The Financial crisis

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Enterprise and Social responsibility
MS60021E
Jose Ruizalba

London
November 2014

Contents
Contents................................................................................................................................................2
1.

Stakeholders..................................................................................................................................3

2.

Tightening of banking regulation..................................................................................................4

3.

Ethical operations in UK banking.................................................................................................5

4.

Clashes of rights............................................................................................................................6

5.

Normative theories........................................................................................................................7

Bibliography.........................................................................................................................................8

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1. Stakeholders
Identify each of the stakeholders and how they are affected. What are the main harms and benefits in this
case for the different stakeholders based on the current situation?

Stakeholders

- Harms / + Benefits

Shareholders

- investment loss
- diminishing share price

Equity/Pension Fund
holders

- loss in value
- minimal or no profits
- withdrawal of funds was restricted

Customers

- loss of confidence in financial system

- increased loan application refusal rate
- increased taxes
- falling value of property
+ deposits were protected due to nationalisation of banks

Employees

- pay cuts
- loss of bonuses
- fear of losing jobs
+ government stimulus package secured some jobs

Businesses

- difficult to secure financing

- falling value of property
- premises for rent stayed empty
+ deposits were protected due to nationalisation of banks

Media

+ wide field of financial news with names to blame

Government

- massive expenditures to bail out banks and prevent wider crisis

+ increased control over banks
+ gaining security and trust when handling the crisis

Financial Services Authority

- critique over its passive actions and inability to manage the

regulations
+ increased control over banks

Financial institutions/Banks

- risk of bank run

- risk of bankruptcy
- loss of reputation
+ government bail-out

National Banks

- risk for the whole financial system

+ greater powers

European Central Bank

- risk for the European economy

European Commission

- threat to economy

Political Parties

+ chance for alternative solutions and public support

Management/Directors

- cut in bonuses
- fear of losing jobs
+ bail-outs may save the job

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CEOs

- critique over unethical practices

- fear of losing jobs
+ huge pension deals/bonuses

2. Tightening of banking regulation

From a utilitarian perspective, would you argue for or against the proposed tightening of UK banking
regulation?

In 1815, Bentham defined Utilitarianism as maximising utility for the greatest number of
people and it has become a philosophical thought (Renouard, 2011).
To apply utilitarian perspective it is important to understand the good and bad the
tightening regulations will have in the long run. This can be done by analysing the actions
of the tightening that affect the society.
From the previous stakeholder analysis of harms and benefits it shows that more harm
was done by the financial crisis than good. The collapse of big banks shook the entire
world and without government intervention (Northern Rock) there would have been a lack
of confidence towards banks and resulted in massive withdrawals. No bank in the world
can satisfy all the demands (withdrawals of deposits) at once (Diamond and Dybvig,
1983). This however rises questions whether nationalisation is better than bankruptcy.
According to Kilpi (1998), the government should help the banks to protect its creditors. A
cost analysis is needed to calculate the benefits and decide on the decision. Bailing out a
large bank will cause less harm to the economy than letting it go bankrupt (Krrberg and
Sellman, n.d.).
The analytics have said that the 2008 crisis has left the banks very cautious. Even though
the government is stimulating the lending with extra funds and encourages banks to
borrow money to small businesses, the banks are making the borrowing difficult (Knight,
2014).
The banks in Switzerland had much tighter rules during the financial crisis and this
resulted in less damage to their banking system (Rochet, 2014). From the utilitarian point
of view it is far better to have tighter rules across the whole financial sector as it prevents
the misuse of trust that comes in the form of money.

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3. Ethical operations in UK banking

Using arguments based on the maxims of duty, would you consider the UK banks to have acted ethically in
their operations?

Maxim 1: Act only according to that maxim by which you can at the same time will that it
should become a universal law.
This maxim is about a consistency and whether everyone should follow it.
The banks lent money to people who were known as bad borrowers. The banks
also resold these bad debts in financial markets without saying anything about
them. Due to the massive turnover the bankers got huge bonuses that were not
linked to the banks share prices. Once the bad debts started to leak the banks hid
the state of the bank by rigging the LIBOR rate (BBC, 2012). Later on they linked
the LIBOR rate to the interest charged.
Maxim 2: Act so that you treat humanity, whether in your own person or in that of another,
always as an end and never as a means only.
The Maxim 2 is about human dignity and it should never be ignored.
Marketing the loans with tiny interest rates to make people borrow and then
bundling them into CDOs is an attack against human dignity. But the banks did not
care whether borrowers could really afford it or not and rather maximised the
lending to show the books.
Maxim 3: Act only so that the will through its maxims could regard itself at the same time
as universally lawgiving.
Will everyone understand that the aggressive lending maximisation was in fact
tolerated? The banks had many products that were complex and non-transparent,
and were not directly covered by any regulations. This helped the selling of CDOs
and sub-primes, keeping it as a secret for years.

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4. Clashes of rights
What clashes of rights are involved in this situation? Is it possible to judge their relative importance? Whose
rights matter most in this situation?

Natural rights are certain basic, important, unalienable entitlements that should be
respected and protected in every single action (Crane and Matten, 2010).
Prior to the Financial Crisis 2008 the bankers were focused on profits, pleasing its
shareholders. During the process of aggressive sales tactics they started to forget who the
real customer was. Right after the recession started all stakeholders tried to safeguard
their own interest and often ignored some natural rights of others. In this disarrangement
the more relevant rights are:

Customers information the banks missold loans to customers who had no real

knowledge of products (complex mortgages).

Employees positions right for continuing employment when they were not involved

in bankruptcy proceedings (banks closed branches).

Shareholders investment they have a right to protect their investment

(government intervention).
Government nationalisation right to protect the economy through nationalisation of

banks and saving deposits.

Businesses - the right to finance their operations through borrowing (lending to

businesses decreased radically).

Tax payers right to be charged the correct and fair amount of legal tax (increased
VAT).

The most important are the rights of customers, following the saving the economy by
government who secures their deposits and jobs. The shareholders are the last ones to be
accounted for because they always invest with a risk of losing their investment.

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5. Normative theories
Select and apply two other normative theories to critically examine the current situation?

Several normative theories can be used to analyse the current situation:

Virtue ethics contend that morally correct actions are those undertaken by actors with
virtuous characters (Crane and Matten, 2010, p.118).
Morally correct behaviour is the goal of forming a virtuous character.
The banks were fair and loyal to its shareholders. However, they did not practice the
honesty and fairness towards its customers, ignoring own statutory obligations to keep
them informed about the operations that led into the financial crisis. These virtues seemed
to be only existing when the banks had to show themselves to those who paid their
bonuses.
Discourse ethics aims to solve ethical conflicts by providing a process of norm
generation through rational reflection on the real life experience of all relevant participants
(Crane and Matten, 2010, p.122).
The financial crisis had a snowball effect that escalated from small mistakes to a huge
crash. Perhaps some of this could have been prevented when all the participants
(government, banks, shareholders, employees, customers and general public) would have
come together and discussed it through. With impartiality and non-coercion the
participants could have used their expertise to settle the main arguments with normgenerating discourse. Not all the banks that fell into bankruptcy were saved by government
intervention. Lehman Brothers for example will remain a remainder of the losses that come
with a large bank being let to fail.

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