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Solutions Manual for Business and Professional Ethics, 9th Edition by Leonard J. Brooks
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Solutions Manual for Business and Professional Ethics, 9th Edition by Leonard J. Brooks. Complete chapters Solutions are included (Chapter 1 to 8) CHAPTER 1: ETHICS EXPECTATIONS CHAPTER 2: ETHICS & GOVERNANCE SCANDALS CHAPTER 3: ETHICAL BEHAVIOR—PHILOSOPHERS’ CONTRIBUTIONS CHAPTER 4: PRAC...

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  • September 20, 2024
  • 563
  • 2024/2025
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SOLUTIONS MANUAL




Note: The Chapters in this document are displayed in reverse order, with
the last chapter appearinf first. This change ensures all chapters are
included in this document. Feel free to preview first few pages for this
solutions manual to verify the document. Thanks for your attention.

,Business & Professional Ethics
for Directors, Executives &
Accountants, 9e


Leonard J. Brooks and Paul Dunn


© 2021

Chapter 8—Subprime Lending Fiasco—Ethics Issues


Chapter Questions and Case Solutions


Chapter Questions..................................................................2

Case Solutions.........................................................................7

, Page |2


Chapter Questions
1. How much and in which ways did unbridled self-interest contribute to the subprime lending crisis?

Almost everyone in the subprime mortgage meltdown was only looking after their own narrow
self-interest and not the board interest of their clients or the economy.

• The homeowners, who knew that they could not afford to own a home, were ignoring
the fact that the when the mortgage came up for renewal they would not be able to
afford to pay the renewed mortgage at its higher interest rate.

• The sales agents, who were only concerned with making commissions on sales, were not
looking out for the best interest of their clients who could not afford these homes and
mortgages.

• The banks were only interested in generating higher interest revenue, without looking at
the credit worthiness of the borrowers and the risks associated with defaults.

• The investors who bought the high yield mortgage-backed securities were ignoring their
fiscal responsibilities by not conducting due diligence on the risks associated with these
securities.

2. How could increased regulation improve the exercise of unbridled self-interest in decision making?

Market failures often occur when there is an inefficient allocation of costs and benefits.
Externalities are costs or benefits that are borne by third parties, i.e., parties who are not part of
the initial contract. An example is air pollution: it is a cost that is borne by society. The
marketplace is unable to control pollution and so government regulation is required. The
collapse of the subprime mortgage market and the associated collapse of the mortgage-backed
securities market are also examples of market failures. Increased government regulation may
have helped to prevent or minimize the negative aspects of these market failures. For example,
Canadian banking regulations prevent Canadian chartered banks from being over-leveraged,
whereas the American banks had no similar legislative constraints. Many American banks failed
as a result of the crisis, but no Canadian banks failed. Although many managers do not like to
have their managerial discretion constrained through government regulation, legislation can be
useful when people forget their responsibilities to the rest of society, or when the opportunity
for unrealistic gain is too great.

3. How could ethical considerations improve unbridled self-interest in ethical decision making?

Ethics help to constrain unbridled self-interest by broadening the decision maker’s horizon.
Decisions have impacts on a variety of stakeholders, including the decision maker. When the
decision maker takes into account the interests of other stakeholders, then the decision maker



Business & Professional Ethics for Directors, Executives & Accountants, 9e
Leonard J. Brooks and Paul Dunn,

, Page |3


is less likely to make a decision that only helps the decision maker at the expense of the other
stakeholders.

4. Identify and explain five examples where executives or directors faced moral hazards and did not
deal with them ethically.

• Creating securities that had no hope of being realizable

• Selling very risky securities without disclosing the risks fully

• Rating agencies knowingly providing inflated ratings

• Over-leveraging of banks and investment firms

• Paying incredibly excessive remuneration based on questionable incentives

• Banking on the fact that their company was to big to fail and endangering investors as well
as costing bailout funds

5. How much should the exiting CEOs of Fannie Mae and Freddie Mac have received when they were
replaced in September 2008?

Executive compensation is multi-faceted. Compensation is used to attract and retain
employees; it is used to motivate and reward good performance; and it is used to discipline bad
performance. If employees are responsible for both their good and bad decisions, then they
should be compensated according to the successes and failures of those decisions. However,
compensation is a second-best contract since the link between effort and results cannot be
clearly observed and measured. To what extend did the actions or in-activities of the CEO’s of
Fanny Mae and Freddy Mac contribute to the crisis? How could their culpability be measured?
If it can be measured, then the size of their exit package should reflect their degree of culpability
and the extent of their bad performance. However, we have only rough measures of the effort-
performance link and so the exit packages may be perceived by some as too generous and by
others as too severe, based on the perceived strength or weakness of the effort-performance
link.

6. The government bailout of the financial community included taking an equity interest in publicly
traded companies such as American International Group (AIG). Is it right for the government to
become an investor in publicly traded companies?

Arguments can be made both for and against government bailouts. (See the discussion of the
ethics case, Mark-to-Market (M2M) Accounting and the Demise of AIG, in Chapter 8 of the Text.)
Taking an ownership interest means that the government is better able to protect and oversee
its investment in the bailed-out company. This is similar to any other block holder (an investor
that owns ten percent or more of the firm’s stock) that can influence the firm because of its
sizable ownership and investment in the firm.


Business & Professional Ethics for Directors, Executives & Accountants, 9e
Leonard J. Brooks and Paul Dunn,

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