Financial market is a broad term that describes a marketplace where buyers and sellers meet to participate in the trade of assets, such as financial securities, and other fungible commodities of value like bonds, currencies and equities. These items are traded at a low transaction costs, but these prices reflect the true value of demand and supply in the market. In financial markets, there are general markets where commodities are traded and specialised markets where only a single commodity is put up to sale (Hartman & Laura 57).
There are several types of financial markets that are active nowadays. These are:
(i) Capital market, which consists of the bond market (provides finances through the issuance of bonds) and stock market (provides finance through the issuance of common stocks and enables their subsequent trading);
(ii) Money market which facilitates short term debt investment;
(iii) Commodity market that ensures smooth trading of commodities;
(iv) Derivative market provides financial risk management instruments;
(v) Foreign exchange market that enhances trading with foreign currencies.
Some financial markets only accommodate participants who have met certain criteria, such as amount of money involved, geographical conditions, market knowledge and the participant’s profession. Most financial markets have seasons of high trading where demands for their securities are elevated and prices may go beyond the historical norms. The opposite is true at times of downturns where prices fall beyond their past level of intrinsic value of demand. Other macroeconomic forces that affect the price of such commodities include national production, tax rates, and employment levels. One of the most important ethical factor of efficient trading at the financial marketplace is information transparency with its purpose to increase the participants’ confidence (Boatright & John 51).
Financial Crisis and Collapse of Ethical Behaviours
Looking at the moral and ethical failures of the financial industry is the professional commitment of ethics after the fulfilment of the key activities. CFA promotes high ethical standards of investor protection through ensuring an undertaking of Code of Professional Conduct in the industry. Market integrity and advocacy have been highly integrated in their system as a reform introduced due to the near failure of the global financial system. Trust in the financial service industry had previously been low for a long time in the world.
Case Study: Ethical Issues that Led to Subprime Lending
In corporate finance, sublime lending was a set of events and activities that resulted in a financial crisis and a subsequent recession that started in 2008, in the USA. In September 2008, a number of financial institutions in America collapsed with a significant disruption in the credit flow to businesses and consumers. This happening was characterised by rising mortgage delinquencies that led to a decline of securities supported by the same mortgage as illustrated below.
Customers obtained mortgages from their local banks that held the mortgage papers on the balance sheets. Hence, the approving officers of the mortgage cared a lot if the papers were good. However, it was found to be highly inefficient, and change took place in the 21st century where the system worked as follows.
Mortgage brokers were engaged to look for borrowers. They were paid on the quantity (number of mortgage sold), but not the quality (value cost of the mortgage). Few cared on whether the buyer was engaged in a serious transaction or they were held up for poverty since the brokers did not have their own balance sheets. Upon approval of a mortgage, the brokers were paid instantly and the borrower could not be seen again. Therefore, a large number of brokers behaved abnormally.
Banks approved the mortgages after reviewing applications, but with no intentions to hold on to the papers. Instead, they wanted to create leverage on their balance sheet, which entailed getting the papers out of the balance sheets as fast as possible. The papers were resold in a mortgage pool, and later to unsuspecting investors. All the underwriting standards were ignored and they eventually disappeared. There were a few moral questions to ask; were the banks careful on whether their shoddy engagements could result to lending money to people who have the slightest chances of paying back? Did the banks bother to forecast what would happen to the ultimate investor who bought the paper? The only answer is that they cared less as long as their leverage was achieved.
Since banks wanted to leverage their financial statements and re-use their lending capacity more and more, this kind of market was developed to facilitate pooled mortgages. Various investment banks and megabanks put these pools together and sold them to investors. They did not consider checking the quality of papers they sold and the harm they had on investors who bought them (Canterbery 68).
Ethical issues in financial service industry turned into a double-edged sword as such manipulations affect everyone. It is apparent that even those who are not involved in the internal transactions become consumers of those services. It has remained a long-time belief in the public domain that the financial service sector is the most unethical in comparison to all other sectors in the money industry. Therefore, the hypothesis of this research has enabled many business college students and researchers to develop ethical and profitable business cultures in various organisations. If ethical standards like the ones introduced by president Obama were in place, such a situation could not have occurred in the first place (Allen & Roy 40). Consumer protection is a global challenge that every financial institution has to consider as a legal requirement.