Hostname: page-component-78c5997874-xbtfd Total loading time: 0 Render date: 2024-11-10T12:37:20.951Z Has data issue: false hasContentIssue false
  • English
  • Français

Structured Finance and the Social Contract: How Tranching Challenges Contractualist Approaches to Financial Risk

Published online by Cambridge University Press:  09 October 2018

Tobey Scharding
Tobey Scharding*
Affiliation:
Rutgers University
Get access Rights & Permissions [Opens in a new window]

Abstract:

Many ethicists argue that contract theory offers the most promising strategy for regulating risks. I challenge the adequacy of the contractualist approach for evaluating the complicated, novel risks associated with some structured financial products, particularly focusing on risks to third parties. Structured financial products like collateralized debt obligations (CDOs) divide a pool of financial assets into risk “tranches” organized from least to most risky. Investors purchase various tranches based on their individual risk-and-return preferences. Whereas contract theory holds that investment risks are ethically permitted (roughly) when everyone—including both parties directly involved in the investments and third parties—consents to them, structured financial products like CDOs show that even risks to which everyone consents are ethically problematic when they involve systemic risks of ruin.

Keywords

contractualismethics of risksystemic risks of ruinthird-party risksstructured financecollateralized debt obligations
Type
Article
Information
Business Ethics Quarterly , Volume 29 , Issue 1 , January 2019 , pp. 1 - 24
Copyright
Copyright © Society for Business Ethics 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Arnold, D., Audi, R., & Zwolinski, M. 2010. Recent work in ethical theory and its implications for business ethics. Business Ethics Quarterly, 20(4): 559–581.CrossRefGoogle Scholar
Audi, R. 2007. Can utilitarianism be distributive? Maximization and distribution as criteria in managerial decisions. Business Ethics Quarterly, 17(4): 593–611.CrossRefGoogle Scholar
Bennet, M. 2011. Complexity and its discontents: Recurring legal concerns with structured products. N.Y.U. Journal of Law & Business, 7: 811–844.Google Scholar
Bentham, J. 1843. The works of Jeremy Bentham, Bowring, John (Ed.). Edinburgh: W. Tait.Google Scholar
Bernanke, B. S. 2006. Hedge funds and systemic risk. Federal Reserve Bank of Atlanta’s 2006 financial markets conference. Sea Island, GA: Federal Reserve Board.Google Scholar
Boatright, J. 2014. Ethics in finance. Malden, MA: Wiley-Blackwell.Google Scholar
Bowie, N. E. 1999. Business ethics: A Kantian perspective. Malden, MA: Wiley-Blackwell.Google Scholar
Brinkmann, J. 2013. Combining risk and responsibility perspectives: First steps. Journal of Business Ethics, 112(4): 567–83.CrossRefGoogle Scholar
Chakrabarty, S., & Bass, A. E. 2015. Comparing virtue, consequentialist, and deontological ethics-based corporate social responsibility: Mitigating microfinance risk in institutional voids. Journal of Business Ethics, 126: 487–512.CrossRefGoogle Scholar
Christoffersen, P. F. 2011. Elements of financial risk management. Amsterdam: Elsevier.Google Scholar
Donaldson, T. 1986. The ethics of risk in the global economy. Business & Professional Ethics Journal, 5(3/4): 31–49.CrossRefGoogle Scholar
Donaldson, T. 2008. Hedge fund ethics. Business Ethics Quarterly, 18(3): 405–416.CrossRefGoogle Scholar
Donaldson, T., & Dunfee, T. 1999. Ties that bind: A social contracts approach to business ethics. Boston: Harvard Business School Press.Google Scholar
Enoch, D. 2017. Hypothetical consent and the value(s) of autonomy. Ethics, 128(3): 6–36.CrossRefGoogle Scholar
Federal Reserve System. 2014. Risk-based capital guidelines: Implementation of capital requirements for global systemically important bank holding companies, 12 CFR Part 217 [Regulation Q; Docket No. R-1505] RIN 7100 AE-26.Google Scholar
Fried, B. H. 2012. Can contractualism save us from aggregation? Journal of Ethics, 16(1): 39–66.CrossRefGoogle Scholar
Hansson, S. O. 2003. Ethical criteria of risk acceptance. Erkenntnis, 59(3): 291–309.CrossRefGoogle Scholar
Hansson, S. O. 2009. From the casino to the jungle: Dealing with uncertainty in technological risk management. Synthese, 168(3): 423–432.CrossRefGoogle Scholar
Harsanyi, J. C. 1955. Cardinal welfare, individualistic ethics, and interpersonal comparisons of utility. Journal of Political Economy, 63(4): 309–21.CrossRefGoogle Scholar
Hayenhjelm, M., & Wolff, J. 2012. The moral problem of risk impositions. European Journal of Philosophy, 20: E26–E51.CrossRefGoogle Scholar
Hull, J. 2015. Risk management and financial institutions (4th ed.). Hoboken, NJ: John Wiley & Sons.Google Scholar
IMF. 2008. Global financial stability report: Containing systemic risks and restoring financial soundness. Washington, DC: International Monetary Fund.Google Scholar
James, A. 2012. Contractualism’s (not so) slippery slope. Legal Theory, 18(3): 263–92.CrossRefGoogle Scholar
Kamm, F. M. 1989. Harming some to save others. Philosophical Studies, 57(3): 227–60.CrossRefGoogle Scholar
Knight, F. H. 1921. Risk, uncertainty, and profit. Boston: Hart, Schaffner & Marx; Houghton Mifflin Company.Google Scholar
Mian, A., & Sufi, A. 2010. Household leverage and the recession of 2007–09, IMF Economic Review, 58(1): 74–117.CrossRefGoogle Scholar
Mian, A., & Sufi, A. 2014. House of debt: How they (and you) caused the great recession, and how we can prevent it from happening again. Chicago: The University of Chicago Press.Google Scholar
Nielsen, R. P. 2010. High-leverage finance capitalism, the economic crisis, structurally related ethics issues, and potential reforms. Business Ethics Quarterly, 20: 299–330.CrossRefGoogle Scholar
Nozick, R. 1974. Anarchy, state, and utopia. New York: Basic Books.Google Scholar
Oberdiek, J. 2004. The ethics in risk regulation: Towards a contractualist re-orientation. Rutgers Law Journal, 36(1): 199–204.Google Scholar
Oberdiek, J. 2009. Towards a right against risking. Law and Philosophy, 28(4): 367–92.CrossRefGoogle Scholar
Petrick, J. A. 2011. Sustainable stakeholder capitalism: A moral vision of responsible global financial risk management. Journal of Business Ethics, 99: 93–109.CrossRefGoogle Scholar
Rawls, J. 1980. Kantian constructivism in moral theory. The Journal of Philosophy, 77(9): 515–572.Google Scholar
Ryan, L. V., Buchholtz, A. K., & Kolb, R. W. 2010. New directions in corporate governance and finance: Implications for business ethics research. Business Ethics Quarterly, 20(4): 673–94.CrossRefGoogle Scholar
Scalet, S., & Kelly, T. F. 2012. The ethics of credit rating agencies: What happened and the way forward. Journal of Business Ethics, 111(4): 477–90.CrossRefGoogle Scholar
Scanlon, T. M. 1998. What we owe to each other. Cambridge, MA: The Belknap Press of Harvard University Press.Google Scholar
Scharding, T. K. 2015. Imprudence and immorality: A Kantian approach to the ethics of financial risk. Business Ethics Quarterly, 25(2): 243–65.CrossRefGoogle Scholar
Shiller, R. 2012. Finance and the good society. Princeton, NJ: Princeton University Press.Google Scholar
Smith, A. (1759) 1976. The theory of moral sentiments, Raphael, D. D. and Macfie, A. L. (eds.). Oxford: Oxford University Press.Google Scholar
Stark, C. A. 2000. Hypothetical consent and justification. The Journal of Philosophy, 97(6): 313–334.CrossRefGoogle Scholar
US Government. 2010. The financial crisis inquiry report: Final report of the National Commission on the Causes of the Financial and Economic Crisis in the United States. Washington, DC: Financial Crisis Inquiry Commission.Google Scholar
Wallison, P. J., & Burns, A. F. 2011. Dissenting statement. In The financial crisis inquiry report: Final report of the National Commission on the Causes of the Financial and Economic Crisis in the United States: 441–449. Washington, DC: Financial Crisis Inquiry Commission.Google Scholar