Banking Industry Meltdown: The Ethical and Financial Risks of Derivatives - Research Paper Example

? Banking industry meltdown: The ethical and financial risks of derivatives November 30, Banking industry meltdown: The ethical and financial risks of derivatives Determine which moral philosophy (as discussed in Chapter 6) is most applicable to an understanding of the banking industry meltdown. Explain your rationale. Deontology is the best ethical philosophy for understanding the banking industry meltdown. The theory focuses on rights of member of the society and on intentions of actors. It argues that an actor ought to frame actions in order to respect rights of other members of the society and its basis defines those things that people should not do. Doing such things identifies unethical conduct while restraint from such acts identifies morality. Fundamental to the theory’s applicability to understanding the banking crisis is its establishment of people’s rights such as “freedom of conscience, freedom of consent, freedom of privacy, freedom of speech, and due process” (Berry, 2013, p. 154). These rights define morality through people’s conformity and can be explored from two deontological perspectives, rule deontology, and act deontology. Developed moral principles inform rule deontology while actions inform act deontology but both perspectives makes judgment on the relationship between an act and the principles (Berry, 2013). Existence of legal and moral rules that ought to have governed practices among banks explains suitability of the deontology philosophy as the best for understanding the problem. Numerous legal cases that faced CEOs after collapse of their banks shoe that the officers and their banks were accused of illegal practices. This further supports existence of legal frameworks that should have regulated decisions in the banking industry but the banks and their managements ignored. Misrepresentation and fraud are examples of acts that the cases report in the crisis and that identify legal misconduct because the financial institutions did not represent fair values of involved risks, in the securities, to their investors. Another significant basis for understanding the case is through a review of balance sheet misrepresentations that the banks used to influence value in their securities. The dishonesty through misrepresentation is also evident from other rules such as accounting standards and practices that require fair value representation of asset values. Self-interest that overlooked involved risks in lending is another basis for understanding the crisis because of deontology’s due process perspective. Based on the principle, activities should follow established processes but the prime lending breached the implementation of results of risk evaluation and offered loans to people with credit worthiness (Shafer-Landu, 2012). The philosophy therefore identifies unethical conduct among banks and their employees towards the banking crisis. Analyze the case study and discern if the “white collar” crimes committed differ in any substantive manner from other more “blue collar” crimes.  White-collar crimes are crimes committed by people who command authority in an area. The accused are often people with academic knowledge and technical expertise, and they commit the crimes within their scopes of duty. The crimes are further non-violent and are associated with financial gain. Blue-collar crimes are however associated with violence, and people from lower social classes do the crimes. The case identifies the features of white-collar crimes and absence of features of blue-collar crimes shows significant difference between the crimes committed in the case and other blue-collar crimes (Justice Committee, 2013). Crimes in the case relate to accounting, assessment and reporting of credit worthiness, risk assessment, professional careers that only learned people do. The case of Barings Bank demonstrate risk assessment and concealment of losses that occurred from risky venture while USB case demonstrates accounting malpractices and misrepresentation that associate with the subprime lending. Misrepresentation of information about loan applicants and investment in subprime loans are also evident in the case of Bear Stearns and these arise from professional practices. The same practices are reported in the case of Lehmann Brothers but non of the institutions reported violent attacks. Consistency in observation from the four firms regarding existence of white collar crimes and absence of blue collar crimes therefore shows that the two types of crimes are different from one another (University of New Mexico, n.d.; Ferrell, Fraedrich and Ferrel, 2011). Determine and discuss the role that corporate culture played in banking industry scenario. Support your response with specific examples. Corporate culture is the “inner rites, rituals, heroes, and values of a firm” (Pride, 2013, p. 201). Rites and values that banks held before the crisis suggest the banks’ active role in development of the meltdown. Inner rites define an organization’s solemn practices and have direct effects on organizational behavior. Organization’s trust in employees is one of the inner rights that illustrate the banks’ active role in the meltdown. Such practices as rewarding output, misrepresentation of financial statement items and fraud are examples of consequences of trust that banks had in their employees and led to their collapse. The case of Barings Bank is an example of the role of banks’ trust in their dishonest employees. The bank trusted Leeson, an employee, and offered him $ 1 billion dollars without monitoring how he used the money. This led to misrepresentation of losses that were realized when it was too late. Decisions to offer subprime loans is another rite that banks practiced before the crisis as cases of USB, Lehman Brothers, and Bear Stearns show. A weak value for ethics is another culture that identifies the banks’ active role into the meltdown. USB experienced a case of questionable practices, leading to fines and the government only established regulations after the fines, an indicator that no regulations occurred to ensure ethical conduct. Wide misrepresentation of clients’ financial statements by Bear Stearns also demonstrates this. Postulate how leaders within the banking industry could have used their influence to avert the industry meltdown. Deontology offers the most suitable philosophy for understanding the problem that occurred in the banking sector towards the crisis. Rules are however not the best solutions to ethical problems because human beings’ acts because of relative benefits. Perceived value in an act would promote the act, even if it were illegal, despite the relatively less consequences. High payable bonuses to Chief Executive Officers and other employees can for example motivate unethical practices as employees strive qualify for the rewards. One of the strategies that leaders in the banking industry could use, through their influence, to avert the meltdown is influencing behavioral change towards instilling morality in organizations, their managements and their employees. The strategy assumes existence of immoral practices that establish need for behavioral change and develops a strategy for influencing the behavioral change. Acts of commission such as concealment of debts and misrepresentation of credit worthiness of creditors are examples of unethical acts that the case study identifies. The approach’s measures include framing people’s behavior, being persuasive, exerting group based pressure, and applying a center of power to influence people’s behavior. Leaders could therefore assume personal responsibility and influence ethical conduct among organizations and within organizations with effects such as organizational cultures that focus on ethical practices and strong moral values among individuals in the industry. With such values as justice, fairness, and non-malfeasance, organizations would consider interests of stakeholders such as borrowers who were not credit worthy and invertors’ interest to ensure that lending and transfer of risk bore reasonable levels of risks (Tengland, 2012). Another way in which leaders within the banking industry could have used their influence to avert the industry’s meltdown is through empowerment. Empowerment defines a state of autonomy in which an individual can make rational decisions on a subject. Its application in the banking meltdown, based on identified morality concern, would involve ensuring a state of independence and integrity in making decisions. Applicable at corporate and individual level, ethical empowerment would help banks and their employees to identify ethical principles and operate within the principles despite such pressures as the need to generate more revenues towards bonuses. Empowering Chief Executive Officers would also help the leaders to influence sound reward and remuneration policies that would not make employees and organizations vulnerable to unethical conducts. A reward system that also focuses on employees’ morality would for example motivate ethical practices and promote such acts as explanation of scopes of loans to applicants, restricting loans to applicants with credit-worthiness record, offering the true risks to investors. Empowerment also defines involvement of stakeholders in simulation processes and leaders could incorporate organizations and their employees in forums for research towards development of ethical practices in the industry. This approach would create the value of developed practices among the parties and motivate the parties to implement the developed practices in their operations. Development and implementation of ethical programs are another strategy that leaders within the industry would have used to avert the meltdown. Ensuring development of strong accounting and internal control systems, for example, would have eliminated misrepresentations and fraud that lead to the meltdown. Influencing development of self regulatory measures at organizational level and at industry level would also limited loans to people with appropriate credit level and therefore reduced involved risk for the banks and for investors. Suitability of these strategies to ensure ethics in the field of pharmacy means that they could be effective in ensuring ethics in the banking industry (Tengland, 2012; Beeri, Rachel, Eran & Simcha, 2013). References Beeri, I., Rachel, D., Eran, D. & Simcha, W. (2013). Advancing ethics in public organizations: The impact of an ethics program on employees’ perceptions and behaviors in a regional council. Journal of Business Ethics 112(1), 59-78. Berry, R. (2013). The ethics of genetic engineering. New York, NY: Routledge. Ferrell, O., Fraedrich, J. & Ferrell, L. (2011). Business ethics: Ethical decision making and cases. Mason, OH: Cengage Learning. Justice Committee. (2013). Inquiry into white collar vs. blue collar offending: Do current sentences reflect the economic and social impacts of these crimes? Retrieved from: http://www.myd.govt.nz/documents/youth-parliament-/justice-committee-background-paper.pdf. Pride, W. (2013). Business. Mason, OH: Cengage Learning. Shafer-Landu, R. (2012). Ethical theory: An anthology. Hoboken, NJ: John Wiley & Sons. Tengland, P. (2012). Behavior change or empowerment: On the ethics of health-promotion strategies. Public Health Ethics 5(1), 140-153. University of New Mexico. (n.d.). Banking industry meltdown: The ethical and financial risks of derivatives. University of New Mexico. Retrieved from: http://danielsethics.mgt.unm.edu/pdf/Derivatives%20Case.pdf. Read More