Assessments of the financial crisis that erupted in August 2007 usually con- sider that the problems stemmed from technical economic and financial fac- tors, mainly related to credit-risk management, liquidity funding, excess leverage, macro-economic, and macro-financial imbalances. Indeed, this explanation is certainly one cause of a large-scale phenomenon affecting millions of people.
But a number of observers and practitioners, both inside and outside the finance industry, find such an explanation short-sighted. They believe that the malady had more serious, deeper roots. It was “a gradual but ulti- mately complete collapse of ethical behavior across the financial industry”
(Curtis, 2008). Misconduct and greed on the part of financial players and market participants were to blame for the crisis.
This begs the question of whether there was an earlier period where finance was more closely tethered to ethical norms. Actually, greed had an opportunity of developing as there weren’t enough barriers.
This also raises the question of how an ethical lapse resulted in such a widespread, long-lasting crisis.
Many people feel in the depths of their subconscious marked by reli- gious culture, at least Catholic or Muslim, that ethics and finance are fun- damentally opposed. This perception is held by actors in every part of society: individuals, consumers, investors, firms, banks, associations, and public institutions. It is based on the idea that finance intrinsically seeks to maximize profit up to a toxic profit maximization. This logic offends public feelings and appears incompatible with individual or shared ethical princi- ples. It supposes that finance stimulates arbitrage and speculation. As if finance was a zero-sum game, it harms agents, sometimes seriously, merely to procure additional wealth for other agents, who are often already privi- leged in terms of wealth, education, and culture.
On the other hand, everyone knows that finance is also beneficial for the economy and life in general, since it fosters trade, production, investment, and the sharing of revenue and wealth. Even those who recognize the eco- nomic benefits of speculation condemn its excesses and the sweeping macro-financial dimension it has taken in recent decades. The sums of money changing hands every day in financial and derivatives markets are totally disproportionate to the economic activity of those outside the world of finance. Moreover, financial players use leverage, committing themselves to many times the sums they pay out and receive.
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Is it possible to define a limit beyond which the benefits of finance become harmful? Where might such a threshold lie? If one exists, might it not change position and shape, depending on the business cycle or the cir- cumstances of those involved? Does the independence of the financial world leave it wide open to every kind of possibility and madness?
As Ciminello (1996)puts it so well, the beneficial role of finance ceases when it loses sight of its final aim, which is to serve economic activity in its widest sense, and to serve social necessities, shared wellbeing, and the com- mon good. This principle is an appropriate basis on which to begin the discussion.
It is nonetheless difficult to detect the ridgeline between the two aspects of finance, and those working with finance every day sometimes feel close to the edge. As an illustration of this, there is a very fine line between finan- cial hedging of commercial operations and speculation and, in practice, the theoretical distinction between arbitrage and speculation vanishes; and these are relatively “simple” cases.
This perception of the incompatibility of ethics and finance has been strengthened even more by the recent crisis and by the immoral behavior of both players and institutions. The spread of seriously immoral, misleading behavior resulted in major ethical failures affecting subprime lending, for- eign exchange and international money markets, asset management opera- tions, securities markets, advisory services, and so on. The financial services industry became an “ethical swamp” (Curtis, 2008). Eagerness and greed, extravagant rewards, misrepresentation, conflict of interest, lack of loyalty, insider trading, market manipulation, and market abuse account for a large part of the move toward the unethical practices mentioned above. To attempt to escape from this dilemma and overcome this feeling of incompatibility, we begin our discussion by looking at the ideas of those who make a distinction between morals and ethics.
According to Jean-Francáois Mattei, Honorary President of the French Red Cross, inLa Croix, a French daily newspaper dated March 15, 2015, there is a clear difference between moral doctrine and ethics, despite the fact that, in many professions, these concepts are often confused, mixed up, or lumped together.
A moral doctrine is an unconditional requirement or imperative. “Do not kill” is a moral judgment and an obligation, even though murderers can be sentenced to death and executed according to the national law of many countries. “Act according to what is right, and do not do what is wrong” is another moral judgment, which does not prevent people from deliberately lying to gain advantage.
On the other hand, ethics is a questioning issue for those who are look- ing for the most appropriate answer to a new problem. Adam Smith, for example, considered economics as a branch of ethics. Today, in the view of many, ethics is a branch of philosophy and Ethics Chairs have burgeoned in many institutes, universities, and countries, most often as a consequence of the financial crisis.
Such a distinction may help us to understand “the root of the crisis.” As regards moral doctrine, many are attached to the traditional, fundamental principle of seeking the “common good,” applied in a professional environ- ment. Notions of “common good” and “general interest” or “public interest”
are often confused.Flahault (2013)relates the change in meaning, and then the changes in mentality, from that of Thomas Aquinas, not to mention Aristotle, to today’s appraisal which emphasizes the very close interconnec- tions between each person’s individual good and the common good. So these concepts are not just “old hat,” but are the basis on which we live in society.
On the other hand, when facing a new problem or an unexpected situa- tion, taking the most appropriate decision when the choice is not apparent is a question of ethics. This is even more crucial when such a decision may affect the way of life and possibly the wellbeing of a large number of people.
As financial activity is based upon a sense of fiduciary responsibility, dealing with ethics should not be a marginal issue for market participants, finance managers, or employees. The regulation of finance which, after all, is related to ethics properis aimed at ensuring compliance by profes- sionals with principles such as market integrity even in case of proprie- tary tradingand the primacy of the client’s interest.
These principles have been enshrined in regulations and various codes of conduct. However, the rules and codes that regulate the finance industry may prove inadequate for the range of issues that need to be addressed.
They did not prevent the crisis from erupting, although admittedly, finan- cial regulation was not as precise and detailed then as it is now. Should we conclude that the rules are useless or inappropriate? Even though each financial firm has its own internal rules, provisions, and instructions, can we conclude that those provisions of individual firms or those of the indus- try are ill-adapted to prevent the eruption of crises? Because the legislators and regulators wanted to provide detailed rules, is it the case that the letter prevailed over the spirit of the law? On the other hand, we cannot be sure that financial practices would have been more ethical in the absence of writ- ten rules. It is more likely that most financial firms, both management and staff, try to comply with applicable external regulations. But, they consider that their duties do not extend beyond compliance with these rules. The 129 Ethical Issues in Finance
role of compliance officers in financial firms is particularly significant in this regard.
However, to address “the root of the crisis,” it would seem advisable, beyond the need to comply with the law, rules and regulations, to follow ethical principles whose expediency the crisis has highlighted. Professionals cannot ignore the calls that the crisis has prompted from both individuals and society.
If we are to avoid the recurrence of past errors and failures, one require- ment will be the re-establishment of appropriate ethical principles.