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The Moral Mathematics and Responsibilities of Financial Crises

By: Kathryn E. Ghotbi1JD, New York University School of Law, 2020; BA in Philosophy, Art History, New York University College of Arts and Science, 2016. My deepest gratitude to Professor Kwame Anthony Appiah for his guidance and supervision of this research. Many additional thanks to Chris Shenton and Thomas McBrien for their invaluable editing work. This piece has been adapted for publication from a longer paper titled “2008’s Harmless Torturers and Group Agents: The Moral Mathematics and Responsibilities of Financial Crises.” For a more thorough explanation of the causes of the 2008 Financial Crisis, analysis of the philosophical underpinnings, and responses to anticipated counter-arguments, you can find the full version here.

August 2, 2020


The 2008 Financial Crisis was the most significant economic catastrophe since the Great Depression.2See U.S. Dep’t of Treasury, The Financial Crisis Response In Charts 2 (2012), About nine million jobs were lost.3See id. Households across America lost more than $19.2 trillion in cumulative wealth.4See id. In 2008 alone, one in every 54 American households was subject to foreclosure.5See Les Christie, Foreclosures Up a Record 81% in 2008, CNN Money (Jan. 15, 2009, 3:48 AM), Like the Great Depression, the 2008 Financial Crisis precipitated unquantifiable harm to millions of people, not just in America but around the world. More than a decade since the market crashed, average wages were only just beginning to rise beyond pre-recession levels6See Ben Casselman, Why Wages Are Finally Rising, 10 Years After the Recession, N.Y. Times (May 2, 2019), before the coronavirus pandemic sent the global economy into a tailspin.7See Larry Elliott, Blindsided: How Coronavirus Felled the Global Economy in 100 Days, The Guardian (Apr. 9, 2020),; Renae Merle, A Guide to the Financial Crisis — 10 Years Later, Wash. Post (Sep. 10, 2019, 1:47 PM),–10-years-later/2018/09/10/114b76ba-af10-11e8-a20b-5f4f84429666_story.html.

Common moral intuition tells us that we ought to hold individuals responsible for the harms they cause. This desire for justice did not cease in the wake of 2008. After millions of people lost their homes, retirements, investments, and even their lives,8See Melanie Haiken, More Than 10,000 Suicides Tied to Economic Crisis, Study Says, Forbes (June 12, 2014), it was a natural question — who is to blame for this harm? Who should pay?

This paper will argue that no one person should. The extant scholarship on the 2008 Financial Crisis has, until now, mainly analyzed these questions of accountability through legal or political lenses rather than philosophical. But policy and law require moral legitimacy to be justifiable and effective. Building on ideas from the philosopher Derek Parfit’s Reasons and Persons, this paper will show that the moral mathematics of the 2008 Crisis “add up” to the conclusion that society would be making a fundamental moral mistake to punish individuals for the resultant harms. Instead, we should hold the relevant corporations and financial institutions accountable as the morally culpable group agents. Therefore, these actors have an ethical obligation to institute compliance programs that regulate how their employees’ actions contribute to systemic economic risk. And now, with the world dealing with another sudden economic crisis on a scale potentially orders of magnitude larger than 2008’s relatively confined recession,9See Adam Tooze, Is the Coronavirus Crash Worse Than the 2008 Financial Crisis?, Foreign Pol’y (Mar. 18, 2020), assigning the costs of tracking and regulating these risks to the responsible agents is more important than ever.


1. The Post-2008 Responses, Enforcements, and Inaction

 A common refrain against the imposition of corporate criminal liability is that it doesn’t effectively deter the offenses it punishes.10See, e.g., Assaf Hamdani & Alon Klement, Corporate Crime and Deterrence, 61 Stan. L. Rev. 271 (2008); Jennifer Arlen & Marcel Kahan, Corporate Governance Regulation through Nonprosecution, 84 U. Chi. L. Rev. 323, (2017). The argument generally states that the threat of prison time doesn’t deter corporations in the same way it might deter individuals.11See Arlen & Kahan, supra note 10, at 344 (“Criminal law cannot optimally deter crime by publicly held firms unless the individuals responsible for the crime are personally sanctioned for the wrongs they commit.”). In the aftermath of 2008, calls to prosecute individuals were widespread. The Occupy Wall Street movement was born in Zuccotti Park under the shadow of the financial institutions and rating agencies that had failed in 2008. Among the many goals of Occupy Wall Street was the demand for greater individual accountability for the 2008 Crisis—a position that garnered the movement political sympathy on both sides of the aisle.12See, e.g., Kim Geiger & Maeve Reston, Mitt Romney Sympathizes with Wall Street Protesters, Chi. Trib. (Oct. 11, 2011, 2:00 PM), http:/; Jessica Desvarieux, Pelosi Supports Occupy Wall Street Movement, ABC News (Oct. 8, 2011, 4:15 PM), For years after the crash, the Department of Justice faced criticism that it had “coddled Wall Street criminals” and was under immense pressure to flex the might of the criminal justice arm of the American government.13See Matt Apuzzo & Ben Protess, Justice Department Sets Sights on Wall Street Executives, N.Y. Times (Sept. 9, 2015), A now-infamous 2015 memo drafted by then-Deputy Attorney General Sally Yates outlined updates to DOJ policies and procedures that would make the prosecution of individual employees of implicated corporations a top priority—tacitly acknowledging that their response had failed. In an interview, Yates stated that “[c]orporations can only commit crimes through flesh-and-blood people…It is only fair that the people who are responsible for committing those crimes be held accountable.”14Id. These policy changes would explicitly give credit—in the form of potential billions of savings from civil or criminal settlements—to corporations for cooperating against individual employees. However, after all this sound and fury, only a single banker went to jail.15See Jesse Eisinger, Why Only One Top Banker Went to Jail for the Financial Crisis, N.Y. Times (Apr. 30, 2014),

While the Department of Justice at least nominally acceded to the activist drive to prosecute individuals, there is an extremely significant harm that individual prosecutions for corporate crime do not prevent nor purport to prevent: systemic economic collapse. Autumn 2008 brought with it the fall of Bear Sterns, Lehman Brothers, AIG, Washington Mutual, and Wachovia—all deemed infamously, and contrary to their eventual fates, “too big to fail”16Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report: Final Report on the Causes of the Financial Economic Crisis in the United States xvi (2011) [hereinafter Financial Crisis Inquiry Report].—while the government took more control over Fannie May and Freddie Mac. While the creation of this economic climate and eventual collapse wasn’t the direct result of fraudulent practices or malicious actions by individuals, it did arise from risky trading practices bordering on institutional recklessness.17Id. at xviii–ix. And, crucially, it was entirely avoidable.18Id. at xvii (“We conclude this financial crisis was avoidable.”). The Financial Crisis Inquiry Report, completed in 2011 after years of government-funded research to determine the sources of the collapse, put it artfully: “The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. […] To paraphrase Shakespeare, the fault lies not in the stars, but in us.”19Id.

2. The Harmless Torturers and Moral Mathematics of 2008

Derek Parfit, in his treatise Reasons and Persons, outlines the “Fifth Mistake” that is commonly made in what he dubs “moral mathematics.”20Derek Parfit, Reasons and Persons, 67 (1986). This mistake is to believe that an act cannot be either right or wrong, because of its effects on other people, if these effects are imperceptible.21Id. at 75. The argument can be illustrated as follows:

World A: There are a thousand torturers each inflicting pain on their own victim. Each torturer turns a switch on a torture device a thousand times, but each turn of the switch affects the victim’s pain in an imperceptible way. After the thousand turns, however, the torturer has inflicted severe pain on his victim.22Parfit calls this world “The Bad Old Days.” Id. at 79.

World B: In this world, each of the torturers presses a button that turns the switch once on each of the thousand instruments. The victims still suffer the same extreme pain as in World A. But none of the torturers makes any victim’s pain perceptibly worse.23Parfit calls this world “The Bad Old Days.” Id. at 79.

The key difference between these worlds is that in World A, we can appeal to the total effect of what each torturer does to explain why what he does is wrong, since all the acts taken together inflict severe pain on his victim. In World B, the same cannot be said—each of the Harmless Torturers, as Parfit calls them, causes no one victim to suffer more.24Assuming of course, you accept the piece of the hypothetical that stipulates that someone’s pain cannot become imperceptibly worse. Alone, they don’t really harm anyone. But is what they do still wrong? Parfit says it is.25Parfit, supra note 20, at 80 (“Even if none of them harms anyone, the torturers are clearly acting wrongly.”). He states, “[i]f we cannot appeal to the effects of what each torturer does, we must appeal to what the torturers together do. Even if none of them causes any pain, they together impose great suffering on a thousand victims.”26Id.

Parfit continues by arguing that when (1) outcomes are worse when more people suffer, and (2) each member of a group could act in a certain way, and (3) they would cause other people to suffer if enough of them acted in this way, and (4) they would cause people to suffer the most if they all acted in this way, and (5) each of them (i) knows these facts and (ii) believes that enough of them will act in this way, then (6) each would be acting wrongly if he acted in this way.27As Parfit notes, this argument raises a classic Sorites Paradox. A Sorites Paradox refers to a problem associated with vague terms and their boundaries. For example, how many straws make a heap? I won’t discuss these sorts of problems here, just as Parfit chooses not to. See id. at 81. Parfit concludes that this argument illustrates that it is a fundamental moral mistake (his “Fifth Mistake in moral mathematics”) to think that an act cannot be wrong because of its effects on other people, if those effects are imperceptible.

But what if part (5) of his above argument was negated? Imagine an additional world:

World C: Each torturer presses a button that turns the switch once on each of the thousand torture devices, the victims suffer the same extreme pain as in World A, and none of the torturers makes any single victim’s pain perceptibly worse. These facts are identical to World B except that each torturer believes himself to be the only one “on the job.” Each torturer believes that when he presses the button, he is the only one doing so.

These torturers in World C believe they are in a world where no perceptible harm is being done, but in fact, they are effectively in World B: they are each a Harmless Torturer contributing to widespread and extreme pain. Nothing has changed except the subjective knowledge and intent of each actor. The moral difference between Worlds B and C seems to be that in World B, when the larger harm is reduced to its causal acts, each individual act is wrong because despite the imperceptibility of the pain from each turn of the devices, each actor knew they were contributing collectively to a greater harm. Alternatively, while the sum of all the Harmless Torturers’ actions in World C create an egregious harm, each act individually (1) causes no perceptible harm and (2) is done without the knowledge that it will contribute to a larger collective harm. Without the subjective knowledge of the harm or its potential, there is no clear avenue to attaching “wrongness” to these causal acts.

The Financial Crisis Inquiry Report, like most of the literature on the 2008 Crisis, concludes that three specific components of the “complex machinery of our financial markets,” contributed primarily to the conditions that caused the eventual failures of those corporations that were “too big to fail”: (1) the combination of the decline in mortgage-lending standards and the rise of mortgage securitization, (2) the widespread use of “over-the-counter” (OTC) derivatives such as credit default swaps (CDSs) and synthetic collateralized debt obligations (CDOs), and (3) flawed credit ratings from the rating agencies.28Financial Crisis Inquiry Report, supra note 16, at xxiii, xxv. Academics who have studied this Crisis are, of course, correct to emphasize that dozens of other amorphous conditions contributed to the crash as well, such as the ascension of a pervasive culture of financial risk-taking, changes in corporate governance models, lack of institutional transparency, and—some have gone as far to say—omnipresent greed. These secondary factors, while important to the causal explanation of the Crisis, will go largely undiscussed in specifics in this section. However, these cultural and institutional factors implicitly underlie each trade executed, every security packaged, and all the pertinent decisions made, and will be considered further in Part II. When we reduce the 2008 Crisis to the constituent acts that created it, we are left with thousands of commonplace tasks that financial institutions and corporate employees performed over the span of the thirty years between the creation of these complex financial products and the economic crash that they eventually precipitated. These tasks included purchasing mortgage-backed securities (MBSs) and subprime-MBSs; trading or investing in CDOs and CDSs; rating the creditworthiness of these financial instruments; and the research, information-gathering, and value-assessment associated with these various investments and ratings.29For a more detailed explanation of the causes of the 2008 Financial Crisis, see Kathryn Ghotbi, 2008’s Harmless Torturers and Group Agents: The Moral Mathematics and Responsibilities of Financial Crises 9–12, SSRN (July 30, 2020), available at The employees acted according to the financial incentives, knowledge, and innovations of the time—and were all, in theory, authorized to do so by legislation encouraging investment in the secondary mortgage market.30See Secondary Mortgage Market Enhancement Act of 1984, 98 Pub. L. No. 440, 98 Stat. 1689 (1984); Tax Reform Act of 1986, 99 Pub. L. 514, 100 Stat. 2085 (1986) (known colloquially as the REMIC law, standing for real estate investment conduit). And now, with the benefit of hindsight, we can determine that each of these acts was imperceptible in the harm it caused to the 2008 Crisis, both in terms of (1) the minute marginal risk each act contributed to the overall systemic economic problem and (2) the fact that each act would have been almost impossible to identify amongst the greater investment landscape.

The individuals whose actions literally caused the crash, therefore, each (1) contributed imperceptibly to the Crisis (2) without knowing (or having reason to know)31This is a crucial aspect of their moral culpability and will be discussed further below. about their contribution to the systemic economic risk—risk that would eventually lead to widespread harm and financial devastation across America and the rest of the world. They were the World C Harmless Torturers of the American financial markets. The investments they made used financial tools commonplace at the time and contributed only imperceptible harms—if they caused any harm at all—on an individual basis. Just as it would be morally incorrect to ascribe blameworthiness to the Harmless Torturers in World C, it would be a fundamental moral mistake to hold individuals accountable for the 2008 Crisis. Of course, imperceptibly harmful actions can still be wrong when they affect people despite their imperceptibility, as Parfit points out in his analysis of the Fifth Mistake.32See Parfit, supra note 20, at 81. But, as explained above, they can only be wrong if those actions were done with the knowledge of their role within a grander harm.

In the conditions that precipitated the 2008 Crisis, it would of course be correct to state that there were actors who were aware of the potential for a larger economic collapse. Pop culture has enshrined many of them as oracles who warned the public of possible financial market catastrophe.33See, e.g., The Big Short (Paramount Pictures 2015); Too Big To Fail (HBO Films 2011); Inside Job (Sony Pictures Classics 2010). Therefore, it can be argued that since some people did in fact see the potential for larger harm before it resulted, the actors who caused the crisis either (1) did know and consciously chose to ignore these warnings or, (2) should have known because those harbingers found ways to assess the risks, therefore so should have others. This objection can be addressed in two ways. First, even if some people did know of these warnings, the vast majority of the actual causers—the individual actors discussed above—did not. If we exclude all those individuals who were aware of these prescient warnings, the objector would still be left with the difficult problem of explaining the thousands of other seemingly imperceptible actions that contributed to an aggregate harm absent the requisite knowledge for blameworthiness.

Second, to say that the individual actors should have known is to make two implicit mistakes: (1) to ignore the information asymmetry between past and present, and (2) to demonstrate a factual misunderstanding about what data individual actors at the time had access to. An aphorism explains the first mistake better than any logical proof could: hindsight is 20/20. In economics and financial services, there are and will always be educated disputes over which indicators are legitimate predictors of outcomes. To ascribe prophetic wisdom to these individuals who warned of the potential for an economic crisis may or may not be correct, but it does label past actions praiseworthy using present standards of judgment. It would be a mistake, then, to state that actors should have seen this potential, when that would put blame on the past mental states of persons because of disputable future consequences. The second mistake is simply a factual one: to state that individuals should have seen the potential for crisis is to assume they had access to the data that could have allowed them to come to an informed decision. On the level of individual employees, this kind of access to sprawling investment data and trading information would have been virtually unheard of. The relevant information was only accessible on a corporate, or even market-wide, level.34This point is important and will be discussed further in Part II. Not only was the information accessible on this higher-level, but so were the reasons to analyze that data; individual employees simply had no reason to check.35The reasons why individuals had no reason to check for these risks (momentarily setting aside the important fact that these employees simply had no access to the relevant data) include that it simply wasn’t within the responsibilities of these individual employees to check for these systemic economic risks, they each were not in a position to analyze such widespread data, and—most importantly—the reasons to analyze this data were instead held by the corporations that employed them. This final, crucial point will be discussed in detail in Part II. It would be perverse to state that someone should have known something that they could not have known and, crucially, had no reason to know.

Another skeptic might say that none of this is relevant if the foundational cause of the 2008 Crisis was fraud. The fact that the actions caused only imperceptible harms is meaningless if the motivation underlying these actions was a fraudulent one, or if the system was pervasively tainted by fraud, because the individual acts themselves were wrong. Therefore, the individuals should be prosecuted.36See, e.g., Jed S. Rakoff, The Financial Crisis: Why Have No High-Level Executives Been Prosecuted, N.Y. Rev. Books (Jan. 9, 2014), It is true that the exact degree to which fraud contributed to the Crisis remains a controversial topic amongst economists.37See, e.g., Atif Mian & Amir Sufi, Fraudulent Income Overstatement on Mortgage Applications During the Credit Expansion of 2002 to 2005, 30 Rev. of Fin. Stud. 1831, 1831–32 (2017).  However, what is clear is that the majority of the causal products, strategies, and financial innovations were not related to intentional misconduct, but instead fell within both ethical and legal grey areas.38See generally Financial Crisis Inquiry Report. This objection, however, is a factual one that falls outside the scope of this paper. To the extent that any clear, fraudulent actions by individuals contributed to the crisis, those individuals should of course be held accountable. But it remains clear that those actions were at least not the foundational cause of the Crisis and are not what this paper analyzes.

Yet another skeptic’s argument might proceed by questioning how this story accounts for the reality that these actions—the individual investments, trades, and ratings discussed above—were controlled by high-level figures. Isn’t it deeply unnatural to reduce the 2008 Crisis to the individual employees executing these trades rather than the C-Suite members that directed them? Few really think that the employees are to blame—the public all along has wanted CEOs and corporate boards to “pay.”

Of course, the literature does not describe the Financial Crisis in terms of how each singular trade by each corporate employee compounded to create ultimately untenable economic conditions. But even CEOs, board members, and other high-level organizational members are corporate employees. These actors, too, were—in the vast majority of cases—directing individual imperceptible harms without the knowledge that their directions would contribute to systemic economic risk. But, this skeptic would also be correct to argue that as the leaders of these corporations, the harms for which these C-Suite officers were responsible certainly must have combined to be so large as to no longer be labeled “imperceptible.” Because these officers are responsible for actions other than the ones they take themselves, the moral responsibility of these individual C-Suite members is inextricably intertwined with the collective actions of the corporate group. In other words, the CEOs’ and board member’s attractiveness as targets for blameworthiness inherently stems from their identities as figureheads of the corporation itself. Is the moral intuition expressed by this skeptic, then, identifying the reality that each individual C-Suite member is responsible for the harm, or alternatively, is it attaching to the deeper truth that the corporation as a collective is to blame?

The remainder of this paper will show that the latter view is the more morally correct: while it would be a mistake to hold individual persons—even individual CEOs and board members—accountable for the 2008 Financial Crisis and other similarly created economic crises, it is instead correct to appeal to their moral responsibility as collective agents. The 2008 Financial Crisis wasn’t wrong because each individual trade, investment, or rating was itself wrong, but because collectively these actions compounded to create extreme economic risk that resulted in widespread harm—a harm that no individual could be rightfully blamed for not having predicted. Instead, corporations and financial institutions operating as group agents are to blame, and they have the ultimate moral obligation to institute compliance programs that monitor how their employees as individual actors contribute to systemic economic risk.


1. The Philosophy of Group Agency and Collective Responsibility for 2008

The preceding section argued that it would be a moral mistake to hold individuals accountable for the 2008 Financial Crisis and its harms. But causal responsibility is not the only factor that contributes to the kind of “responsibility” discussed here. Responsibility in the full sense requires that the agent is a candidate for blameworthiness or praiseworthiness;39Philip Pettit, Responsibility Incorporated, 117 Ethics 171, 173 (2007). mere causation isn’t sufficient.40Id. The philosopher Philip Pettit, who has written extensively on the philosophy of group agents and corporate responsibility, opens his article Responsibility Incorporated by stating that there are some cases where, “it can make good sense to hold that while the individuals involved may not bear a high degree of personal responsibility, together as a corporate enterprise they should carry full responsibility for what occurred. Although the members may not fully satisfy the conditions for being held personally responsible […] the organization as a whole may satisfy such conditions perfectly and may be fully fit to be held responsible.”41Id. at 171–72 The 2008 Financial Crisis, and other instances of economic collapse caused by systemic risk, are such cases.

Pettit outlines three conditions that must be met in order to hold an agent responsible for a given choice in this way: (1) he or she is an autonomous agent and faces a value-relevant choice involving the possibility of doing something good or bad or right or wrong, (2) the agent has the understanding and access to evidence required to make judgments about the relative value of such options, and (3) the person has the control necessary to choose between options on the basis of judgments about their value.42Id. These characteristics are generally uncontroversial requirements in the philosophical community for fitness to be held responsible.43See Matthew Talbert, Moral Responsibility, Stanford Encyclopedia of Philosophy Archive §§ 1, 2.3, 3.1.1, 3.2.1 & 3.2.2 (Winter 2019 Edition), available at Where Pettit innovates is in his application of these features to “group agents,” including corporations.44See Pettit, supra note 39, at 176 (“I argue that corporate bodies are fit to be held responsible in the same way as individual agents, and this entails that it may therefore be appropriate to make them criminally liable for some things done in their name; they may display a guilty mind, a mens rea, as in intentional malice, malice with foresight, negligence, or recklessness.”). Like persons, groups must satisfy the three above requirements to be fit to be held responsible.45See id. at 177. Furthermore, group agents must have (1) individual members that act on shared attitudes,46This is a broad generalization. For a broader discussion of this issue, see Ghotbi, supra note 29, at 18–20. (2) programmed conditions that explain the value-sensitive control the group agents involved had over the decisions of these members, and (3) have “the understanding and access” to relevant evidence of the value of options related to their actions. The corporations involved in creating the conditions that precipitated the Great Recession meet all three of these conditions.

First, in order to establish a group’s agency separate and apart from its members, it is crucial to show a unifying intention, belief, desire, or knowledge—some sort of shared attitude—among its members.47See Pettit, supra note 39 at 177–84. While the group’s members must have a shared attitude to be considered a group agent,48But see supra text accompanying note 12. that shared attitude need not be relevant to the moral choice for which it is being held responsible. For example, Facebook is a group agent (in part) due to its members’ shared mission to work to “[g]ive people the power to build community and bring the world closer together.”49Facebook: Our Mission, (last visited Apr. 22, 2020). On some level, this vague attitude is what allows the members to work together to create the conditions of agency—all the members “will each intend that together they mimic the performance of a single unified agent”50Pettit, supra note 39, at 179. through the coordination and execution of Facebook’s mission. What makes Facebook a group is the collection of shared intentions of its members, but once Facebook is established through these members’ shared intentions, it is entirely possible that a sub-group of Facebook can make a decision that not all members of Facebook agree with or are even aware of. If this decision leads to negative consequences—for example, the decision by Facebook’s security team not to immediately disclose the Cambridge Analytica data breach—Facebook as a whole can still be responsible for that decision that only a small subset of its members made. And of course, one shared attitude in most, if not all, corporations is the intention to produce profits by carrying out the corporations business. Any group, once established through the proper shared intentions and attitudes, can be responsible for some of its members’ actions despite the majority of the members not sharing the specific intentions that lead to those actions.

Therefore, in order to hold financial institutions involved in the 2008 Crisis responsible for the harms caused by the crisis, it is not necessary to show that each member of these corporations had a shared intention or attitude to create the conditions necessary to precipitate those harms. The fact that these financial institutions existed as groups before these decisions were made—just as Facebook existed as a group before the Cambridge Analytica scandal—makes it possible to ascribe group responsibility to decisions that only a few members were privy to.

Second, in order to be fit to be held responsible, the group agent must have “the control necessary for being able to choose between options on the basis of judgments about their value.”51Id. at 175. Pettit argues that this control is accomplished through corporate “programmed conditions,” which are created “by maintaining a constitution for the formation and enactment of its attitudes, arranging things so that some individual or individuals are identified as the agents to perform a required task, and other individuals are identified as agents to ensure that should the performers fail, there will be others to take their place as backups.”52Id. This argument is essential because it explains why group agents—and not solely the individuals that comprise them—deserve to be held responsible for the actions that only the individual members can physically perform. Although individual agents can be fit to be held responsible for the actions they commit, “the corporate entity will also have to answer for what it ensures” will be committed.53Id. at 192 (emphasis added).

The relevant financial institutions and corporations, through their programmed conditions, ensured the 2008 Crisis would occur. But corporations are complicated entities, and it would be impossible to document every programmed condition that precipitated the inter-corporate coordination that lead to the Crisis. Some obvious examples of these programming conditions include corporate governance structures, pervasive corporate cultures encouraging financial risk-taking,54Id. internal firm pressures on individuals to perform and innovate to ever-increasing standards, systemic breakdowns in accountability and ethics,55See Financial Crisis Inquiry Report, supra note 20, at xix. and compensation structures that incentivized short-term, risky dealing.56See id. at xix. While these conditions may not be actions that caused the crisis in a strict sense, they are essential to the causal accounting of the Crisis—indeed, the story of 2008 cannot be told without appealing to them. Financial crises caused by amalgamation of risk are of the kind of events that, while implemented by individuals, are undoubtedly programmed by corporations.

Third, in order for a group agent to be considered fit to be held responsible for an action, it must be clear that they had access to the value-relative information that would have allowed them to make the morally relevant choices. But of course, a significant factual controversy within various theories of accountability for the 2008 Crisis is whether corporations in fact had access to this very information. Rather, it is unnecessary to show that these corporations had the actual understanding and access to relevant evidence of options’ value in order to prove moral responsibility for their actions—instead, it is sufficient to establish merely that they should have checked.

Unlike the individual persons who comprise them, the corporations and financial institutions that helped cause 2008 were in the position—in terms of their finances, resources, and obligations57E.g., the legal obligations corporations hold to their shareholders.—to determine whether their actions were contributing to systemic economic risk. No other agent or agents in the world were better positioned to determine the extent of these harms. For example, a significant contributing problem in 2008 was the ratings agencies’ and investment banks’ lack of scrutiny in the risky mortgages and their derivatives. Often, purchasing corporations failed to conduct even remedial investigations into the no-credit or poor-credit mortgages that comprised the securities in which they were investing.58See Financial Crisis Inquiry Report, supra note 19, at 165 (“As subprime mortgage securitization took off, securitizers undertook due diligence on their own or through third parties on the mortgage pools that originators were selling them. The originator and the securitizer negotiated the extent of the due diligence investigation. While the percentage of the pool examined could be as high as 30%, it was often much lower; according to some observers, as the market grew and originators became more concentrated, they had more bargaining power over the mortgage purchasers, and samples were sometimes as low as 2% to 3%.”). These mortgages were extremely risky on their face and should have caused any investor to proceed with utmost caution. Indeed, buyers—in this case the corporations and financial institutions—are allowed to ask any question they see fit to ask. And yet, even obvious questions frequently went unasked.59See id. at 165–66. These failures were not the actions of a few bad apples;60See Financial Crisis Inquiry Report, supra note 19, at xxiii (“Yet a crisis of this magnitude cannot be the work of a few bad actors, and such was not the case here.”). if they had been, the problem would not have sent the entire world economy into a severe recession. These failures and the flaws that produced them were often baked into the corporations’ policies.61See generally Financial Crisis Inquiry Report, supra note 19. Undoubtedly, part of the problem was that these corporations in many cases were incentivized to “look the other way.”62For example, credit rating agencies are paid by the very institutions whose financial instruments they are tasked with rating. See Financial Crisis Inquiry Report, supra note 19, at 28, 44. But incentives are not excuses, and the following section will discuss how it is crucial to alter those incentives going forward. It is not necessary to show that in fact these corporations had access to the value-relative information to determine whether they can be fit to be held responsible for their actions that contributed to the 2008 Financial Crisis; it is sufficient to say that they were in the best-possible position to access this information and should have done so.

In sum, these group agents (1) faced a morally significant choices, (2) were the positions to see and understand what was at stake, and (3) the ultimate choices were within the domain of their control.63These, as described above, are the three requirements for fitness to be held responsible under Philip Pettit’s theory of group agent responsibility. See supra note 39 and accompanying text. When the public and policymakers going forward or looking-backward ask the questions—“Who is responsible for the 2008 Financial Crisis? Who should ultimately pay?”—the answer is corporations and financial institutions, and not any of their individual members.

2. The Moral Obligations of Corporations and Financial Institutions Post-2008

While the corporations and financial institutions discussed above share the moral responsibility and blameworthiness for the effects of the economic collapse, this paper does not argue for criminal prosecution or civil enforcement against them. Instead, moral responsibility incurs only moral obligations—whether or not a community sees fit to institute legal obligations to deter or promote desired actions is a separate issue. But a “good” legal regime is one that reflects the morality of the society it regulates. If we want a good legal system, we have to determine what is moral before we draft the laws.

At least part of the story is that corporations should have sought access to the information required to assess the decisions that contributed to the Crisis. What is also true, though, is that these corporations had many reasons—mainly economic incentives—not to.64See, e.g., Heski Bar-Isaac & Joel Shapiro, Credit Ratings Accuracy and Analyst Incentives, 101 Am. Econ. Rev. 120 (2011). These incentives as well as the pervasive presence of corporate programmed conditions discussed above—for example, cultures of financial risk-taking and compensation structures that benefitted short-term gains—overrode the moral and financial reasons to gather proper information. If policymakers want to prevent the conditions that precipitated 2008 from recurring, the world needs innovative policies that fix this incentive ambiguity and assign the responsibilities of accumulating this information to the responsible parties.

Undoubtedly, we all have an interest in the fundamental security of the economic system—not simply to avoid collapses akin to 2008, but to ensure markets are performing at the efficiency required for sustained wealth-generation. Therefore, investors must have a right to reasonably rely on the risks they take, and risks cannot be accurate if no one has the reasons to determine the value-relative information required to assess those risks. In simpler terms, the right to an accurate risk-assessment is useless—practically speaking—unless someone has an assigned duty to protect it. The natural bearer of that duty are the corporations and financial institutions who are themselves generating these risks. It is not only good economic policy, but morally essential, for these corporations to therefore institute compliance programs that regulate how their employees’ actions contribute to systemic economic risk.

When this duty to track systemic risk is assigned to the corporations, the now-imperfect right of all investors to reasonably rely on a well-functioning economic market will be perfected.65A “perfect right” is one that has an assigned duty-holder tasked with ensuring it. See Hemant More, Kinds of Legal Rights, The Fact Factor (Feb. 16, 2019),,but%20it%20cannot%20be%20enforced. Of course, many issues of practicality arise with the perfection of this right. For instance, once a financial institution sees it is responsible for keeping track of these risks, it will need to create rules, protocols, and standards that allow its employees to keep track of their investment-related actions. Additionally, it will likely be insufficient to inform corporations of their moral obligations and expect them to institute such programs voluntarily. Realistically, an entity would need to have a role in both ensuring these programs were instituted and in collecting the data generated by them—maybe a federal regulator such as the SEC or a private self-regulatory organization akin to FINRA supported by the fees generated by the trading of financial instruments. Such a program could only be effective if there is some sort of transparency that provides visibility into where the systemic risk is accumulating—not only within corporations, but between them as well. Because systemic risk can be the result of correlations among the risks born by each corporation that are invisible to the others, this regulator-entity can monitor, receive, and analyze this information in a more centralized and efficient manner than the market could. There are good design and legal questions regarding how this would work: Could anonymous sharing of data work so as to retain competition while regulating these risks? Do blockchain programs have the potential to track these actions as they occur in real-time? The answers aren’t clear. Already, though, some publicly-traded corporations have employed data analytics and machine-learning within their compliance programs to track the actions of their employees with the goal of detecting and predicting problematic behavior.66See Dylan Tokar, AB InBev Taps Machine Learning to Root Out Corruption, Wall Street J. (Jan. 27, 2020, 5:30 AM), It is not so far-fetched to believe, then, such a platform could be built to monitor systemic risk instead.


As this paper is being written, it is still the early months of the COVID-19 pandemic and the economic crisis caused by the effective total shutdown of the global economy. Much information regarding the extent of the looming crisis remains shrouded in lack of institutional transparency and the natural uncertainty of such an unprecedented time in world history. Indeed we have faced no comparable crisis in the modern era, with economists analogizing to World War II and some of the other darkest moments in world history as our only potential guides.67See, e.g., Peter Suderman, Tyler Cowen Thinks Coronavirus Could Be This Generation’s World War II, Reason (Mar. 18, 2020, 9:19 AM),; Daniel Susskind, The Pandemic’s Economic Lessons, The Atlantic (Apr. 6, 2020) Markets have been extraordinarily volatile—oscillating dramatically from fear-stricken sell-offs to foolhardy optimism, often only days apart.68See Julia-Ambra Verlaine, Globe-Spanning Volatility Trade Is Hit Hard by Market Slump, Wall Street J. (Mar. 22, 2020, 7:35 AM), Despite some commentators assuring us that the recovery will be a “V-curve” akin to the brief slump and spike after 9/11, others are predicting an unparalleled economic depression reaching years into the future.69See Just What Kind of Recession is the COVID-19 Recession Going to Be?, Marketplace (Mar. 17, 2020), Many agree that until an effective vaccine is widely available, which the most optimistic estimates suggest will not be until at least 2021,70See Jonathan Corum et al., Coronavirus Vaccine Tracker, N.Y. Times (July 8, 2020), (last updated July 24, 2020). the hopes of returning to any semblance of normalcy and production are extremely slim. Regardless, it is still far too early to understand or appreciate the myriad of issues that the world and the global economy will face in the coming months, and potentially, years.

What we do know, however, is that corporations and financial institutions remain at the center of this economic crisis just as they were in 2008. Although the respective causes and preconditions of these recessions are extraordinarily divergent and cannot be easily compared, it is clear that financial institutions, faced with many comparable issues, are already reverting to their 2008 playbooks. For one, the incentive structures discussed above in length have not been altered—banks still finance ratings agencies, and corporations, of course, have not instituted the kind of risk-regulating programs that are necessary. In addition, many precarious financial realities echo those in the pre-Crisis financial markets: there are historic, unsustainable levels of corporate debt,71See Jon Danielsson et al., We Shouldn’t Be Comparing the Coronavirus Crisis to 2008 – This Is Why, World Econ. F. (Apr. 1, 2020), (“The perverse consequence of that is historical levels of leverage. The private sector is highly indebted, increasing its vulnerability to a demand shock like Corona as we warned here on Vox in 2016 (Csullag et al. 2016).”). stock buy-backs have ceased completely after a long period of corporate insatiability,72See Matt Philips, The Stock Buyback Binge May Be Over. For Now., N.Y. Times (Mar. 24, 2020), entire sectors of the economy have sought massive federal bail-outs,73See Jim Tankersley & Ben Casselman, Washington Weighs Big Bailouts to Help U.S. Economy Survive Coronavirus, N.Y. Times (Mar. 18, 2020), and even many of the same individual players are at the helms of these corporations and federal agencies.74See Yalman Onaran & Sonali Basak, Key 2008 Financial Crisis Players Are Back for Coronavirus, Bloomberg (Apr. 3, 2020, 5:00 AM), And unfortunately, while regulations enacted post-2008 have made commercial banking safer to a certain degree, they have also pushed the same risky behaviors to the corners of the market that those regulations don’t reach—resulting in “a still-brittle system, one in which financial players rake in profits in good times but the government is forced to save them or leave the economy to suffer when things go awry.”75Jeanna Smialek and Deborah B. Solomon, A Hedge Fund Bailout Highlights How Regulators Ignored Big Risks, N.Y. Times (July 23, 2020), economy/hedge-fund-bailout-dodd-frank.html?smid=tw-share (“A decade after Dodd-Frank, America’s sweeping post-2008 crisis fix, was signed into law, commercial banks like JPMorgan Chase and Bank of America are better regulated and safer, but they may be less willing to help smooth over markets in times of stress. Tougher regulation in the formal banking sector has pushed risk-taking to the shadowy corners of Wall Street — areas that Dodd-Frank left largely untouched.”). This structure has created an untenable, and familiar, moral hazard: why should entities carefully track their risks if they know the Fed is ready and waiting to resolve any negative consequences that result from those risks?76See id. (“The bet that hedge funds were making earlier this year was simple enough. Called a basis trade, it involved exploiting a price difference in the Treasury market, generally by selling Treasury futures contracts — promises to deliver a bond or note at a set price on a set date — and buying the comparatively cheap underlying securities.The hedge funds made a tiny return as the price of a security and its futures contract converged. To turn those mini payoffs into real money, they tapped a form of short-term borrowing, called repo, and used it to amass huge holdings of Treasuries. Such trades are often incredibly leveraged.”). 

Crucially however, this crisis was not precipitated by a “flaw within the system” like the housing bubble—rather, it is a shock to the entire system. The risk that the market is responding to is exogenous, not endogenous.77See Danielsson et al., supra note 112. But even though the current economic crisis was caused by an exogenous risk does not mean that this exogenous “shock-to-the-system,” could not have been mitigated. An interesting potential application of the above philosophical analysis may be in analyzing the moral failings of high-level public health policy makers rather than the players in the financial markets. Even though the dust has yet to settle, those failings have already resulted in dire consequences: tens of millions of Americans have filed for unemployment,78See Rakesh Kochhar, Unemployment Rose Higher in Three Months of COVID-19 Than It Did in Two Years of the Great Recession, Pew Research Center (June 11, 2020), millions more have lost significant capital,79See Kim Parker et al., About Half of Lower-Income Americans Report Household Job or Wage Loss Due to COVID-19, Pew Research Center (Apr. 21, 2020), and—most tragically—hundreds of thousands of Americans have died.80Centers for Disease Control and Prevention, Coronavirus Disease 2019 (COVID-19), Cases & Deaths in the U.S. (2020), And again, like in 2008, the media has already identified “oracles” who sounded prescient warnings to the federal government, state governments, and the public at large.81Centers for Disease Control and Prevention, Coronavirus Disease 2019 (COVID-19), Cases & Deaths in the U.S. (2020), This time, however, these harbingers attempted to draw attention to the fact that our medical supply chains are woefully disorganized and reliant on foreign production,82See Noam M. Levey et al., A Disaster Foretold: Shortages of Ventilators and Other Medical Supplies Have Long Been Warned About, L.A. Times (Mar. 20, 2020), our hospitals communicate ineffectively with each other83See Lena H. Sun, Christopher Rowland & Lenny Bernstein, Shortages, Confusion and Poor Communication Complicate Coronavirus Preparations, Wash. Post (Feb. 25, 2020), and lack adequate PPE stockpiles,84See Lisa Schnirring, WHO Warns of PPE Shortage; nCoV Pace Slows Slightly in China, CIDRAP News (Feb. 7, 2020),  testing capabilities are limited and difficult to scale-up,85See Lisa Schnirring, WHO Warns of PPE Shortage; nCoV Pace Slows Slightly in China, CIDRAP News (Feb. 7, 2020),  and so many more crucial factors that, if remedied, could have prevented the harms we are all experiencing today.

Unlike in 2008, however, the duty to protect the right of the public to be free from these harms was already assigned to duty-holders prior to the crisis. The federal government (and to some extent, state governments) is specifically endowed with the power, control, and resources to prevent exactly these kinds of public-health emergencies. Put simply, unlike the above analysis of responsibility for the Great Recession, this isn’t a difficult moral case. To the extent that mitigation of harm was possible (and we already have ample evidence showing that it was)86See id. the holders of the duty to mitigate these kinds of harms are fit to be held responsible. These duty-holders include the group agents we as a society have assigned to monitor these risks: specifically, the CDC, the FDA, HHS, and other federal and state public-health agencies.87See id. (“Across the government, they said, three agencies responsible for detecting and combating threats like the coronavirus failed to prepare quickly enough. Even as scientists looked at China and sounded alarms, none of the agencies’ directors conveyed the urgency required to spur a no-holds-barred defense.”). Specific analysis of the blameworthiness of these agencies should be left to the public-health policy experts, but surely it is obvious to people of all expertise levels that the American public has been failed by those we have assigned to perfect these rights. And importantly, if these agencies failed in their duty to mitigate the public-health risks of a pandemic, their moral responsibility should extend to the secondary-effects those risks imposed on the U.S. economy as well.

Kathryn E. Ghotbi, J.D. Class of 2020, N.Y.U. School of Law

Suggested Citation: Kathryn E. Ghotbi, The Moral Mathematics and Responsibilities of Financial Crises, N.Y.U. J. Legis. & Pub. Pol’y Quorum (2020).