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Decisions and Risk Management That Led to the Subprime Mortgage Crisis

The U.S. financial markets have experienced a storm unseen since the Great Depression (some say worse than that). Losses in the financial sector wiped out much of the liquidity in the U.S. credit industry, further affecting companies' ability to borrow and continue operations. The ensuing recession has had a staggering effect on the world economy, leading to millions of job losses and causing national governments to intervene to keep the world financial systems from collapsing altogether. Because our objective in this book is to understand and learn about computer-supported decision making, we will not dig deep into financial aspects of what led to the subprime mortgage crisis. Many of the following Web sites do a good job of explaining or illustrating what happened. Review the material at the following sites (and thousands of others like these):

- (Caution: some people may find a few words offensive.)

- E. L. Andrews, "My Personal Credit Crisis," magazine/17foreclosure-t.html?_r=1&ref=magazine&page-wanted=print




Read as many of these stories as you can. They paint a picture of a complete disregard for risk, irrational assumptions, lying, pure and simple greed, and follow-the-crowd mentality (groupthink). It will be a good learning experience to discuss the crisis in context of the decision-making model described in this chapter.

Questions for the Case

1. Apply principles of the intelligence phase of Simon's decision-making model, and discuss major problems that led to the subprime mortgage crisis.

2. Given what has already taken place, reapply the intelligence phase principles to determine the current state of the problem.

3. What can you recommend about the crisis now? Apply design and choice phase principles to guide you.

4. What issues will you have to keep in mind as you move your proposed solutions to implementation?

Solution Preview


Hope you are well.

1. Apply principles of the intelligence phase of Simon's decision-making model, and discuss major problems that led to the subprime mortgage crisis.

The main elements within the intelligence phase of Simon's decision making model are in reference towards utilizing the finding, identifying, and formulating the solution of the problem to issuing out a decision. Thus, the findings indicate an extreme lack of "oversight" and "responsibility" to adhere towards viable measures preventing greed to lead towards subsequent recession. The crisis in subprime lending mainly correlated to the conditions of poor market choices as well as lending choices attributed towards several events stemming from conditions of the following elements:

a) foreclosures

b) delinquencies

c) decline of securities that are secured by mortgages (try and think of the lack of value attributed to the mortgages that only led to continue failure in the financial structure)

Aim in framing the several monetary models of subprime lending of poorer decisions to approving the loans and corresponding ineffective choices to using securities as collateral to only contribute to failure. Thus, the mortgage financial market leader's failure in oversight and good judgment call to warrant such poorly constructed loans, primarily, lead to the collapse of the economy. Try and identify the series of events and conditions impact of mortgage delinquencies over a period of time (the amount of many borrowers unable to pay and the continuation of bad decisions that unwilling to make the required different design decisions).

Moreover, the design alternatives within the mortgage financial institutions only continued the ...

Solution Summary

The solution reviews the subprime mortgage lending crisis using Simon's decison-making model and offering recommendations with implementation suggestions to improve the situation. 1056 words with references.