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

Speculation and Finance Ethics 45
Speculation and Finance Ethics
The capital market assumes two tasks in which it resembles the credit market. Like
the latter, the capital market serves as a transfer process in which savings are channeled
into investments, and as a transformation process in which investments of
different time horizons are transformed into investments of long-term ownership
titles or shares. In the capital market for shares, the conversion of savings and
the transformation of time periods are achieved not through the banks as financial
intermediaries but by conversion of the savings into risk-bearing securities, by
their subsequent securitization and marketability on the stock exchange, and by the
institutionalization of speculative trading in securities. The control function that the
banks fulfill in the credit market is fulfilled on the stock exchange by other institutions:
by control over the issue of new shares, which is exercised by the stock
exchange supervisory authority or the government, 17 by the marketability of the
shares and securities, and by professional and public speculation about the future
prices of shares.
In comparison with bank balances or mortgage bonds, investing in shares in the
capital market is a higher-risk investment. The stock market serves as a means of
allocation for directing investible funds to firms. The prices of corporate shares
reflect the expected profit and the expected risk attached to such results for those
firms that participate in the capital market. Stock prices show how the firms listed
on the capital market are assessed by market participants. The prices of equities
reflect estimations of their profit and risk, arrived at by means of the capital market.
Shareholders are investors who, as owners, bear the full risk of their invested
capital. On condition that there is complete transparency regarding the past and
present performance and the future strategy of the firm, the share price in the market
reflects the estimation of past and present performance and of expected future
returns and risks by market participants, and, in the ideal scenario, fully reflects the
risks and returns at stake.
In an ideal market, every share would have a certain market price. Stock trading
would barely take place since the price of the corporate share would be the same
for everyone at every point in time. In reality, however, huge trade volumes exist
in modern-day capital markets. According to Friedman, the annual volume of trade
on the New York stock exchange normally amounts to almost half the total value
of all currently listed shares. 18 Friedman explains this massive trade in corporate
17 In Germany and Switzerland, the so-called “anchoring principle” has applied. It is stipulated in
law that bonds or equities in one of the currencies of these two countries can only be issued by
banks that are established in the country in question. This regulation was given up in the euro zone
with the introduction of the euro in 2002, in Switzerland in the year 2004. On the impact of this
principle in the German capital market, cf. R.E. BREUER.: “Die Deutsche Terminbörse als Vorreiter
einer Börsenlandschaft der 90er Jahre?” [The German options and futures exchange (DTB) as the
precursor of a stock-exchange landscape of the 90s], Zeitschrift für Bankrecht und Bankwirtschaft,
2(1990), No. 3, p. 101.
18 FRIEDMAN (1987), p. 323.