Northern Rock Crisis - an Assessment as a Concern to the International Business Ethics - Essay Example

Northern Rock crisis: An Assessment as a Concern to the International Business Ethics WHAT'S HAPPENING AT NORTHERN ROCK? Fig.1 Mortgage lending Northern Rock lends a large amount for mortgages, and finances this with money from banks and savers. Savings Northern Rock receives a relatively small amount of money from savers. Money markets have stopped lending money to Northern Rock due to the crisis in the US sub-prime mortgage market. Bank of England Steps into the breach to give Northern Rock an emergency loan Images: PA, Getty SOURCE http://news.bbc.co.uk/1/hi/business/6994160.stm The objective of this paper is to check a detailed condition as got prevailed by the outburst of the crisis in Northern Rock. The crisis of Northern Rock had come so far that it had to ask the Bank of England for emergency funding, in order to help continuing its operations. Inspite of the prevailing reassurances from the great and the good in the City, including the Financial Services Authority, tens of thousands of people have withdrawn their savings, apprehending the bank will collapse anytime. The idea of this paper is to investigate the crisis from the point of view of Kantism, Deontology, Virtue theory and Adam smith vs. Keynesian Ethical theories. The purpose is to underpin the argument as this issue to an International Business Ethics concern. According to Stevenson & Haberman the problems of human individuals is what Plato diagnoses are intimately related in human societies. For them an imperfect society tends to produce flawed individuals, and troubled or poorly educated individuals add to social dilemmas. On the other hand, Kant who was recognised as the deepest philosopher in his time, lift up the questions about the values, which shaped the behaviour and the ethic under which the individual ventures gets activated. The inner conflicts usually get alternative interests and thereby get pulled in different directions. A manager taking the Kantian approach to business ethics would consider on condition that meaningful work as a moral obligation. Some management manners and put into practices are more encouraging toward meeting this responsibility than others. Thus, Kantian managers need to create a definite kind of organization. A discussion of what a Kantian business firm would look like leads directly to a conversation of the third formulation of the resounding essential. It is a kind of situation that organizational managers often find themselves in. the Northern Rock to go down such a crisis. Lot of discussions has taken place in this area. According to the sources of BBC, there are demand to bail Northern Rock. The reason that supports it is that, it is the firm which is in need to secure admittance to a greater flow of cash so that it can continue its business. Unlike most banks, which get their money from customers making deposits into savings accounts, Northern Rock is built around its mortgage business and that added to its ethical values. Moral hazard: Risk taking in the Banking Division The activity of this particular organisation is done by carrying most of the money which provides for mortgages via the wholesale credit market. Initially this money got run by selling the debt on in the form of bonds. Following the widespread losses made by investors in loans to US homebuyers with poor credit history, the so-called sub-prime loans, banks and investors have become wary of buying any mortgage debt, including Northern Rock's. This is the reason that resulted in a very slow flow of money that it would normally get. These losses slower down the growth of the business, along with the operating pace of sustainability. The main damage done by this bail-out - and this nationalisation is indeed a bail-out - of Northern Rock’s creditors, employees and other stake holders (if not, as I fervently hope, of its shareholders) - is to future incentives for prudent lending and funding in the UK banking sector.  It is clear now that no bank is small enough and systemically insignificant enough to fail.  Northern Rock’s failure would not have constituted a threat to the stability of the UK financial system, as long as the deposit guarantee remained in place. As a result there was a great panic uproar among the customers. Yet the economists say that Northern Rock is still a profitable and viable business and that there is little prospect of getting ruined. It is a clear declaration made by Angela Knight of the British Bankers' Association that people who have got saving accounts with Northern Rock probably don't need to panic. Yet the fact, as declared by the government official sources; is that the Bank of England has agreed to provide emergency funding was a clue that it believed the inconveniences at the Northern Rock were temporary. However, almost £2bn was withdrawn from Northern Rock accounts by the savings account holders, on a Friday and a Saturday alone. Here I would like to indicate towards a situation that got illustrated best by Kant. Kant is best known for preserving a version of the “respect for persons” principle which entails that any business practice that puts money on a par with people is immoral, though there is much more to a Kantian approach to business ethics than this. This mental state of the account holders are thus in a way gets justified. The concept is that s business manager who accepts Kantian morality would ask for any given decision, does the principle on which the decision is based pass the test of the categorical imperative. The condition of Northern Rock as said to be more susceptible to problems than others gets its own moral and ethical under question. Though the scenario is that almost every bank is facing the funding problem the crisis of Northern Rock is getting more hype in the media. This is the reason for which, being as a specialist mortgage lender; Northern Rock has thrash about more than most of its contemporary banks. According to the BBC business editor Robert Peston, "It is much more exposed than its rivals to this distaste for mortgage debt, because its business is overwhelmingly focused on providing mortgages, rather than other kinds of banking business". In a short term as a business the picture of Northern Rock gives the identical meaning to the borrowing money at a rate well above the market rate. To all intents and purposes the bank is led to the recent financial penalty. As a resort to the problem the bank has planned to lend much less to new home buyers in the upcoming months of this year. Along with this there are strict restrictions for any sort of fresh mortgage offers to its clients. The declarations are made by its chief executive Adam Applegarth, "We have taken prudent action to rein back our lending until markets normalise". Keeping the aspects of the longer term, few economists like Howard Wheeldon of BGC Partners; are predicting that Northern Rock might face a takeover. Howard states, "I'm not sure it will be the end of Northern Rock". "But it may be the end of it as we know it." As the deontology school of thought considers on the preservation of individual rights and on the intentions associated with a particular behavior rather than on consequences [Ferrell and Fraedrich, 1991]; the positions of the customers of the bank gets highlighted. The enquiry comes up about the customers of other banks. As an answer, it for the people with poor credit history will find it increasingly hard to get a loan or mortgage from the bank. There is the participation of an inadequate accountability mingled with the influence that makes it potential to take huge financial risks in the financial sector (vide Leeson and Kerviel). The case of free labour contracts cannot bind an employee to the job. These are the hallmark of a civilised society, but it also represents that bank employees cannot convincingly perpetrate themselves to stay with their existing company. On the contrary they might have to pay more for it. As per the deontological Golden Rule view, "Act in the way you would expect others to act toward you" and also Kant's categorical imperative, 'Act in such a way that the action taken under the circumstances could be a universal law or rule of behavior" [Laczniak, 1983]; the act of the bank deserves the act that are being shown by its customers. Deontologists look for conventionality to moral principles to conclude whether an action is ethical or not. Standards to defend personal ethics are often developed from types of deontological philosophies [Velasquez, 1982]. The recommendation is of the implementation of applications like open book management would go far on the way to correcting the asymmetrical information that managers possess, a condition that sponsors maltreatment of power and dishonesty. Beneath open book management, if a firm faced a circumstances that might involve the layoff of employees, everyone in the firm would have contact to the same information. Trickery would not be very easier said than done in such circumstances. Suspicion would be less and, as a result, accommodating attempts to address the problem would be more likely. With all these considerations we can see that some banks may have a rough business, and Northern Rock is no exception. The important thing to note here is that the Bank of England has agreed to facilitate every bank hit by the credit crisis; but how can they be so sure of the underlying business being safe and sound. The help offered by the Bank of England will be possible when the crisis gets stabilised and is in a scale of recovery as a whole. This will certainly follow the deontological idea on the preservation of individual rights and on the intentions related with a particular performance rather than on outcomes. In a way it is not naturally common for a firm to have to turn to the Bank of England in this mode. This shift in reality is a tremendously exceptional case and thus is making it such massive news all over the country. My emphasis is to give the issue an International look. This is a rare case and is a situation that can get common in any country. Thus the limitations and the solutions should be dealt globally. Earlier too, the Bank of England has acted as a "lender of last resort" to a bank in the 1970s. This shows that though not common now but is an issue of high seriousness. After that incident in 1970s the decision has been made after a meeting with the Treasury and the City watchdog, the Financial Services Authority. On its website, the Bank of England says that it would expect to take such a step "very rarely" and it "would normally only be undertaken in the case of a genuine threat to the stability of the financial system to avoid a serious disturbance in the UK economy”. So it's not a regular incident, but at the same time is something that is also obvious to any bank in any corner of the world. Positioning Shareholders To look at the problem from a meta-theoretical point of view of business based on virtue theory, we find that it gets which linked to the concept of virtues, the common good, and the dynamic economy into a unifying and comprehensive theory of business. The Virtue theory states that the companies who pursue ethically-driven strategies can realise a greater profit potential than those who currently use profit-driven strategies. The theory gives further details about ethical business by stating it to be the business of business. For all these thinkers, commerce is a way of bringing people together rather than keeping them apart. If commerce is successful in bringing people together, then the chances for peace among nations improves. Given the exponential growth of international business, it is not surprising that this view has many adherents today. During the 1970s and 1980s, trade agreements between the USA and the former Soviet Union were defended on the grounds that they would enhance the chances of peace. Similar arguments are heard today regarding the granting of Most Favored Nation Status to China. Such arguments are not limited to US spokespersons. A Mideast Common Market has been proposed as a cure of the continuing conflicts in the Middle East. The crisis as faced by Northern Rock is related to leadership and ethics. However, there has been some apprehension for some weeks in financial circles about Northern Rock's position and problems it may face. A large amount of people agree that for things to have become this bad is still a big bolt from the blue. the Governor of the Bank of England, Mervyn King, told the Treasury Select Committee that ‘the Bank would be prepared to provide emergency loans to a bank that ran into difficulties, so long as those difficulties were the result of temporary market conditions’. There is likely to be widespread proceedings about shareholder reimbursement, but in the end, the law is likely to follow the economic and commercial logic of the case: without the reality and the expectation of government financial hold, Northern Rock has no shareholder assessment and has had no one since the crisis broke in September 2007.  The shareholders should therefore get nothing.  Here the light is on the enquiries regarding the shares of Northern Rock's. The fact is that the firm's shares have by now fallen in value by about 50%, this also includes the losing about 5% on Thursday. On Friday, its shares plunged another 32%; thus a On the whole they should get nothing now and be last in the queue of applicants for the continuation of the definitive re-privatisation of Northern Rock or the dumping of its advantages. It is a demoralizing situation for the bank and its customers. No doubt that such condition got leaded by the crisis that its leadership and ethics must have been in action long back. It may cause, if an aphorism permitting writing checks without adequate funds in the bank to cover them was really universalized. There would be no establishment of check writing. There are instances that show the critical situations that gets the grip as some crisis comes up. The most famous incident came shortly after the fall of communism in Russia. There was a bank collapse because people did not pay on their loans. And experts in general are of the same opinion that one of the obstructions to the expansion of capitalism in Russia is the malfunction of various parties to pay their bills. This indicates the universal appeal of such issues. The consequences were such that suppliers got disinclined to provide a product if it is not known if and when payment will be received. Fig. 2 Performance in the new financial system will necessitate a variety of ideas and magical strategies. It is a fact that to pick up with a competitive and profitable business the human resource management needs to be very strong and proficient. The gesticulated feature of Corporate Social Responsibility (CSR) is getting followed across all the nations and world bodies such as ILO. The new definition of successful businesses will be those that are capable to coherent noticeably their philosophies and principles on the business ground. CSR has come into sight as on such strategies that even the European Parliament has seconded and mandated the agency transacting with such concerns to maintain a register of companies that have been blacklisted. Thus the companies whose CSR initiatives have functioned successfully are being imitated by those inquiring about solutions for their past miscalculations. This is what for me needs an International concern of Business Ethics. The objective is to make a comprehensive elaboration of business ethics in the application of all those features that re related to the dealings of human moral senses. Indulging the humanity in a person as an end, and not as a means simply, in a business relationship involves two things. First, it requires that people in a business relationship not be used, i.e. they not be pressurized or mislead. Second, it means that business organizations and business practices should be arranged so that they contribute to the development of human rational and moral capacities, rather than inhibit the development of these capacities. These requirements, if implemented, would change the nature of business practice. A few examples are in order. Liquidity of the Crisis The crisis faced by Northern Rock is not a solvency issue it is rather liquid in character. Yet the suggestions are that if someone has comparatively a bigger amount of money in one of its accounts then it’s recommended to check whether he can have a better rate in some other bank. Northern Rock discloses that it "cannot gaze into a crystal ball" on what the prospect may get, and that the Bank of England's solution is a short-term appraisal. Lenders such as Paragon, Alliance & Leicester and the Bradford & Bingley have all denied that they have any trouble with this particular liquid condition of the bank. However it is very improbable that there will be a full-blown banking crisis - the FSA, the Bank of England and the Government will do everything in their powers to prevent such a catastrophic occasion from ever getting phenomenon. The effect is bigger than ever expected. The implications of the critical situation of credit of Northern Rock's problems are being felt across the mortgage market too. The costs of new mortgages and personal loans are likely to continue to rise. This is where we see the conflict between the theory of Adam Smith and Keynesian Ethical theories. In a way even those people will get affected who doesn’t have an account in Northern Rock. As it has been seen that several lenders, including Abbey and Halifax, raised rates on their new variable-rate of mortgages; it is clearly affecting all the people who ever thought that they will not be facing any problem for the Northern Rock crisis. The affect is also on the property-buyers and those who were about to remortgage their capital. According to Martin Lewis at MoneySavingExpert.com, ‘as the estimated 250,000 homeowners whose fixed-rate mortgage ends in the next three months should act immediately; there's nothing wrong with sorting and agreeing your mortgage now, even if you don't need it until December. For a fixed-rate deal by a customer, within the next yea, needs much broader speculation in such crisis. There might be a situation where the customer may want to have a contingency plan in place in case rates remain at today's levels or even higher. It may also be worth checking the personal credit history. These days the lenders are tightening their lending criteria and as such the level of interest is increasing in much higher pace. Thus the need is to review the finance to check such situations. In a business context, I prefer to look at the issue from the pont of view that Kenneth Goodpaster made. For Kenneth Goodpaster [1994, pp. 54-55], there are five virtues in such cases. These are; (1) Prudence - neither too short-term nor too long-term in time horizon; (2) Temperance - neither too narrowly materialistic (want-driven) nor too broadly dispassionate (idea-driven); (3) Courage - neither reckless nor too risk-averse; (4) Justice - neither too anarchic regarding law nor too compliant; (5) Loyalty - neither too shareholder-driven (private sector thinking) nor too driven by other stakeholders (public sector thinking). This needs to a universal approach to all those banking sectors that are into the maintenance of their financial status quo. Thus the critical variation, among Adam Smith and Keynesian Ethical theories is that the latter focuses on the temperament and impetus of the agent, and on the negotiator's aptitude to follow superiority through righteous performances. There are also the distinctions between the traditional approach to business ethics and the new virtue-ethics approach. There is no doubt that the future prospects of Northern Rocks will get checked to fund it thoughtlessly and to lend and thereby to invest recklessly. Their creditors are after all the beneficiaries of a free of charge from government assurance. If their bets come off, management, super-employees shareholders and creditors benefit. If they fail, the shareholders may still lose, yet taxpayer picks up the tab for the rest. These are basically labelled as "action-based" and "agent-based" approaches. In such cases the former tends to highlight on moral rules that can be normally functional to indentured situations (e.g. Kantianism and utilitarianism). On the other hand, virtue ethics concerns the aspirations of the agent, and thereby the agent's ability to exercise the moral 'virtues'(MacIntyre, 1988, p. 137). Thus rather than being some peripheral adjunct or constriction on a substance-based consistency perception, this come within reach of places morality of a business strategy. Conclusion Eventually the purpose is to learn from such crisis and to give it good deal of importance, in order to prevent the circumstances that lead to it. It should be further accredited that the functionality of CSR should be the core concern of all new upcoming businesses. The involvement of Corporate Social Responsibility (CSR) in the new-fangled economy has come to be recognized as one of the major components of business growth and protractability. The disputes necessitate business and their managers to think afar conventional way of looking for short-term goals. It needs business and the people within these behemoths to grip a much broader standpoint that is also comprehensive of stakeholders. It should remain in the public domain for a longer time, for better functionality at the business end. The matter of concern is that the crisis of Northern Rock needs to be sorted as fast as possible and that the issue should go international. 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