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

148 10 Disturbance of the Invisible Hand
acting individuals in pursuit of their interests are forced, by competition, to accept
the condition that if they fail to take consumer interests very seriously or to satisfy
consumer demand, they will be squeezed out of the market. Competition and the
market force the individual into behaving in such a way that the finis operantis, the
intention of the person acting, coincides or at least very closely matches the finis
operis, the intention of the firm’s product for the consumer.
The purpose that the firm has to fulfill is to produce a product or a work (an opus).
So the firm exists for a finis operis; for the sake of a product. Individuals have their
own purposes, usually the purpose of earning as much money as possible. In the
business world they can pursue this purpose much more vigorously than in politics,
public administration or the academic world. The organizations of the business
world, i.e. firms, must somehow bring together these two purposes in a way that
makes them compatible. They do so by means of incentivization. Because business
firms can make better use of income-based incentives than other fields of endeavor,
they are very efficient. Financial institutions can offer even better financial incentives
than industrial firms. By achieving their own purpose of income maximization,
pursuing their finis operantis, employees simultaneously fulfill the purpose of the
firm, the finis operis. Incentives do not always work, however, and can even steer
efforts in the wrong direction, as has already been shown.
Hyper-Incentivization and the Hubris of the Financial Manager
The hyper-incentivization of financial managers had set the incentives in such a
way that they were no longer compatible with the purpose of the finance industry,
its finis operis, and were steering the efforts induced by the incentives in the wrong
direction. The reward systems of the banks were tending to encourage an infinitely
high degree of indebtedness, 1 because if bank customers and bank competitors were
infinitely deeply indebted, bank employees and shareholders could theoretically
earn infinitely high rewards. The remuneration structure geared towards rapid profits
taught brokers to lose all sense of the correlation between risk and liability. A higher
bonus focuses executive minds on business expansion, sidelining financial stability
as a factor in their decision-making. Bonuses should be replaced with a bonus/malus
system so that employees also bear a share of the loss occasioned by their excessive
risk-taking and a penalty mechanism is built in to cover default risks. The question is
how much performance-related pay, how many incentives the financial system can
bear. There are considerable differences between the West and Japan in the reliance
1 Thus GÜNTER FRANKE: “Gefahren des kurzsichtigen (internationalen) Risikomanagements des
Bankkredits, der Collateralized Debt Obligations (CDO) sowie der Structured Products und die
Finanzmarktkrise” [Risks of short-sighted (international) risk management of bank credit, CDOs
and structured products, and the financial market crisis], presentation at the conference “Einsichten
aus der Finanzmarktkrise für das Bank-Compliance” (Insights from the financial market crisis for
bank compliance) of the “Working Group on Compliance and Ethics in Financial Institutions,
German Business Ethics Network”, held in collaboration with Bayerische Hypo- und Vereinsbank
AG on 29 May 2009 in Munich.