Massive Financial Bailout Emerges as Focus of Ethics Questions
Sep 22nd, 2008 • Posted in: NewsAmong the questions: Was impending meltdown caused by greed and recklessness? Does bailout reward bad behavior? Should taxpayers foot the bill for executives’ mistakes?
NEW YORK and WASHINGTON
One of the largest proposed government bailouts in financial history, a move designed to head off what many view as an impending catastrophic collapse of the economy, has raised ethics questions not only about the propriety of the bailout but also about the moral climate that led to the meltdown.
Philadelphia Inquirer staff writer Linda Loyd examined the origins of the near-collapse over the weekend, noting that while “proper risk management gets drummed into students,” various business-ethics and finance professors maintain that when times are good, ethics and risk frequently are forsaken for easy money and greed.
Loyd quotes Thomas Donaldson, an ethics and legal-studies professor at the University of Pennsylvania’s Wharton School, as predicting that ethics discussions now are likely to focus on relationships between government and business, particularly the financial services industry. In the current crisis, buyers were given loans “when they had no money to put down and no reliable credit,” Donaldson said. “Rating agencies were greedy as they marked assets as more secure than they should have been,” he added.
In much the same way, Wall Street securitized home loans and let collateralized debt obligations pile up recklessly, according to Donaldson. “People on Wall Street knew better and tried to make money in a way that was too risky.”
Another group of investors also have been cited as villains in the story, according to Los Angles Times business columnist Tom Petruno.
“After the collapse of Enron Corp. in 2001, Wall Street ’short sellers’ were hailed as heroes for helping to expose the company’s massive accounting fraud,” Petruno writes.
“Seven years later, the ’shorts’ — traders who borrow stock and sell it, expecting to profit from falling prices — are the reviled black hats of global markets. They have been damned by regulators and politicians who say they’re largely responsible for the meltdown in bank and brokerage stocks that brought the financial system to its knees this week.”
Regulators in the United States, Britain, Australia, and several other nations banned short selling last week, provoking protest from those who claim that short sellers merely are an easy target for lawmakers desperate to be perceived as taking action, the Times of London reports.
The short-selling ban was part of the United States’s sweeping proposal to put up about $700 billion in taxpayer money to buy up toppling mortgage-related assets — a plan that the San Francisco Chronicle estimates would represent more than $2,000 in tax obligations for every man, woman, and child in the country.
While the bailout has received widespread — if tentative — bipartisan endorsement, it also has been the focus of anger from both the right and the left, with detractors arguing that it rewards reckless investment, imposes an unfair burden on the middle class, and shifts the burden from Wall Street executives to Main Street taxpayers.
Some lawmakers, including House Financial Services chair Barney Frank (D-Mass.) say they expects Wall Street executives to give up a share of pay and perks in exchange for the intervention, according to a report from Bloomberg.
“If you want to participate in this, if you want your company to be the beneficiary of us buying up this paper, you have got to accept compensation guidelines that will remove this one-way street and provide an incentive structure that does not need too much risk taking,” Frank said.
Sources: Washington Post, Sep. 22 — Philadelphia Inquirer, Sep. 21 — San Francisco Chronicle, Sep. 21 — Los Angeles Times, Sep. 20 — Bloomberg, Sep. 20 — Times of London, Sep. 19 — MarketWatch, Sep. 19.
For more information, see: Related Newsline story, Sep. 15 — Related Newsline story, Sep. 8 — Related Newsline story, July 14 — Related Newsline story, July 7 — Related Newsline story, June 16.
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