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

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The Financial Market Crisis as a Crisis Caused by Excessive Trust 165 At the moment the whole world trusts the state to step in, as the great savior of the economy in times of trial and tribulation. The state’s role as the helper of last resort implies that the government is the creditor of last resort, the insurer of last resort, the breadwinner of last resort. Trust in the state as the savior of last resort is an idea of the modern era, and one that is very seductive. Trust and hope in the state is problematic because it combines legitimate elements of state assistance for the development of society with the worship of state power and the willingness of citizens to delegate responsibilities to it. Hegel says that the state is God made real, or words to that effect. 27 The religious faith in God is also a faith in the savior of last resort, but according to Hegel, that kind of help is not real in this world – whereas the state is real, in this world, and really able to help. It can give. On the other hand, the state in this world can only give by virtue of also taking. Like anyone else, unless it takes, the state cannot give. In this respect, the state is not God made real but a God who always has to take in order to give. It takes taxes from the citizens in order to give subsidies, such as bailouts to the banks. It also takes from corporations in order to help the socially disadvantaged. It keeps taking, in order to give. In the necessity of having to take in order to give, the state is not God made real. It may be real, but it cannot give without taking. Hegel’s words on the state as God made real are therefore economically and theologically incorrect. This fact does not increase trust in the present situation. It would be fairer to say that, in view of the high indebtedness of the state, the economy comes back to the message on the dollar bill: the more we trust the state in the present situation, the more we are trusting de facto in God. We have no alternative: in order to restore trust in the financial system, institutional trust must be restored. But this is only possible through the state and through trust in its action. On the other hand, as we have seen, the state is not God made real. It does not always know better, and there is a great likelihood that it will make the same or at least similar mistakes as the bankers, whose intellects were so extraordinarily well paid. Hope springs eternal, however. In his show on 2 April 2009, Jim Cramer announced the end of the Depression. But he added that the recession would continue for a while. The end of the Depression means the continuation of the recession. Can you trust someone who calls his show “Mad Money”? Or is someone like that the only one worth trusting nowadays? 27 Cf.G.W.F.HEGEL: Vorlesungen über die Philosophie der Geschichte, Werke in zwanzig Bänden, ed. by Eva Moldenhauer and Karl Markus Michel, Frankfurt a. M. (Suhrkamp) 1970, Vol. 12, p. 57: “Der Staat ist die göttliche Idee, wie sie auf Erden vorhanden ist.” [The state is thedivineideaasitexistsonearth.]HEGEL, Grundlinien der Philosophie des Rechts, § 270, loc. cit. Vol. 7, pp. 418 f.: “Der Staat ist göttlicher Wille als gegenwärtiger, zur wirklichen Gestalt und Organisation einer Welt entfaltender Geist.” [The state is the divine will, in the sense that it is mind present on earth, unfolding itself to be the actual shape and organization of a world.] Ibid., § 272 Zusatz [Addition], p. 434: “Man muss daher den Staat wie ein Irdisch-Göttliches verehren und einsehen, dass, wenn es schwer ist, die Natur zu begreifen, es noch unendlich herber ist, den Staat zu fassen.” [One must therefore venerate the state as a secular deity, and observe that if it is difficult to comprehend nature, it is infinitely harder to understand the state.] English translations from the hypertext versions of Hegel’s General Introduction to the Philosophy of History and Philosophy of Right at http://www.marxists.org/reference/archive/hegel/index.htm
166 10 Disturbance of the Invisible Hand Conflicts of Interests and Conflicts of Disinterest: Having an Interest in Credit Enhancement and No Interest in the Monitoring of It In past decades, the business ethics and business law discourse was determined by the thesis of the necessity of avoiding conflicts of interest. Conflicts of interest still play a major role, as is demonstrated by the danger of self-dealing and the conflicts between the bank’s interest in obtaining a high launch price for its IPO customers and its interest in providing its investor advisory clients with the optimum advice. Firewalls between the divisions of the bank are a means of averting such conflicts, although the fact remains that the board of the bank has and must have access to all details from all divisions of its bank, and can never be completely free of conflicts of interest, because the conflicting interests of divisions of the bank remain the interests of the bank as a whole. The expansion of lending and the sale of securitized loans shows, nevertheless, that banks are not only caught up in a conflict of interests, but also in a conflict of disinterest. 28 If there is an incentive for the bank to sell its borrowers’ mortgages due to interest in the proceeds of sale and an interest in reducing the minimum equity, the collateralized debt obligation (CDO) creates an indirect incentive for disinterest in the collateral. It encourages disinterest in the mortgage collateral, and hence in the bank’s debtor. The salability of mortgage-backed securities and mortgage loans to investors by means of CDOs carries the inherent risk that the bank will subsequently lose interest in monitoring its debtors and the security of the loans it has brokered. Thus, a conflict arises between the interest of the finance system in systematic debtor monitoring and the disinterest of the bank in carrying out this monitoring. Debtor monitoring is a burdensome duty for the bank, and one in which it has a disinterest or lack of interest if it sells the risk from the loan. If it can sell it, it will sell it. The investor, in turn, has a self-interest in carrying out the debtor monitoring, but he has neither incentives nor means of actually doing so. He does not possess the same resources and experience to carry out debtor monitoring as a bank whose primary role is to mediate between savings and investment, deposits and loans. In the case of CDOs, the financial system faces the difficulty that they do not seem to permit the invisible hand of the market to bring about convergence of the bank’s self-interest and the financial system’s efficiency interest. Instead, a conflict arises between the interest of the financial system in diligent debtor monitoring and the disinterest of the bank in undertaking such monitoring in relation to the CDOs. Yet debtor monitoring matters not only to the lender, but also to the borrower as an aid to efficiency and self-control. So the net result is a coalescence of disinterest, 28 Cf. BAKER (2008), p. 731: “In the new financial system, the link between lender and borrower has become increasingly tenuous. How else could mortgage loans emerge with no income documentation and dramatic interest rate resets built in? How else could leveraged loans appear with so few covenants?”
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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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Futures and Options 85 They are str
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Variants of Derivatives 87 signific
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Variants of Derivatives 89 the law
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Variants of Derivatives 91 CDO synt
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Hedging and Speculation 93 insuranc
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Hedging and Speculation 95 average
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Chapter 7 Interdependences Between
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The Information and Influence Asymm
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Intangibility of Financial Products
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Intangibility of Financial Products
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Chapter 8 The “Banking Secret”,
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The Swiss “Banking Secret” 107
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Banking Secrecy, the Right to Priva
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Page 166 and 167: Hyper-Incentivization and the Hubri
Page 172 and 173: Easy Credit and the Hubris of the C
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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 184 and 185: From Big Bang Deregulation to Big B
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Page 194 and 195: The Failure of Economics and Manage
Page 196 and 197: The Outsourcing of Asset Management
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Page 200 and 201: The Financial Crisis - Systems Cris
Page 206 and 207: The Way Out of Financial Crises 189
Page 214 and 215: References ALBERT,H.:Marktsoziologi
Page 216 and 217: References 199 CASPARI, K.-B.: “D
Page 218 and 219: References 201 HALDANE, A,A.TURNER
Page 220 and 221: References 203 KOSLOWSKI, P.: Ethik
Page 222 and 223: References 205 MESSNER,J.:Das Natur
Page 224 and 225: References 207 SCHMID, N.: “Insid
Page 226 and 227: References 209 WEBER, M.:Die Börse
Page 228 and 229: Name Index Note: Page numbers in it
Page 230 and 231: Name Index 213 N Naughton, M. J., 1
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