and lower their payments. Therefore rising home prices helped keep mortgage default rates low from the mid-1990s through 2006. Investing in real estate and mortgage-backed securities seemed to involve very little risk during this period in part because real estate investments appeared to be relatively safe, lenders began relaxing their standards for borrowers. This change led to tremendous growth in a category of loans called subprime mortgages. Subprime mortgages are mortgage loans made to borrowers with lower incomes and poorer credit histories as compared to "prime borrowers Loans granted to subprime borrowers often have adjustable rather than fixed interest rates, which makes subprime borrowers particularly vulnerable if interest rates rise. Many of these borrowers (and lenders) assumed that rising home prices would allow borrowers to refinance their loans if they had difficulties making payments. Partly through the growth of subprime mortgages, banks and other financial institutions gradually increased their investments in real estate loans. In 2000, real estate loans accounted for less than 40 percent of the total loan portfolios of large banks. By 2007 real estate loans grew to more than half of all loans made by large banks, and the fraction of these loans in the subprime category increased as well 2009. Over that 3-year period home prices fell on average by more than 30 percent. Not surprisingly, when homeowners had difficulty making their mortgage payments, refinancing was no longer an option, and delinquency rates and foreclosures began to climb By 2009, nearly 25 percent of subprime borrowers were behind schedule on their mortgage payments Some borrowers, recognizing that the value of their homes was far less than the amount they owed on their mortgages simply walked away from their homes and let lenders repossess them With delinquency rates rising, the value of mortgage-backed securities began to fall and so too, did the fortunes of financial institutions that had invested heavily in real estate assets. In March 2008, the Federal Reserve provided financing for the acquisition (that is, the rescue) of Bear Stearns by JPMorgan Chase Later that year, Lehman Brothers filed for bankruptcy Throughout 2008 and 2009 the Federal Reserve the George W Bush administration and finally the administration of Barack Obama took unprecedented steps to try to shore up the banking sector and stimulate the economy, but these measures could not completely avert the crisis As banks came under intense financial pressure in 2008, they began to tighten their lending standards and dramatically reduce the quantity of loans they made. In the aftermath of the Lehman Brothers bankruptcy, lending in the money market contracted very sharply Corporations that had relied on the money market as a source of short- term funding found that they could no longer raise money in this market or could do so only at extraordinarily high rates As a consequence, businesses began to hoard cash and cut back on expenditures, and economic activity contracted. Gross domestic product (GDP) declined in five out of six quarters starting in the first quarter of 2008, and the economy shed more than 8 million jobs in 2008-2009 as the unemployment rate reached 10 percent. Congress passed an $862 billion stimulus package to try to revive the economy, and the Federal Reserve pushed short-term interest rates close to 0 percent. Although the economy began to recover in 2009, the recovery was very slow As late as May 2013 total employment was still just 2 percent lower than it had been prior to the start of the recession Perhaps the most important lesson from this episode is how important financial institutions are to a modern economy. By some measures, the 2008-2009 recession was the worst experienced in the United States since the Great Depression Indeed, there many parallels between those two economic contractions Both were preceded by a period of rapid economic growth, rising stock prices, and movements by banks into new lines of business, and both involved a major crisis in the financial sector. Recessions associated with a banking crisis tend to be more severe than other recessions because so many businesses rely on credit to operate When financial institutions contract borrowing, activity in most other industries slows down too