Case Normative Ethics Utilitarianism And Deontology Finance Essay
The financial crisis of 2008, which caused the deep economic recession, revealed a number of controversies in policies conducted by banks. In this regard, the Troubled Asset Relief Program (TARP) and the bailout became the turning point in the revelation of controversies in banks’ policies because, in spite of the bailout, banks kept paying off high bonuses, which often reached seven or eight digit sums, to their top executives. In fact, such policy raised a number of ethical issues, among which the social responsibility of banks became the primary concern, because banks used government aid, i.e. money of American tax payers, to pay exorbitant bonuses to its top executives, whereas the American economy and the overwhelming majority of Americans was stumbling, facing the threat of consistent deterioration of their financial position. Obviously, from the deontological perspective, such policy was unfair and unjust because it contradicted to existing ethical norms, whereas, from the utilitarian perspective, this policy was quite reasonable because it allowed banks to preserve its top executives and, thus, to maintain their competitive position and to carry on their marketing performance successfully. However, even the utilitarian approach should takes into consideration the good of the majority that makes the policy of paying of high bonuses to top executives of banks unethical, because the financial position of the majority of Americans was desperate and banks should save costs of taxpayers refusing from paying off exorbitant bonuses to its top executives.
First of all, the government bailout aimed at the prevention of the bankruptcy of largest American banks that could have caused the rapid downturn in the economic development of the US. Consequences of the downfall of leading American banks could affect the entire American society, whereas the recent economic recession was the light manifestation of the economic crisis, which could have been provoked by the downfall of the largest American banks. In such a context, the government bailout was a salvation not only to American banks but to the American economy at large.
However, Americans banks acted irresponsibly, while obtaining the financial aid from the government and, thus, from American tax payers. To put it more precisely, according to the Bank for International Settlements, the entire derivatives market had a gross credit exposure of $3.5 trillion at the end of 2009. Obviously, even a small fraction of that amount could represent a sizable call on the taxpayers if a clearinghouse hit the skids. So much for eradicating too-big-to-fail (Morgenson, 2010). In such a way, the government decided to save American banks and, in this regard, the decision taken by the government was right. The problem was that banks used the funds obtained from the government ineffectively. In fact, Treasure Secretary, Geithner, called this time “an era of irresponsibly high bonuses” (Schmidt, 2009).
In this regard, it is possible to refer to some facts about bonuses, the largest American banks paid off to their top executives after the bailout. For instance, Citigroup, one of the biggest recipients of government bailout money, gave employees $5.33 billion in bonuses for 2008 (Bernard, 2009). Similarly, the Bank of America, which also received $45 billion in TARP money, paid $3.3 billion in bonuses, with 172 employees receiving at least $1 million. Of those, 28 received bonuses of more than $3 million. Merrill Lynch, which Charlotte (N.C.)-based Bank of America acquired during the credit crisis, paid out $3.6 billion (Bernard, 2009). In such a way, banks, which were in a desperate financial position paid off high bonuses to its top executives, regardless of the financial and economic crises and regardless of the bailout. At this point, policies conducted by banks were unethical in regard to their clients and American taxpayers because it is their money American banks used to pay off high bonuses to their top executives. Such policies conducted by banks contradicted to existing ethical rules and norms. Therefore, from the deontological perspective, American banks acted unethically because they should reduce bonuses to their top executives in the time of economic recession, when all Americans had to save money. In contrast, rewards came even at banks where poor results foretold the economic crisis that sent them to Washington for a government rescue (Despite Bailout, Bank Chiefs Received Bonuses, 2008).
In such a situation, American banks should take into consideration the position and interests of the majority. From the utilitarian perspective, American banks should reduce bonuses to its top executives for the majority’s good because the majority of Americans had to pay taxes, whereas their money were sent to banks, where, instead of using the government funds effectively, banks spent the money on exorbitant bonuses to their top executives. At this point, it is possible to refer to Geithner, the Treasury Secretary, who said that all banks — even those that have repaid government aid — need to restrain the amount they pay their leaders and tie compensation to long-term goals (Schmidt, 2009). In fact, the position of the Treasury Secretary is utilitarian because it stands for interests of the majority.
At the same time, from the deontological perspective, policies conducted by American banks contradicted to existing ethical norms and rules. Obviously, the triple whammy of the financial crisis, the trillion-dollar government bailout and the return of lavish bonuses to many on Wall Street while unemployment in the United States is stuck above 9 percent has cast the intimacy between political and business elites in a new, often more jaundiced light (Freeland, 2011). Obviously, the high bonuses paid off to top executives of American banks are unjust, taking into consideration the high unemployment rate. In fact, the government funds comprised of money of American taxpayers could be directed to create new job places and to support unemployed Americans. Instead, the bailout became the means to pay off high bonuses to top executives of American banks.
Obviously, American banks should not pay high bonuses to their top executives because these policies contradicted to existing ethical norms and rules. Therefore, they were unacceptable from the deontological perspective. At the same time, American banks’ policies were unacceptable from the utilitarian perspective as well because they did not take into consideration interest and good of the majority of the American society. In stark contrast, the bailout and policies conducted by American banks focused on interests and good of top executives of banks but not on interests and good of the majority. Hence, such policies are unacceptable from both utilitarian and deontological perspective.
The public dissatisfaction grew stronger as more and more new facts about high bonuses paid to top executives of American banks became known to the public. In this regard, it is worth mentioning the fact that the government attempted to improve the TARP and to minimize the risk of the ineffective use of funds in terms of the program. The program set restrictions on some executive compensation for participating banks, but did not limit salaries and bonuses unless they had the effect of encouraging excessive risk to the institution. Banks were barred from giving golden parachutes to departing executives and deducting some executive pay for tax purposes (Despite Bailout, Bank Chiefs Received Bonuses, 2008). Consequently, the TARP has proved to be a failure in regard to the effective use of funds.
However, what is even more important is the fact that American banks conducted irresponsible and unethical policies. They had no ethical right to keep bonuses for their top executives exorbitantly high. From different ethical perspectives, their policies were totally wrong and could not be justified ethically. At the same time, they can be justified by top executives because they put their personal interests beyond interests of American tax payers, the overwhelming majority of the American society and even beyond interests of the banks they work in. To put it more precisely, banks could save considerable funds, if they refused from paying off high bonuses to their top executives. In fact, they could save about $30 billions, in case of refusal from paying off the bonuses to their top executives. In the time of the economic recession, $30 extra billions could facilitate the position of banks and help them to recover faster after the financial crises. Moreover, this money could have helped the American economy to recover and to minimize negative effects of the economic recession. In addition, the effective use of the funds banks obtained in terms of the bailout could contribute to the creation of new job places. The latter means better economic opportunities for about 10% of Americans, who are unemployed. The growth of new job places implies the economic growth as well. The economic growth in its turn, increases the national wealth and opens larger opportunities for the prosperity and better life for the majority of Americans, if the national wealth is distributed fairly but not appropriated by top executives of American banks and other representatives of the economic elite of the US as is the case of the recent economic recession and the bailout.
Thus, taking into account all above mentioned, it is important to place emphasis on the fact that policies conducted by American banks were unethical. From the deontological perspective, American banks should not pay high bonuses to its top executives because this would contradict to existing ethical norms. In fact, banks should not use public funds to increase the personal wealth of top executives. Such policies are irresponsible and unethical. Similarly, from the utilitarian perspective, high bonuses paid to top executives of American banks in the time of economic recession were harmful for the majority, whereas the primary concern of the utilitarianism is the common good or the good of the majority. Consequently, policies conducted by American banks served to the good of their top executives solely, whereas the majority suffered from the profound economic recession, while money of American tax payers were spent on bonuses paid off to top executives of American banks instead of spending the money on the recovery of the national economy.
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