Living a life completely clear of Mudd

Fannie Mae

Fannie Mae, as you might know, has been heavily involved in the financial crisis of 2008. Along with Freddy Mac, Fannie Mae is a quasi-government mortgage-lender. It was a gigantic cash cow and, perhaps, one would call it a cash cow. They were however contributing to the housing bubble by trading relatively large number of subprime mortgages, most of which were not reported in financial reports, which partially led to collapse of the company and further federal takeover of Fannie Mae.

CEO of Fannie Mae at that moment was Daniel Mudd. One would think, that Mudd, who stayed away from everything “dirty”, should not have gotten in big trouble after seemingly large problems he, as an executive, led Fannie Mae into. Indeed, Daniel has quietly stepped down as a CEO and continued to pursue his dream and attempted to rebuild his career basically from scratch. After leaving he took the helm of a hedge-fund, Fortress Investment Group. He began a completely new life – a Fannie Mae story of his life seemed to end with a not-so-happy ending and Mudd started an entirely new novel. He even put his huge mansion on sale, which clearly indicates that Danny is leaving all the mud behind.


To me it sounded like a perfect ending of a story. I even felt that I started reading a new book – the one that only remotely reminds me of the previous unhappy romance I read. The only similarity seemed to be main character’s name. However, one of the things Mudd forgot to do is clear his name and reputation of mud. “Don’t judge a book by its cover” – one would say. In this case, however, the cover is just simply way too conspicuous and the implied protagonist becomes a clear antagonist in public’s eyes. Mudd couldn’t even start to enjoy his new life, when SEC filed a law suit against poor guy, which led to his resignation as a CEO of Fortress. He was accused of fraudulent actions as a CEO of Fannie Mae. Although he was not the only one who SEC brought law suits on, Mudd was in fact the most prominent one. In fact, company’s board gave Mudd an option: “settle the case quickly and you can stay”. Mudd did not think it was an option; he stepped down and devoted his time to clearing his name. He is Raskolnikov, looking for redemption, and economy is an old grumpy lady, who just had to die at some point (Crime and Punishment by Dostoevsky).


“The charges are baseless and political, and I have no intentions of settling anything,” said Mr. Mudd. So, let us wish Daniel Mudd luck, because it seems to me that fortune is his biggest hope at the moment.


Fannie Mae’s Former Chief, Mudd, Sells in Washington
Fortress Chief Daniel Mudd Resigns
US charges ex-Fannie, Freddie CEOs with fraud
Fannie Mae’s Former Chief Fights to Clear His Name

Enforced Ethics

1. Why does Mills make the argument that it is critical for society to have a sociological imagination?

He argues that the sociological imagination is crucial not only for individuals, but also for groups, to use when making decisions.  Throughout the article, he explains that if people act with this kind of consideration, they will be able to operate in a more understanding manner. By doing this, it not only makes society better, but it would create a cohesiveness of decision making for both one’s personal and business life. Mills continues that society needs the sociological imagination in order to think carefully – using the information to act in a way that is significant or sometimes insignificant to them.  Mills suggests that motives of one’s behavior wouldn’t be questioned since the thought process could by the society that used this method of thinking.

2. What did Standard and Poor and Moody do to contribute to the financial crisis of 2008?

Listed above are the two largest rating companies that helped contribute to the recession. Their purpose was to rate the riskiness of securities, and especially mortgages. Although the questions asks, “what did” they do, the question should be asked in terms of “what didn’t they do?”

The businesses continued rating mortgages on the highest possible levels, which in fact in some cases, have been disqualified. The problems were that the companies did not foresee a decline in the housing market, and therefore failed in their responsibilities. The system in which they were giving these ratings was thoroughly defective.  The companies were giving high ratings, not because the people deserved them, but in order to be hired by the agencies that were giving these ratings. This in turn ensured more happy customers, and therefore created a higher paycheck for Standard and Poor and Moody. By failing to give appropriate ratings, high-risk investments were made because of a falsely high rating.

3. Should large businesses leaders be obligated to make sure that their company is run in an ethical manner?

“Ethical” is a loose term, for the definition can vary depending on who is answering the question. If we reflect on the sociological imagination that Mills discusses, there is an explanation of ethical reasoning outlined that business leaders should use. By utilizing the imagination, there will always be a simplistic or creative solution that is likely to end with a positive outcome – not only for oneself, but also for the community involved. Although events cannot be changed, it is the reaction and adaptation to these occurrences that define the nature and ethical practices of a business.

The company Barclays was involved in a scandal in which they were being accused of rigging interest rates. After months of a quiet lull, Anthony Jenkins came out publically to publically uphold the five values most cherished by the company: respect, integrity, service, excellence and stewardship. He also states that he doesn’t “want to do it for public relations…it is simply how [he] will run Barclays. Yes, this announcement was made after a scandal, but it simply amplifies the point that leaders should make sure that the company is run in an ethical way. Not only will they have to out and apologize to the public, but will have to take the time to restructure the way the company runs; meaning time wasted. Leaders do have the obligation to enforce ethical practices, for it is the only way to ensure self-preservation from a shaming community.


Social Issues and Creative Solutions

  1. Are we merely avoiding social issues by making them into personal troubles?

More and more people are starting to place society’s issues on individuals. Many great public issues are becoming ignored and  dealt with wrongly because people neglect to connect both individual and public connections. Mills describes trouble as a private matter or when a value cherished by an individual becomes threatened. On the other hand, an issue is a public matter or when a value cherished by the public is felt to be threatened. However, people neglect to recognize that an issue is the aggregation of personal troubles.

For example, look at the education debate in America. Many people place the blame on students or teachers not trying hard or caring. These people ignore both the personal limitations and boundaries of the education system.  They merely place the blame on the INDIVIDUAL. Rather than thinking critically and gathering all the information, they avoid problems of modern society. They neglect to ask “Why are teachers not trying hard?”, “Why are students not caring about education”, “Why do teenagers work rather than go to class?” If they were to ask these questions, they would notice both personal and public restrictions like public school’s limited funding, students forced to help their parents with finances, student’s unhealthy family life, peer pressure, drugs, racism, and many other topics.

Overall, instead of placing the blame on individuals, people need to recognize that public issues are not caused by one simple explanation. But, rather they need to seek more in-depth explanations for the issue by looking at both the issue and the troubles to obtain a valuable solution.

  1. How much did the Mortgage industry really change?

Reading Managing Business Ethics: Straight Talk about How to Do it Right by Linda Trevino and Katherine Nelson, I had an intuition to talk my father for the first time about his 15 year experience in the mortgage industry.  When I asked to talk to him about the 2008 crash, he immediately laughed and said “it was a shit show.” Starting in 1994, he said it started to dramatically change in the late 1990’s. Every year there was a complete change in both State and National regulations.  For example, in 1997 Texas permitted home equity loans that allowed a person to barrow up to $80,000 on the house.

One of the biggest changes was that receiving a mortgage became easier and easier. Before, it was practically impossible to obtain a 100% loan even if you had great credit. However, when banks and mortgagors started to make more money, mortgages restrictions decreased. My father explained one of the biggest changes was that usually people had to make a 20% down payment and if you had bad credit, you simply were denied a loan. But by the late 1990’s, banks were  handing out 100% mortgages to people with bad credit merely because the more loans they approved, the more money they  receive.

My father then explained how this was all based on greed with in the industry. Luckily, owning his own company allowed him to maintain his moral standards. However, he still constantly competed with the big banks and companies that ignored ethics. For example, many clients would claim that the other banks offer them a better mortgage and my dad would have to explain that they were offering an “improper loan.” This means that the mortgagor was leaving out valuable information or actually lying about the loan. One of the most common ways mortgagors tricked clients was by neglecting to inform them of the variable rates. This allows them to qualify for a low down payment, but after a year the rate would double or triple and the person would be forced to pay.

All of this is out of the name of greed. Banks and mortgagors were only concerned with making money through giving out as many loans as they could; as a result, they gave loans to people who cannot afford to pay them back. My dad was fortunate to never have one bad complaint about his business ethics and loans. He exemplifies how not all businesses choose to act unethically. Overall, ever since the late 1990’s, the increasing lack of registration in the mortgage industry no doubtable contributed started the financial crisis in 2008.

3. How does social imagination apply to businesses?

Mills explains that social imagination is the ability to adapt and develop reason to not only understand the world around you, but also understand what is happening within themselves. By utilizing his imagination, a person can gauge his own fate rather than be controlled by outside circumstances. For this reason, I believe that there is a creative solution to almost anything.  Many people blame the event or outside factors for problems in their lives; however, it all comes down to creating the solution. Since most of the time you cannot change the event, you have to create a solution to obtain your desired outcome.

Just like individuals, businesses too have to discover creative solutions that help them achieve their goals. For example, Whole Foods created a solution to sell sustainable fish without impacting their sales negatively. Another example of a social imagination used in a business environment is Chipotle.  Chipotle founder, Steve Ells, started his restaurant with the intention to change the fast food industry. His goal was to show the world that sustainable farming is possible on a large-scale. Through creative marketing and business strategies, Chipotle has become a unique leader in the fast food industry that illustrates sustainable farming methods. When everyone thought they would not be able to offer organic fast food at their expensive price, they found a way to control their own fate and succeed. They show that businesses can use social imagination to control their fate and reach their goals as well.

Contemporary United States and Corporate Reputation

1)     Explain the condition of uneasiness and indifference and how it defines our current period.

C. Wright Mills declares that uneasiness arises when people are unaware of any cherished values, but still sense a threat. The experience of indifference occurs when people are neither aware of any cherished values nor experience any threat. This indifference can turn to apathy, if it encompasses all of a persons’ values. Our current period is marked by uneasiness, which is a personal trouble, and the issue of indifference. Mass leisure, as opposed to poverty, has become the center of concern. The problems created by this leisure time, coupled with the ambition of men at work in the incorporated economy have shaped the problems of public and private life. Uneasiness and indifference now form the social and personal climate of American society. Social scientists must distinguish the elements of uneasiness and indifference while possessing the sociological imagination quality of mind.

2)    Explain how unethical actions affect not only single businesses, but also entire industries and countries.

Business behavior affects personal and company reputations, society, and national reputation as well. Reputation in the business world influences everything. For example, reputation influences trade relations, who will hire you, buy from you, or who will finance your debt. Unethical behavior can tarnish the reputation of a business with lasting consequences.

National reputation can be compromised when unethical actions lead to a major crisis. The 2008 financial crisis had its roots in the United States. The reputation of the U.S., in turn, suffered greatly because of individuals and certain companies. China’s reputation has also suffered due to the contaminants found in some of the country’s exports. These scandals point out the key takeaway that corporate misbehavior does not solely affect corporate reputations. This sort of unethical behavior has detrimental effects that impact entire industries and countries.

3)   How much does corporate reputation actually affect the bottom line?

Corporate reputation greatly impacts consumer buying patterns. Companies that take part in unethical behavior run the risk of harming their bottom line in today’s business world where reputation means everything. For example, two recent scandals have surfaced in corporate Japan that have each been highly detrimental to the companies involved. The first of these scandals occurred when the former chief executive of Olympus, the medical imaging and digital camera maker, released internal documents proving that the company made over $1 billion in improper payments over a series of acquisitions. As a result of this behavior, the company has lost half its stock market value this month.

The other major controversy of Japan concerned the country’s leading tissue maker, Daio Paper. The company filed a criminal complaint against its former chairman who allegedly borrowed $140 million in company money and channeled some of it to a Las Vegas casino company. Ex-chairman, Mr. Ikawa has admitted to borrowing the money but has suggested he intended to return it. Consequently, Daio Paper’s share price has dropped about 15 percent since the reports about the loans began to surface in the local media. Both of these scandals mark the importance of maintaining strict corporate responsibility. Unethical decisions have the ability to greatly upset a company’s bottom line.

Unanswered Questions of Business Ethics

1. Is the sociological imagination still relevant today?

It has been roughly fifty years since C. Wright Mills wrote The Sociological Imagination, which begs the question, is the sociological imagination still relevant today? In my mind, the answer to this question is clearly yes. The sociological imagination shows how big social issues are connected to personal issues of both biography and history. Mills makes the argument that in order for people to think on a critical level, they have to connect what is happening to them to larger universal forces. In other words, they must combine the individual with the surrounding society. Mills defines the sociological imagination as “the vivid awareness of the relationship between experience and the wider society.” In order for you to have a sociological imagination, you must be able to separate yourself from the current situation and think from a different point of view. This can be applied to any behavior. For example, take the common activity of attending a concert with friends. If we try to think like Mills, he would probably argue that attending the concert is not just about listening to a musical performance, but rather, has symbolic value as a social ritual. It is an important occasion for social interaction among peers and friends. Although Mills’ perspective is much more complex than the example I just described, I think it is a situation to which we can all relate.

2. Did poor ethical behavior give way to the financial disaster of 2008?

When reading the first chapter of Treviño and Nelson’s, Managing Business Ethics, I wondered, did poor ethical behavior give way to the financial disaster of 2008? I had thought about this before in passing, but never in great detail. After reading this chapter it became clear to me that although many of the activities that took place were not against the law, they were completely unethical. It was some of these activities that laid the foundation for the financial crisis. Out of all of the things mentioned, the one that impacted me the most can be seen under the subheading “Those Who Were Supposed to Protect Us Didn’t”. Rating agencies, the actions of AIG, bank CEOs/executives, and regulatory agencies and legislators are all partially to blame. One of the major mistakes made during this time was that banks made the unethical decision to loosen credit restrictions. In result, borrowers that had no proof of employment or income were given loans. This is a prime example of the crucial role that ethics play in the world of business.

3. Are business leaders motivated to act ethically for selfish reasons? 

The motives behind human behaviors are complex. There are two ideas that I have deduced to be the main reasons business leaders act ethically. The first being that they do what is right because they want to better society, and the second is that they do what is right because they expect it to benefit themselves in the long run. It is my conjecture that most business leaders are motivated by a combination of the two. For instance, let’s think about the various reasons more and more companies are deciding to jump on the environmental bandwagon and “go green”. Yes, “going green” is great for the environment. But is that the ONLY reason that companies are turning over a new lead toward greener technologies? My answer to this question would be a definite no. When a company invests in these new technologies and devotes new efforts in becoming environmentally friendly, they are given grants, loans, tax incentives, and hope to gain thousands of new customers. For these reasons I think that some business leaders act ethically in order to put themselves and their companies in better financial positions.

Lessons Learned

1. How did the rising cost of real estate affect the Financial Crisis?

Trevino and Nelson contend that the financial crisis of 2008 was caused in part by an unprecedented flow of financial capital into commercial and housing markets. People at the time were under the impression that investing in real estate would be a safe and conservative option. According to Trevino and Nelson, “there had been relatively few instances of real estate value declining” so naturally, people put their money into what had always been considered a safe investment. However, what many did not expect was real estate becoming an overwhelmingly popular way to invest. 


Aided by historically low interest rates, by the early 2000s, demand had overtaken supply and the value of homes soared. People bought houses with no down payments in anticipation that their homes would be worth more in a few years than what they had paid for it. Homeowners mistakenly believed the value of their real estate could only increase. As a result, homeowners spent money on things under the premise that they could afford them based on the value of their homes. This would come back to bite them when housing values fell off a cliff in 2008 and 2009. Many homeowners were left with no choice but to declare bankruptcy and walk away from their house. Ultimately, the rising cost of real estate led people to spend more, leaving them with little when the housing bubble burst. 


2. Would Mills argue that having sociological imagination is beneficial to society?

Mills argues that having sociological imagination is critical for both people and societies to grasp. It would make society better in the sense that people would be more open-minded, and they would be able to answer questions by relating their personal lives and situations to societal issues. A person using sociological imagination is more able to think and act critically in accordance with evidence both relevant and irrelevant to himself/herself. For Mills, the key to understanding the value in such a perspective is in appreciating that one can only understand the motives, behavior, and actions of others by locating them within a wider and more meaningful context. So, yes, Mills would maintain that having sociological imagination is beneficial to society as a whole. 



What is the current real estate situation? How can we prevent the housing bubble from bursting again?

Real estate value is rebounding in full swing. Prices are on the rise. According to a recent report by Corelogic, “House prices are up 6.3% year-over-year in October, the largest increase since 2006 and eighth consecutive increase in home prices nationally on a year-over-year basis.” The future looks bright as well: J.P. Morgan thinks prices could gain another 10 percent in the next 12 months. Of course, there are reasons too be skeptical as this is the second time that prices rallied since the bottom fell out in 2006. Will this growth continue? Or is it the real deal this time? Something else to consider is just how much do we want real estate value to grow? It was surging prices that initiated the collapse in the first place. 


There’s already talk of the next housing bubble. As the market improves, we need to protect ourselves by shifting away from the incentives that helped create the real estate bubble that trapped us. We’d like to think that hard lessons were learned. However, we must stop relying on credit and bad mortgages. As the housing market recovers, we need to make some decisions that allow the housing market to rise on a strong, sustainable foundation.