Abstract
We experimentally assess the ethics of the U.S. government’s indirect bailout of the bank counterparties of American International Group during the 2008 financial crisis. When the indirect bailout is jointly compared with a counterfactual where the government directly bails out the banks, subjects judge the indirect bailout to be far more unethical. On the other hand, when the two scenarios are judged separately, subjects consider a direct bailout of banks to be more unethical. This suggests that ethical judgments of indirect versus direct action exhibit a type of preference reversal that is dependent upon whether the evaluation mode is joint or separate. The pedagogical and policy implications of this preference reversal are discussed.
Highlights
The action is a direct result of the organization’s own behavior, or is instead implemented indirectly through an agent of the organization? For example, if a multinational’s product is produced under ‘sweatshop’ conditions abroad, does it matter to consumers whether or not the multinational owns the offending factory? if the action is taken by an indirect agent, does it make a difference to outside observers as to whether the organization could foresee the agent’s actions? These issues feed into our understanding of the ethical judgment of individuals, the reactions of policymakers and regulators to such actions, and for the public relations of organizations that are faced with ethical dilemmas
We examine the ethics of the government assuming 79.9 % of shareholder equity as compensation for providing American International Group (AIG) with an $85 billion twoyear loan in conjunction with the government’s decision to have AIG pay its investment bank counterparties 100 cents on the dollar for credit default swap agreements the banks held with AIG’s Financial Products division
AIG’s Financial Products division (AIGFP) engaged in credit default swaps (CDSs) where, for a fee, AIGFP would agree to pay bondholders whatever portion of the underlying debt obligation remained in the event that the bonds defaulted
Summary
When an organization takes an action that has the potential to be perceived as morally questionable, does the public’s perception of the ethics of the action depend upon whether the action is a direct result of the organization’s own behavior, or is instead implemented indirectly through an agent of the organization? For example, if a multinational’s product is produced under ‘sweatshop’ conditions abroad, does it matter to consumers whether or not the multinational owns the offending factory? if the action is taken by an indirect agent, does it make a difference to outside observers as to whether the organization could foresee the agent’s actions? These issues feed into our understanding of the ethical judgment of individuals, the reactions of policymakers and regulators to such actions, and for the public relations of organizations that are faced with ethical dilemmas. Our interest is in how these concerns affect the perception of the U.S government’s indirect bailout of the bank counterparties of American International Group (AIG) during the 2008 financial crisis and what this implies for business ethics education. AIGFP engaged in credit default swaps (CDSs) where, for a fee, AIGFP would agree to pay bondholders whatever portion of the underlying debt obligation remained in the event that the bonds defaulted In addition to this ‘credit risk’ of a default, writing CDSs exposed AIGFP to ‘collateral risk,’ in that AIGFP would be required to post collateral with its counterparty should AIG or the associated pool of bonds suffer a downgrade in its credit rating. The amount below 100 cents on the dollar that the counterparty receives is known as a ‘haircut.’ The bank has to write off the haircut as a loss
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