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

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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.
46 3 The Ethical Economy of the Capital Market shares in terms of different estimations of risk by investors, but he does not mention the differences that pertain to the intended duration of the investment and to the chance timing of selling decisions. Corporate shares are short-term or longer-term risk-bearing investments. The title to ownership that they define remains constant, but their actual owners change over time. The time periods in which corporate shares are held can be transformed at low transaction costs; low in comparison with other kinds of titles to property. This transformation is made possible by the fact that corporate shares are marketable and tradable on the stock exchange. The marketability of corporate shares presupposes, in turn, that the supply of a certain share will always be met with demand for the same share at any given point in time, even if the buyer’s and seller’s original intentions regarding the duration of the investment in the corporate share do not coincide. The transformation of different holding periods is guaranteed by stock trading. The supply, demand and marketability of corporate shares are massively amplified by an occupational group whose specialized niche within the economy is stock trading: the group of professional speculators. The Functions of Speculation in the Capital Market: Bearing Uncertainty and Risk as Well as Enabling the Division of Labor Between Calculation and Speculation Professional speculation creates a large trade volume by generating additional supply and additional demand for corporate shares on the stock exchange, which far exceed the volume that would exist if there were no speculation, i.e. if investments in corporate shares were only ever made for the returns on very long-term if not permanent investments. Speculation is the kind of economic activity which seeks to turn a profit from the differences between current and future stock prices. The speculator who goes “long” assumes that the future price of the share will be higher than the current price. Speculating by going “short” assumes that the price will be lower. The long speculator attempts to turn a profit from buying shares now and selling them in the future. The investment decision does not concentrate on the expected return from dividends, but primarily on the differences between the future and current price of the stock. The division of labor in the capital market between those who concentrate on the profit yields and the capital value of the corporate share, investors in the real sense, and those who concentrate on the differences and fluctuations in the share price over time, the speculators, ensures that an investment in shares can be liquidated at any point in time. 19 Speculation in shares increases the marketability of corporate shares and thereby the transformability of time periods for the capital invested in the capital market. Professional stock market speculation reduces the risk that one may not be 19 Cf. WILHELM RÖPKE: article on “Spekulation”, in: Handwörterbuch der Staatswissenschaften, 4th edn., Jena (Gustav Fischer) 1926, Vol. 7, pp. 706–710, here p. 708.
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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
Page 12 and 13: Contents Part I Foundations of Busi
Page 14 and 15: Contents xiii 6 The Ethical Economy
Page 16 and 17: Contents xv After the American Fina
Page 18 and 19: Part I Foundations of Business and
Page 20 and 21: Chapter 1 Ethical Economy, Economic
Page 22 and 23: The Justification of Ethical Duties
Page 24 and 25: The Justification of Ethical Duties
Page 26 and 27: Business Ethics and the Fiduciary D
Page 32 and 33: Part II The Ethical Economy and Fin
Page 34 and 35: Chapter 2 The Ethical Economy of th
Page 36 and 37: Purpose and Task of the Credit Mark
Page 42 and 43: Duties of Banks Arising from the Na
Page 50 and 51: The Globalization of the Capital Ma
Page 52 and 53: Values and Valuations in the Capita
Page 54 and 55: Which Values Should Determine the A
Page 56 and 57: On the Ethics of Financial Consulti
Page 58 and 59: Tasks of the Capital Market and Dut
Page 60 and 61: Tasks of the Capital Market and Dut
Page 64 and 65: The Functions of Speculation in the
Page 66 and 67: The Functions of Speculation in the
Page 68 and 69: Chapter 4 Insider Knowledge and Ins
Page 70 and 71: Insider Trading as Pseudo-Speculati
Page 78 and 79: Statutory Provisions Against Inside
Page 80 and 81: The Abuse of Insider Knowledge as a
Page 82 and 83: The Abuse of Insider Knowledge as a
Page 84 and 85: Ethical Duties of the Investor 67 a
Page 86 and 87: Ethical Duties of the Investor 69 a
Page 90 and 91: The Finance Ethics of Hostile and F
Page 92 and 93: Mergers and Acquisitions 75 On the
Page 94 and 95: Corporate Governance by Consensus a
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
Page 108 and 109: Variants of Derivatives 91 CDO synt
Page 110 and 111: 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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Banking Secrecy, the Right to Priva
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Part III Financial Wagers, Hyper-Sp
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Chapter 9 Financial Wagers, Hyper-S
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Wager or Gambling: What Is Speculat
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The Principle of Shareholder Primac
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Chapter 10 Financial Overstretch: T
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Hyper-Incentivization and the Hubri
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Easy Credit and the Hubris of the C
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Easy Credit and the Hubris of the C
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Credit and Credo, Economic Success
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Credit and Credo, Economic Success
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The Financial Market Crisis as a Cr
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The Financial Market Crisis as a Cr
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From Big Bang Deregulation to Big B
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After the American Financial Overst
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After the American Financial Overst
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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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