Author: André Franco Montoro Filho

Source: Folha de S. Paulo, 24/10/2008

RECENTLY, a journalist asked me how one could evaluate, from an ethical point of view, the bailout programs for financial intermediaries. Which would justify using billions - now trillions - of taxpayer dollars to rescue banking institutions that lost fortunes through speculative transactions. I recognize that the question took me by surprise.

The trivial answer is the existence of a systemic risk. Interventions would be justified to avoid the worst: a general breakdown, with the stoppage of productive activities and the generation of high unemployment.
But isn't the same with any economic sector? The bankruptcy of a company also creates unemployment - and not only in the company itself, but also in suppliers and customers or resellers. What differentiates the financial sector? What differentiates a financial intermediary, as the term itself indicates, is that it intermediates financial resources from other people or other companies. He does not apply or speculate only with his own resources, but mostly with third party resources. It is not with your money, but with the depositors' money.
In these circumstances, if a bank goes bankrupt, the losers are not only the owners of the banks or their shareholders, but also the thousands of citizens who in good faith put their “savings” in the various forms of deposits and investments, from deposits to cash and savings accounts to sophisticated financial instruments, such as derivatives and hedge funds.

In this way, a banking crisis threatening the solidity of the entire system becomes a problem of the popular economy, since, if the crisis is not stopped, millions of people who, directly or through pension funds, managed to realize some form of savings will see your financial assets evaporate.

Therefore, it is the defense of the economies of millions of savers, the overwhelming majority of people who absolutely did not speculate, that ethically justify the bailout programs for banks and other financial agencies that have carried out failed high-risk operations.

The point is that, in this process of financial recovery of banks, those responsible for the problems end up benefiting.
And here lies the moral and ethical dilemma. Will it be possible to save the finances of millions of depositors and savers without, at the same time, helping those who were responsible for the mistakes or who irresponsibly speculated with the money of others? This is the great challenge of the programs and must be the guideline of these policies: saving depositors, but not speculators.
In the reported cases of bailouts in the USA, the shareholders and creditors of the banks in difficulty lost almost all the capital invested in these institutions. Apparently, the rule set out above was followed.

While the financial intermediation characteristic of applying resources from others morally justifies relief programs, it also requires that banking activity be carefully regulated by government authorities.

As the current crisis abundantly demonstrates, the financial sector operates based on trust among participants. This confidence is indispensable, as there is asymmetric information among the various participants in this market. Borrowers do not have perfect knowledge of the borrower's ability and actual willingness to pay obligations. Despite some or much information and guarantees required, uncertainty is always reborn. It is the trust that ultimately makes the financial market work.

When confidence disappears, the financial market totally disintegrates. That's what we're experiencing right now. The financial crisis will only be contained when trust between agents is restored.

Trust is not a good or a service that can be provided only by the free play of the forces of supply and demand of private agents.

This is the mistake of those who advocate radical deregulation. Rules of conduct and, in particular, rules of prudence are necessary, and efficient supervision by government entities is essential.

The financial market is like a fiery horse with a lot of energy.
Well conducted, win the race. Without control, he throws the jockey on the floor.

ANDRÉ FRANCO MONTORO FILHO, 64, doctor in economics from Yale University, is a professor at USP's School of Economics and Administration and president of Etco (Brazilian Institute of Competition Ethics). He was secretary of Economy and Planning of São Paulo (1995 to 2002) and president of BNDES (1985 to 1988).

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