Tuesday, September 10, 2019

Ethical dilemmas are everywhere in finance Research Paper

Ethical dilemmas are everywhere in finance - Research Paper Example An interesting aspect of this dilemma is to understand what is considered ethical and what is not. Finance by its very nature propagates the theory of maximization of profits. Why would anyone culminate a financial transaction if there was nothing to gain out of it? Now to decide how much to earn and by what means to earn is the most interesting facet of this dilemma. In theory, an organization is considered to be an entity that works for the benefit of its shareholders. The employees of the firm are thus assumed to be the representatives of this entity. They work on the various financial models to look for avenues which have minimum risk and maximum return. The financial theory also states that people are averse to taking risk. Hence, an investment in a risky proposition would mean that the investor is expecting an above average return. Riskier the proposition, higher the return expected. But the amount of risk to be taken is something that the investor needs to understand. Another concept in financial management is that of the Net Present Value (NPV). A firm should invest only in those assets or projects which have a positive NPV. All these concepts are interlinked with the fact that ethical dilemmas will continue to haunt the stakeholders at all points of decision making while running an organization. The various theories of finance can tell what the best options to maximize returns are, but ethics relate to the means that are used to achieve those ends. This is the most important aspect of this topic. The figures used in finance require an ethical basis to produce positive and sustainable results. Let us see how this dilemma exists in the present market. Discussion of Financial irregularities that lead to the recent global crisis (Kolb 2010) One of the stark examples of financial irregularity and unethical activities can be seen in the recent financial crisis of 2008 which is considered to be the biggest financial depression since the depression of 1930â₠¬â„¢s. This has been attributed to the emergence of complicated financial instruments called CDOs which are traded through investment banks. Investment banks, unlike the normal banks which give out loans and have adequate deposits to cover them, do not need to keep any deposits. They collect all the mortgage backed securities (MBS) and sell them to investors after securitization. Kolb (2010) explains the process of lending that takes place in the mortgage market in the figure below. The figure shows the origin to distribute model (OTD) which was being applied in the industry before the financial crisis occurred. As per this model, the originators of the loans were not there holders unlike in the normal banking loans scenario. Ethical dilemmas at borrower level (Kolb 2010 and Stich n.d) Kolb (2010) observed that most of the borrowers never had any intentions of paying their principal amounts. Ethical issues cropped at all the links in the model. The first level of unethical financial dealing started at the borrowers level itself. In a normal banking scenario a borrower has access to only those loans and interest rates which are commensurate with the risk he has been associated with by the lender ( the banker in this case). However, in the OTD model, the originator of the loan gives the borrower options of varied interest rates and EMI payments by overlooking their actual credit worthiness because the originator is

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