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

190 10 Disturbance of the Invisible Hand
restrictions of human rights, it develops ethical normativity out of the nature of the
matter of the finance industry. The obligations thus derived, from the principle of
adequacy for the purpose of an institution or the principle of obligation arising out
of the nature of the matter, are certainly normative, even if they are not perhaps
as comprehensive and strict as those who were harmed by a financial market crisis
might hope. From the ethical principle that the obligation arises out of the nature of
the matter, we can infer that we must reject utterly inflated instruments which deliver
no benefits for the customer or superficial solutions which reap micro-economic
benefits for the financial institutions but have no macro-economic merit.
According to this principle, certain forms of securitization are also ethically
problematic. When Posner, for instance, writes, “The opacity of complex securities
to investors on one side, there is nothing improper about securitizing
debt – that is transforming a debt into a security”, 65 it is a self-contradictory statement.
The opacity of complex securitized financial instruments cannot be left aside.
It is the central economic and ethical problem of securitization. From the viewpoint
of a theory of ethical economy, it is indefensible to create securitized instruments
that are not understood and consequently cause enormous damage. It would be like
allowing racing cars on the public highway – most drivers could not handle them
safely even though there will always be a few who can. The conditions for securitization
must be modified and made more stringent. 66 And banks must be prepared to
explain the economic benefit for capital allocation of securitized bonds like CDOs,
which are only constructed and sold in order to circumvent the banks’ capitalization
requirements and which thereby increase the economic or systemic risk and trigger
crises.
The question of limiting derivatives wagers has already been discussed. When
it comes to derivatives, the same question applies as to securitization. Do the vast
majority of derivatives have any functional benefit other than to generate commissions
and fees for the financial institutions? On ethical grounds it is also worth
demanding that the number of derivative contracts is not inflated and is not decoupled
from the hedging and arbitrage function, so as to lead to economically harmful
speculation. The objective of avoiding hyper-speculation makes it necessary for
derivatives contracts to be made more responsible and transparent through registration
and the deposit of capital than is the case today. As a general principle for
financial markets speculation, it is required on ethical grounds that speculation does
not escalate out of control and exceed the necessary level to ensure market liquidity.
The most effective way out of the crisis is to instill an awareness among the
actors in financial institutions and financial markets that the finance industry is
not just a playground for financial geniuses and speculators, but that banks, the
stock exchange and financial advisers have a service function. They serve the real
65 POSNER (2009), p. 54.
66 This demand is also voiced by SINN (2009), p. 314: “So multi-tiered securitization should be
prohibited. [...] A multi-tiered securitization of often six and up to 24 tiers is absurd and fulfils
no economic function whatsoever. It is nothing other than trickery to exploit the highly lax and
loophole-ridden rules of the system.” (Own translation from the German).