The Ethics of Citibank - Research Paper Example

? The 2007/2008 Citibank Debacle Section/# Although it is impossible to understand the 2007/2008 collapse of the stock market and housing market (and by extension the broader collapse of many of the financial markets of the economies of many of the strongest and most dynamic nations of the world) by merely examining a single financial institution, a broader examination into the ethical behavior and determinants of how other financial entities behaved would necessarily require something of a thesis length dissertation. As a function of this, this particular analysis will analyze the means by which an ethical breakdown fundamentally effected and contributed to the financial crisis within one of the United State’s most powerful banking institutions ? Citibank. As a means of understanding the ethical ramifications of the collapse and the contributing factors that ultimately led up to it, the analysis will first delve into something of a historical analysis of the collapse so that the key decisions that Citibank made leading up to and just prior to the collapse can be understood within a broader appreciation for the means by which successive ethical oversights and dependency behavior created the perfect something of a perfect storm that has affected untold millions around the world and cost untold trillions in loss to the global economy. Moreover, it is the hope of this author that such an analysis will help the reader to not only come to an appreciation for ethical factors and the impacts that they can have but to create a sense of urgency within the mind of the reader to integrate with ethical decision making at each and every step of the business process. As such, the forthcoming analysis will break down the financial collapse and subsequent ethical oversights into two main sectors; those dealing with the ethical oversights that existed prior to the crash and contributed to the global financial meltdown (evidenced within Citibank), and those ethical oversights that took place after the crash and fundamentally concerned appropriation and disbursal of stimulus funding. Taking the more recent situation first, it can be noted that in excess of 220 billion USD was allocated to Citibank by the Federal government as a result of TARP. The initial reason for this allocation was of course the fact that the Federal government and key decision makers within the Federal Reserve felt that without TARP stimulus it would be highly possible that the poor investment structure of Citibank could lead to its collapse. Due to the fact that Citibank and others were labeled as “too big to fail”, it was determined that it was vitally necessary to transfer this massive amount of money from the taxpayers into the coffers of some of the largest financial institutions in the world. Not surprisingly, Citibank and others were none to alarmed with such a rapid increase in the overall level of money that they could leverage to meet their liabilities. Unfortunately, rather than leveraging this money and immediately doing a thorough audit of their firm to ensure that key standards were being met and no such situation as had been witnessed the following year could ever occur again, the key ethical oversight of merely continuing to conduct business as usual was witnessed. Certainly, it can be noted that Citibank and others met minimum federal requirements; however, a proactive stance in seeking to maximize their shareholders utility and minimize any potential and lingering levels of ethical oversights was not engaged. Moreover, it can also be noted that one of the first major managerial decisions that was made after the financial collapse and subsequent federal disbursal of bailout funds was with relation to liberal bonuses for many of the top leadership positions within Citibank. This serves as perhaps the most visible ethical oversight that this brief analysis will analyze. The news media soon picked up on this revelation and broadcast the names and actual bonus levels that many of these upper management leaders received immediately following the financial collapse that saw many individuals lose their life savings and/or their homes. Not only was this poor form, it was unlikely that any of these bonuses were deserved. As a function of the fact that these leadership positions ultimately oversaw the ethical standards and key levels of decision making that went on inside the firm prior to, leading up to, and during the financial collapse, it is doubtful if any of these bonuses were deserved. Rather, if a truly ethical approach to financial disbursement at Citibank was made in light of the 2007/2008 financial collapse and necessity to be bailed out by the federal government, few if any of these management positions should have continued to be filled by those who oversaw this debacle. This strikes at something far beyond a given ethical oversight or key unethical action and details the fact that a level of ethical disregard existed within the very culture of Citibank. Without such a level of cultural disregard for ethics, it is unlikely that any such liberal bonuses would have been handed out at a time that Citibank was ultimately dependent upon the charity of the United States government; and by extension the taxpayer (their ultimate customers). As such, it is necessary to know, understand, and discuss the forces which could have prevented or at least greatly assuaged the crisis as it has been presented to the financial markets and subsequent global economies over the period of the past 5 years time. In this way, such an exploratory look into the realm of the financial crisis and its subsequent aftermath can allow for a more informed understanding of how the crisis itself could have been prevented as well as the formulation and creation of new and insightful ideas within the reader with regards to how such a situation might be stopped in the future. The first aspect of anticipation and reduction to the crisis came as early as the mid to late 1990s when a number of analysts within Citibank began to make a series of warnings concerning the untenable nature of the ways in which the financial sector was being managed. Sadly, these warnings were unheeded and resulted in key ethical oversights. Moreover, deregulation was a component of business that the higher echelons of Citibank leadership very much wanted to engage in (Ahmed, 2012). Moreover, the first real and measurable signs of impending difficulties on the horizon were first demonstrated around the year 2006 when the Department of Commerce noted that new home permits had dropped an astounding 28%. Although a metric that was concentric only upon ethical oversight within Citibank, such a metric encompassed the range of unethical behavior that was so rampant in the financial sector prior to 2007/2008. Normally incremental increases and/or decrease in the reduction or expansion of new home permits are little cause for alarm; however, when something as earth shattering and innately odd as nearly a 1/3 reduction in the demand for housing should have been a major red flag to the Federal Reserve as well as the entire regulatory system. However, rather than heed such a statistic, the Federal Reserve remained unrealistically optimistic regarding how the economy would likely behave over the next several months and years (Nagy, 2013). Moreover, with regards to Citibank, such a reduction should have signaled an entirely different approach to business services and the means by which MBS (mortgage backed securities – to be discussed at greater length further on in this analysis) impacted upon the way in which debt and credits were leveraged. However, as can of course be seen, stakeholders and decision makers within Citibank were unwilling to change procedure or mechanisms and ensured that the financial collapse would affect them in a powerful manner. This allowed for the current situation to continue to extend itself for approximately another 2 years time before the final result of such a failure in oversight and monetary policy was noted by the stock market in the painful round of shocks that exhibited themselves throughout the stock market and economy during 2008 and 2009. Ultimately, the Federal Reserve felt that even though the drop in applications was something of an “anomaly”, the strong employment figures that the economy was continuing to generate were indicative of the fact that increased consumer spending, and low inflation would help to cover and shortfalls that such an externality may have on the economic system as a whole. Unfortunately, this was not the only sign of distress that the economy exhibited prior to 2008. Economists today point to what is collectively known as an inverted yield curve; utilized to predict the recessions of 1981, 1991, as well as 2000. This inverted yield curve is ultimately something that can be understood from the way that Treasury notes are higher than their long term yields. In a typical situation, long term yields are higher as a result of the fact that investors demand and expect a higher return for investing money for such a long period of time within a certain economic mechanism. Yet, as individuals believe the economy is cooling, the rate at which they will seek to invest in long-term investments as a means of hedging bets with regards to the rigidity of the system exponentially increases (Graafland & Ven, 2011). Again, the Federal Reserve ignored this implication and assumed that due to the fact that interest rates were low that there was a very large amount of liquidity left to continue to provide for high levels of growth. However, as would soon be seen, liquidity exhibited itself to be the fundamental shortcoming for Citibank as well as for the entire system. As a direct result of this, Citibank soon saw a situation in which more and more money was being tied up in long term investments that were hedging themselves against a very difficult path ahead for the economy. Thus, the overall level of liquidity that internal economists and the Federal Reserve expected was not there to back up anticipation. This shortcoming might not be directly seen as an ethical oversight; however, key personnel within Citibank, as well as internal and external auditing firms, had noted that this weakness threatened to morph into a huge concern if and when contributing factors changed the dynamics of the economy (Deltuvaite, 2011). However, decision makers within the bank’s higher echelons decided to ignore such pertinent and salient information and continue along the course of action that had taken the financial entity to such great heights in the recent past. This represents perhaps the greatest and most fundamental ethical breakdown that this particular analysis will discuss. The willful decision to ignore pertinent advice soon spelled disaster as the firm, along with a litany of others, found itself in a liquidity crisis that started an avalanche of financial issues around the globe. As such, it cannot be understood that any one single culprit is ultimately responsible for the financial collapse of 2008-2009; rather, a litany of factors, many compounding one another, continued to stack up until the point that they were not only providing a definitive strain upon the system, they also served to coalesce and combine in order to send shock waves throughout the global financial system (Nielson, 2010). One of the ways in which this lack of regulation played into creating, sustaining, and developing the crisis was the sub-prime mortgage market and its general lack of oversight. Although a discussion of regulation may seem amiss within an analysis upon ethics in Citibank leadership, the fact of the matter is this deregulation was an aspect of financial services management that was fundamentally pushed and lobbied for; not only by Citibank but also by many of the other largest financial services entities within the United States. Perhaps most importantly of all the aspects that have thus far been discussed is the role that MBS (Mortgage Backed Securities) played with regards to the financial crash. MBS were ultimately bundled and sold as a means of generating income by leveraging assets. These high risk bundles were snapped up by willing investors when the market was booming; however, once it began to crumble, few if anyone truly understood what percentage of “bad mortgages” were constituted within the MBSs that were being bought and sold; thereby leading to a fundamental breakdown and/or lack of trust within the system. However, most importantly the breakdown in the financial system can be defined as the responsibility of the mortgage brokers who made the bad loans as well as the hedge funds who too heavily leveraged the financial instruments that were derivatives of these loans (Gunay, 2011). Moreover, a third culpable party remains the federal government as it ultimately and completely failed in its mission of oversight and regulation of key financial transactions and markets. As a function of understanding the way in which the crash was ultimately precipitated, it is the hope of this author that the reader will be more able to provide thoughtful insight into both explaining the key causal factors as well as seeking to prevent such an incident from occurring again. In effect, seeking to place an ethical burden upon the leadership of Citibank goes a long way in helping to define and understand the financial collapse of 2007/2008; however, it does not explain everything. As a function of the research that has thus far been presented, the reader can come to an appreciation for the way in which key ethical oversights existed within Citibank and extended not only into the lower leadership positions of the firm but also extended into governmental sectors that had been tasked with watching and observing the financial behavior of such a firm. Such behavior was of course instigated and encouraged by the very leadership of Citibank and other financial institutions that had the most to gain from such a lack of oversight; representing just another link in a very long chain of unethical behavior. References Ahmed, G. (2012). The new regulatory concerns and regulatory management. China-USA Business Review, 11(9), 1205-1212. Deltuvaite, V. (2011). Measuring the costs of banking crises: Theoretical and practical aspects. Economics & Management, 16, 1089-1100. Graafland, J., & Ven, B. (2011). The credit crisis and the moral responsibility of professionals in finance. Journal of Business Ethics, 103(4), 605-619. doi:10.1007/s10551-011-0883-0 Gunay, E., & HortaCsu, A. (2011). Bank managers' perception of ethical and legal conduct in emerging markets during the post-crises period: Evidence from Turkish banking sector. Journal of BRSA Banking & Financial Markets, 5(2), 11-49. Nagy, A., & Benyovszki, A. (2013). The global crisis: Challenges to the banking system. Theoretical & Applied Economics, 20(4), 7-26. Nielsen, R. P. (2010). High-leverage finance capitalism, the economic crisis, structurally related ethics issues, and potential reforms. Business Ethics Quarterly, 20(2), 299-330. Read More