November 13, 2009

Ethics is also about not preventing financial crisis at any cost

Sir Philip Booth in “Ethics alone will not prevent financial crisis” November 13 asks: “If I can make a few million from a securitization – is that creating a dodgy financial product to generate fees for the bank or does it reduce mortgage spreads for poor homeowners?” In some cases there can be no doubts.

In a business based on convincing risky Joe to take a $300.000 mortgage at 11 percent for 30 years and then, with a little help from the credit rating agencies, reselling that same mortgage in a securitized version to risk-adverse Fred in $510.000 yielding him an expected return of six percent, and pocketing as a result of it profit of $210.000, anyone should be able to understand that some sort of foul play was involved somewhere.

And in reference to the title of Booth’s article we should also never forget that preventing financial crisis from happening might be just as unethical, if with that prevention we stop society from taking the risks it needs to move forward. In this respect the current bank regulation which determine the capital requirements exclusively on the basis of perceived default risks, are, simply put, very unethical.