Ethics Newsline®

Among the issues: executive compensation, subsidizing risk, ethics education at business schools, responsibilities of stockholders to monitor the institutions in which they invest, U.S.’s standing as world economic leader, and the morality of pursuing short-term profit

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The U.S. Congress last week passed a $700 billion financial bailout package, which was signed quickly by President Bush. Now, the U.S. Treasury will implement what may be the costliest government economic intervention in history.

Several ethics angles on the events were featured in reports and opinion pieces from the national and world press last week. Among the top stories:

• Lawmakers added more than 400 pages to the Treasury Department’s original three-page proposal for the bailout, including limits on how much executives could recoup if their firms sell assets to the government, according to a report from the Los Angeles Times. The fairness of executive compensation has been a particularly touchy issue throughout the evolution of the crisis, as critics complained that many of those responsible for the meltdown were walking away from the rubble with millions of dollars in their pockets.
• Wall Street Journal columnist Daniel Henninger weighed in on the “moral hazard” argument, noting that now, “with big banks dropping like flies and Wall Street vaporizing amid a mortgage meltdown, every corner bar and hair salon is filled with experts on the perils of moral hazard. Everyone gets it: Cut risk down to next to nothing and some people do crazy things.” Henninger notes that the term has been kicking around for hundreds of years, but when it eventually came into the economists’ lexicon “the first thing they did was strip out the heavy moral freight to make the concept value-neutral. Now moral hazard became less about judgment and more about the economic ‘inefficiencies’ that occur in riskless environments.” Henninger says that now we are “back to the original meaning. Losing tons of money for an institution is an economic inefficiency. Lose the nation’s financial structure, however, and moral fingers get wagged.”
• Fox News religion correspondent Lauren Green argues that the seeds of the current economic implosion were sown in the nation’s business schools during the 1970s and 1980s — the same schools she says are trying to reclaim the moral high ground today. She cites Harvard professor Rakesh Khurana’s claim that in the first half of the twentieth century, U.S. business schools taught a standard of socially responsible management — a standard they abandoned in the last two decades to advocate decisions made on the premise of a higher return rather than a higher purpose. But now, Green maintains, those same business schools are trying to correct that profit-at-all costs culture. Green points to Harvard’s new Leadership and Corporate Accountability course, the Wharton School’s recently developed doctorate in business ethics, and Yale’s Center for Faith and Culture, which offers a joint degree between the School of Management and the School of Divinity.
• One of Europe’s senior bankers last week said the financial crisis had been caused by a collapse of ethical standards among banks, as well as the blind eye turned to the situation by watchdogs, rating agencies, and accountants. Sir Evelyn de Rothschild had harsh words for shareholders who ignored the increasingly overextended positions of the companies in which they invested, according to the London-based financial website ThisIsMoney.com.
• Philadelphia Inquirer columnist Trudy Rubin contends that the financial crisis imperils the United States’s standing as the world economic leader, with the dollar’s status battered by the cracks in the foundation of the nation’s financial systems. Moreover, Rubin argues, the implosion of the financial structure undercuts the nation’s image as the home of stable institutions. She also posits that recent events erode the nation’s credibility, noting that the United States staunchly had opposed bailouts for ailing banks during the Asian banking crisis in the late 1990s, during which many banks failed, hurting many middle-class Asians.
• A top Vatican official last week proclaimed that the world’s financial crisis is a result of an obsession with short-term profits and an example of what happens when the common good is ignored, the Associated Press reports. Cardinal Tarcisio Bertone, the Vatican’s number-two official, criticized the quest for short-term profits, which, “virtually identified as a good in itself, ends up wiping out the profit.”

Sources: Los Angeles Times, Oct. 4 — Wall Street Journal, Oct. 2 — Fox News, Oct. 2 — AP, Oct. 2 — ThisIsMoney.com, Oct. 2 — Philadelphia Inquirer, Sep. 29.

For more information, see: Related Newsline Commentary, Sep. 29 — Related Newsline story, Sep. 29 — Related Newsline story, Sep. 29 — Related Newsline story, Sep. 15 — Related Newsline story, Sep. 8.