The Problem of the Major U.S. Banks, Essay Example

Abstract

The paper discusses the problem of the major U.S. banks’ using the bailout money to pay large bonuses to their top executives. The situation with the bailout money and the position of the U.S. banks are discussed. The paper applies to deontological and utilitarian ethical perspectives, to evaluate the ethical implications of the U.S. banks’ decision to reward their top executives with large bonuses. The paper asserts that the major banks that received the bailout money should not be allowed to pay large bonuses to their top executives, because these bonuses (a) do not promote the greatest good for the greatest number of people, and (b) break the rule of fairness in the distribution of the bailout money in the banking sector.

Ethics

The U.S. banks had long been known for the large bonuses they paid to their top executives. More often than not, bonuses had to serve an effective driver of the executives’ strategic motivation. However, the situation today is quite different – the major banks have received the bailout money from the federal budget, to be able to survive through the most difficult times. In light of the current financial crisis, the top executives of the major banks that received the bailout money should not be allowed to receive large bonuses, because these bonuses (a) do not maximize the overall economic good for the greatest number of people in the U.S., and (b) break the rule of fairness in the distribution of the bailout money in the banking sector.

The past financial crisis became a good test to the stability of the banking system in the U.S. The crisis proved the major banks and financial institutions to be extremely vulnerable to the economic and financial changes. The major American banks had but to apply for federal financial support, to be able to survive the tough financial times. The bailout money had to save the major banks from the imminent failure. A $700 billion bailout package was approved, to loosen the credit market, to compensate for the lack of liquidity, and to let the banks lend money to each other, to small businesses and individuals (Prins, 2008). Yet, the major banks chose a different path, using the bailout money to pay unbelievably large bonuses to their top executives. “Whereas Wall Street may not believe in higher taxes for the richest citizens, it does believe in higher bonuses for the head honchons. No matter what the market conditions are on the outside, steadfast feelings of entitlement tend to prevail” (Prins, 2008).

It should be noted, that large bonuses had long been one of the major problems in the U.S. banks. In 2007 alone, the five top banks paid themselves almost $40 billion in bonuses (Prins, 2008). Even the crisis did not change anything in the major banks’ relations with their executives: the banks continued spending significant sums to favor their top executives. For example, the new government’s chief budget officer Jacob Lew received more than $900,000 in bonuses from Citigroup Inc., last year (McElhatton, 2010). The bonuses would not be an issue, if it were not for the fact that banks used the bailout money to reward their executives. The U.S. taxpayers expected the $700 billion bailout package to improve the financial and economic situation in the country; but this never happened. For this reason, it is particularly offensive for the bailout money to line the pockets of the Wall Street executives (Prins, 2008). Neither deontological nor utilitarian ethical principles justify the major American banks’ decision to use the bailout money as the source of the top executives’ compensation. The top executives of the major banks that received the bailout money should be allowed to receive large bonuses, because these bonuses (a) do not promote the greatest economic good for the greatest number of people, and (b) break the rule of fairness in the distribution of bailout money among different bank departments.

Deontological ethical principles require that in their actions and ethical judgments, individuals follow a predetermined set of rules. Kantian categorical imperative is, probably, the brightest example of how deontology works in practical decision-making environments. According to Kant, categorical imperative is “the one which represents an action as objectively necessary in itself, without reference to another end” (Mizzoni, 2009). Individuals and organizations must do their duty for the sheer principle of the thing (Mizzoni, 2009). This duty is necessary simply because it is the right thing to do (Mizzoni, 2009). In case of banks and the bailout money, fairness is the determining principle to follow. The major banks that received the bailout money should avoid paying their executives large bonuses, because they violate the rules of fairness in the distribution of the bailout money in the banking sector. The Obama administration states that the strings attached to bailout payments are strong and tight (Weisebecker, 2009), however, no rule forbids the major banks to pay bonuses to their top executives. No bonuses are the right thing to do, because banks should be fair in the distribution of the public moneys. No bonuses are the right thing to do, because it is at least unethical to spend the bailout resources to favor a few top executives, while the banking system is suffering the consequences of the financial crisis. No bonuses are the right thing to do, because the banks must promote their commitment to the ethical values of fairness and justice.

Utilitarianism, too, does not leave the major American banks a single chance to justify their bailout money distribution intentions. Utilitarianism requires that individuals judge the ethical character of their actions and decisions, based on the consequences, to which these actions and decisions may lead (Leslie, 2009). By using the bailout money to pay large bonuses to the top executives, the major banks do not promote the greatest economic good for the greatest number of people: they do not improve their financial situation and cannot avoid bankruptcy. Large bonuses make it difficult for the banks to expand the range of their services for individual and business consumers and do not help to preserve the overall stability of the banking and financial sector. Today, it is high time the major banks reconsidered their attitudes toward the ways they choose to spend the bailout money. It is high time the banks finally became more ethical in their strategic and tactical decisions.

Conclusion

The past year became a good test to the overall stability of the American banking sector. The major U.S. banks had but to apply for federal financial support. Unfortunately, much of the $700 billion bailout money was used to pay large bonuses to the banks’ top executives. Neither deontological nor utilitarian perspective can justify the major banks’ decision to use the bailout money as the source of the top executives’ monetary benefits. The major banks that received the bailout money should not be allowed to pay large bonuses to their top executives, because these bonuses (a) do not promote the greatest economic good for the greatest amount of people; and (b) break the rule of fairness in the distribution of the bailout money in the banking sector. Today, it is high time the banks reconsidered their attitudes toward the ways they spend the federal financial aid. It is high time the banks became more ethical in their strategic and tactical decisions.

References

Leslie, S. (2009). The science of ethics. BiblioBazar.

McElhatton, J. (2010). OMB nominee got $900,000 after Citigroup bailout. The Washington

Times, 28 July. Retrieved August 25, 2010 from http://www.washingtontimes.com/news/2010/jul/28/omb-nominee-got-900000-after-citigroup-bailout/

Mizzoni, J. (2009). Ethics: The basics. John Wiley & Sons.

Prins, N. (2008). Wall Street fat cats are trying to pocket billions in bailout cash. AlterNet.

Retrieved August 25, 2010 from http://www.alternet.org/economy/106195/wall_street_fat_cats_are_trying_to_pocket_billions_in_bailout_cash/

Weisbecker, L. (2009). Obama administration issues tighter bank bailout rules. Triangle

Business Journal, February 20. Retrieved August 25, 2010 from http://triangle.bizjournals.com/triangle/stories/2009/02/23/story3.html