Role of commercial banks in development. INTRODUCTION A commercial bank is something with which every one of us is well known. However different bankers and economists have defined it in….
Ethics Bank Bailout
This paper explores the ethics of bank executives receiving large bonuses despite the fact that they received a bailout. I identify the utilitarian and deontological implications of these executives’ actions. This paper also examines if the executives deserved the bonuses, did the banks need a bonus, and how the banks should have been regulated by the banks.
Keywords: bailout, utilitarian, deontology
Ethics of Bank Bailout Bonuses
Currently the economy is still in “The Great Recession” largely due to the fallout caused by banks. Banks caused this fallout by giving out home loans to unqualified borrowers. The banks approved loans they know could not be repaid by the borrower because of the terms such as adjustable rates.
These home loans started defaulting; which started a domino effect of bank failures, further driving the economy into a downward spiral. In came the government, armed with astronomical sums of money determined to rescue these large financial institutions. Enrich, Hilsenrath, and Solomon (2009) state that 700 billion dollars of taxpayer money was used to bailout these banks under the Troubled Assets Relief Program (TARP).
It wasn’t long after these bailouts that these banks continued to reward the executives with large bonuses. Should have these top executives of these major banks that received the bailout money been allowed to receive large bonuses? I say definitely not because it was wrong under the provisions of utilitarian ethics which I believe should have been applied in this situation. These executives were at the helm when these banks failed. Bonuses should be rewards for success not compensation for a title or position. If these banks had enough money to give bonuses then the question of do they really need a bailout should be asked.
Furthermore, this bailout money did not belong to the banks to give out as they pleased, it belonged to the taxpayers and the money should have been accompanied by stringent regulations imposed by the government. A bonus is normally given as a reward for production or as an enticement for favored behavior or performance. On Wall Street a bonus is an equivocal right with no strings attached. Success or failure does not matter. Being an executive in the country’s most powerful financial firms is justification enough to entitle them to a bonus. This is the methodology that these institutions follow.
Executives used deontological ethics because they focused on their rights and entitlements as executives. They decided their rights to large bonuses outweighed the importance of righting the economy which affected the entire country. Meanwhile, these are the same executives that were in charge when many American’s retirement plans and investments were depleted or completely wiped out. These were the same executives that oversaw an industry that gave out home loans with impossible repayment terms. It can be argued that the banks caused the entire financial woes that are still present today.
Instead of the institutions terminating their executives for not stopping their organization’s misdeeds they were rewarded. These bank executives drove their institutions to the brink of demise. Yet, they were still rewarded with multi-billion dollar bonuses. How could this be justified or ethical? According to Freifeld (2009), Citigroup Inc. , Merrill Lynch & Co. and seven other U. S. banks paid $32. 6 billion in bonuses in 2008 while receiving $175 billion in taxpayer funds through TARP. That means that almost 20% of the government’s bank bail-out to these banks was used on bonuses for their institution’s executives.
The question has to be asked, “Could the bank bailout have been 20% less to these banks? ” An even more interesting question would be, “Did these banks really need the bank bail-out money? ” These executives took an ethical egoistic approach by accepting these bonuses. Andre and Velasquez (1989) explain that three steps to apply utilitarianism to any situation to decide a moral course of action. The first step is to identify all the course of actions that are available in a situation. The second step is to determine all the beneficial and harmful consequences of each course of action for everyone affected by the action.
Finally, the third step is to select the course of action that provides the greatest benefits after the costs have been taken into account. Let’s apply this theory to the bank executives and their choice to receive a large bonus. First step would have them identify all their course of actions available to them, which was to take or leave the massive bonus. Secondly, was to determine all the beneficial and harmful consequences for each course of action for everyone affected by taking or refusing the bonus. Those affected by the taking or leaving the bonus include the executive, the financial institution, and the taxpayers.
The beneficial consequence of taking the bonus for the executive is a very large sum of money. The benefit to the financial institution and the taxpayer is none. The harmful consequence to the executive would be obvious, which would be the loss of a tremendous amount of money. The harmful consequences for the financial institution would be loss of capital that could be used somewhere else more productive and the loss of the government’s confidence. The harmful consequence of the executive taking the bonus would be an increased budget deficit which may lead to higher taxes and loss of federal program funding.
Finally, weighing the consequences using the utilitarian theory the greatest benefit would be for the executives to refuse the bonus. The right decision for these bank executives would have been to take a utilitarian ethical approach and not accepted their bonuses. These bonuses hurt the government and the people of the United States by costing the bailout more money than necessary and creating a larger deficit. Thus, the act of the executives taking their bonuses was morally unethical under the theory of utilitarian ethics because the consequences were more harmful for the greater population.
Instead, these executives prioritized their needs and wants higher than the needs and wants of the people. Financial executives were following the ideology of deontology when they made their decision to take their multi-billion dollar bonuses. According to Alexander and Moore (2008) deontology is based from the word “duty. ” I believe that these bank executives felt it was their duty and entitlement to take the bonus. Also deontologists believe in following the rules even though the act may be considered the right thing to do even if it produces bad consequences (Alexander & Moore 2008).
They were not breaking the rules or law when they took their bonuses because there were no regulations or rules against them doing so. They followed the rules and it produced the bad effect of creating a larger than necessary bailout amount. On the other hand however, the government made the bank bailout loan on good faith. Utilitarian ethics were applied in the decision to give out the loan because they feared the banks would ultimately fail without the money. The choice was made out of consequence. The consequence of failing banks would be a country with an even worse economy and completely ruined financial sector.
Thus, the government acted and followed utilitarianism’s theory of the greatest good, for the greater amount of people. The government should have not rushed to give the money to the banks without devising stricter regulations. Restrictions were placed on some executive compensation for participating banks, but did not limit salaries and bonuses (Despite Bailout 2008). If the government had placed limitations regulating excessive bonuses this could have been avoided. Executives would have been able to follow either consequential or deontological ethics by following these limits imposed.
Instead the government through legislation did not impose sanctions against bonuses as part of TARP. By failing to do so they left the door open for banks and executives to make ethical choices on their own. I explored the utilitarian and deontology implications of the bank bailout bonuses. I found that the bank executives should not have taken the bonuses after receiving bailout money from the government by using the utilitarian theory because ultimately the consequences were more harmful than good for greater population. I also explained why executives should not have received the bonuses based on their and their institution’s performance.
I also questioned whether the bank bailout money was necessary because the banks had enough money to give out large bonuses. Also discussed was the idea of the government imposing stricter sanctions with the TARP legislation forbidding large bonuses. I also stated that the bank executives could have been ethically right under the pretense of deontology. Deontology’s theories revolve around duties, rules, and obligations (Waller B. , 2008). Therefore, the bank executives felt they had the right and duty to an enormous bonus as heads of multi-billion dollar financial institutions. They also followed the rules by accepting the bonuses.