The Ethics of Banking: Conclusions from the Financial Crisis (Issues ...

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Wager or Gambling: What Is Speculation? 129 Bismarck in 1890) recommended the appointment of an enquête commission on stock exchanges, the prohibition of commodity futures transactions, and a massive limitation on forward trading in raw materials and shares. The Reichstag codified this decision in the German Stock Exchange Act of 1896. The Act overturned a civillaw court decision of 1872, which had ruled that speculation in futures can only be equated with gambling if it can be shown that neither party had the intention of fulfilling the contract, which was difficult to prove. The new law made it mandatory for participants in the market for futures to have their transactions recorded in a register. The purpose of the measure was to discourage speculation in futures, and to transfer a major part of the capital for futures speculation abroad. According to Borchardt 18 and Carter 19 the stock exchanges in many countries were reformed during the 1890s, including Belgium, France, Holland, Russia, and the USA. But only in Germany did it come to a restructuring of the financial markets so overwhelmingly dictated by the authority of the state. The Continuum from the Wager on Corporate Strategy and the Wager on Technological Development to the Gambling Wager: The Difference Between the Value-Creating and the Non-Value-Creating Wager Again, these historical observations show that financial speculation is always a wager, a fact that they have in common with the philosophical or metaphysical wager, such as Pascal’s Wager on the existence of God. Financial speculation, however, like the metaphysical wager, is no mere chance-driven wager because its rationality and its yield are increased through knowledge. On the other hand, the chance-driven wager and the sporting wager are also not entirely uninfluenced by the wagerer’s knowledge and ability; and likewise, luck and chance certainly play a role in the outcome of a financial wager. The different degrees of amalgamation between knowledge and chance in the different kinds of wagers shows that the concept of the wager is an umbrella term encompassing the class of actions whereby predictions about the future are made with incomplete knowledge and, based on these predictions, strategies for the future are adopted which are risk-laden, partly or totally dependent on luck, and associated with varied possibilities of gain. This definition applies across the spectrum, from the wager on corporate strategy via the speculative financial wager to the sporting and chance-driven wager. If wagers are arranged in a continuum, from a firm’s wager on a corporate strategy to the chance-based wager, this continuum exhibits a consistently rising element of chance and luck and a consistently declining element of rational analysis and knowledge. 18 KNUT BORCHARDT: “Einleitung” [Introduction], in: MAX WEBER: Börsenwesen. Schriften und Reden 1893–1898 (Matters of the stock exchange. Writings and speeches), ed. Knut Borchardt, Tübingen (Mohr Siebeck) 1999, p. 25. 19 CARTER (2006), p. 209.
130 9 Financial Wagers, Hyper-Speculation and Shareholder Primacy The similarity between types of wager must not, however, mask the fact that the character and effects of the said wagers are highly disparate. The knowledgeenlarging wager is value-adding and a positive sum game, whereas the chancedriven wager is non-value-adding and a zero-sum game. The differentiation between the wager and the game of chance allows a distinction to be made between the acceptable form of investment with a speculative element, and mere chance-based gambling. The foundation and justification of the differing definition and valuation of the types of wager mentioned are the different degrees to which the wagerer’s skills and knowledge influence the outcome of the wager, and the different degrees to which the different types of wagers contribute to value-creation in the economy. Although the element of luck plays a role in every wager, and hence also in speculative investment, the knowledge and prosperity-enhancing corporate wager in market competition represents an unavoidable and value-creating element of capitalism, indeed of every form of economic system, whereas this cannot be upheld for the chance-based wager. The speculative element is also legitimate in wagers on corporate strategies, because without speculative entrepreneurial thinking, no new products and forms of production can be invented and put into practice. 20 Intel’s one billiondollar wager on a new type of microchip is a good example of the speculative character of the strategies of modern technology firms. It is therefore useful to maintain the distinction and differing legitimacy of chance-based games and wagers, without denying that even in games of chance there is an element of the wager. The Functional and the Dysfunctional Extent of Financial Wagers on Derivatives Financial wagers differ from games of chance only when they demonstrably provide some economic functionality, or a contribution to value-creation such as hedging, market liquidity, or arbitrage. But even if such functionality is present, that in itself is not sufficient to determine what volume of financial wagers is useful and valuecreating. Even if financial wagers are demonstrably useful for the financial markets, more wagers may be placed than are necessary for this purpose, and the excess of wagers may not only be non-functional and inappropriate to the purpose, but may even be detrimental. The escalation of financial wagers to a dysfunctional scale encourages financial wagers of the gambling type and shifts the financial markets for these wagers in the direction of an arena for games of chance. Excessive financial wagers create excessive liquidity in the markets, which only serves the gambling motive and increases price fluctuations. The rule for options is therefore: if options are to fulfill their function for hedging and arbitrage, for the fulfillment of these functions a certain extent of 20 On speculation, cf. also HANNS LEISKOW: Spekulation und öffentliche Meinung in der ersten Hälfte der 19. Jahrhunderts (Speculation and public opinion in the first half of the 19 th century), Jena (Gustav Fischer) 1930.
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THE ETHICS OF BANKING
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The Ethics of Banking Conclusions f
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Preface The crisis in the financial
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Introduction: Is the Finance Indust
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Introduction: Is the Finance Indust
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Contents Part I Foundations of Busi
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Contents xiii 6 The Ethical Economy
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Contents xv After the American Fina
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Part I Foundations of Business and
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Chapter 1 Ethical Economy, Economic
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The Justification of Ethical Duties
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The Justification of Ethical Duties
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Business Ethics and the Fiduciary D
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Part II The Ethical Economy and Fin
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Chapter 2 The Ethical Economy of th
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Purpose and Task of the Credit Mark
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Duties of Banks Arising from the Na
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The Globalization of the Capital Ma
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Values and Valuations in the Capita
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Which Values Should Determine the A
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On the Ethics of Financial Consulti
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Tasks of the Capital Market and Dut
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Tasks of the Capital Market and Dut
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Speculation and Finance Ethics 45 S
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The Functions of Speculation in the
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The Functions of Speculation in the
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Chapter 4 Insider Knowledge and Ins
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Insider Trading as Pseudo-Speculati
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Statutory Provisions Against Inside
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The Abuse of Insider Knowledge as a
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The Abuse of Insider Knowledge as a
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Ethical Duties of the Investor 67 a
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Ethical Duties of the Investor 69 a
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The Finance Ethics of Hostile and F
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Mergers and Acquisitions 75 On the
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Corporate Governance by Consensus a
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Page 102 and 103: Futures and Options 85 They are str
Page 104 and 105: Variants of Derivatives 87 signific
Page 106 and 107: Variants of Derivatives 89 the law
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Page 176 and 177: Credit and Credo, Economic Success
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Page 180 and 181: The Financial Market Crisis as a Cr
Page 182 and 183: The Financial Market Crisis as a Cr
Page 184 and 185: From Big Bang Deregulation to Big B
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Page 194 and 195: The Failure of Economics and Manage
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The Outsourcing of Asset Management
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The Outsourcing of Asset Management
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The Financial Crisis - Systems Cris
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The Way Out of Financial Crises 189
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References ALBERT,H.:Marktsoziologi
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References 199 CASPARI, K.-B.: “D
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References 201 HALDANE, A,A.TURNER
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References 203 KOSLOWSKI, P.: Ethik
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References 205 MESSNER,J.:Das Natur
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References 207 SCHMID, N.: “Insid
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References 209 WEBER, M.:Die Börse
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Name Index Note: Page numbers in it
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Name Index 213 N Naughton, M. J., 1
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