Reference no: EM131657007

Question: You are the CFO of Ridgeway Bank, which makes loans to consumers and businesses totaling $870 million annually. Ridgeway Bank receives promissory notes from its borrowers, which notes the bank typically sells in bulk to investment banks, hedge funds, and other institutional investors within days after making the loans to its borrowers. By doing so, Ridgeway Bank is able to turn over its assets many times and optimize its profits. Finding buyers for the notes, however, can be challenging and depends in large part on the quality of the promissory notes, especially the collateral backing the notes and the borrowers' abilities to pay the notes. You are considering expanding Ridgeway's loan business by making loans to riskier borrowers. Before doing so, you want commitments from institutional investors that they will be willing to buy the risky notes. Because other banks made a large number of bad loans in 2005 and 2006 on which borrowers defaulted, Ridgeway has found it especially difficult to sell higher-risk notes, as institutional investors have greatly restricted their buying of risky notes. You know that if you can convince one institutional investor to purchase some of the risky notes, you can tell other institutional investors that they are missing an opportunity that one of their competitors is taking. Do you think it is ethical to use that tactic to convince institutional investors to buy the notes? What fallacy are you expecting the institutional investors to make when they agree to do what their competitors do?