Besides putting suppliers and demanders of financial assets in contact for possible exchange, the financial markets serve as a channel for the determination of fair and suitable prices for those assets, counterbalancing supply and demand positions. An active and well-organized stock market is a fundamental component of the capital market when facilitating the existence of the long-term bond issue market, through which resources are directly channelled for investment. The tendency to acquire bonds depends on the possibility of liquidity that the secondary market contains when eliminating all notion of time or term between the issuer and subscriber.

As Peter Koslowski indicated (1987), a group of important ethical problems appears in price fixing of the different public or private goods and services, also and especially, in the financial markets. The allocation of advantages and disadvantages between buyers and sellers through price is an open question between two contracting parties and, therefore, a relevant matter from an ethical-economic perspective where fair play appears as an important factor. The establishment of prices, even in competition markets, is demonstrated as a socio-economic phenomenon and not only material and neutral. Peaceful and socially conventional exchange is in definitive an act of solidarity and social unity.

So that those contracts are fair, and are perceived this way from an ethically correct point of view, it is necessary:

1) that the good that is object of the exchange is authentic and not feigned, where profit is not made of those false illusions created through the manipulation on the part of the salesperson and without having created a real economic value. A whole series of ethically condemnable operations arise from the simulation of deceiving circumstances, in short, falsification.

The factors that most influence in the relative price of a financial asset as opposed to others are those that define its prospective future yields, its effective capacity for liquidity (that is to say of reconversion), and its risk. Any new information that is acquired about those factors instantly modifies the price of the asset. The distortion and manipulation of the information causes unsoundness immediately in prices of the different assets. Prejudiced book entries, audits distorted by collusion of the auditor with his client, reports that hide all that is negative, movements of Treasury stock to influence the company image, etc. are some cases of distortion of information that in definitive are, in the case of financial assets, distortion of the product that is being sold. As financial assets (options and futures) where their value depends on that of another financial asset on which they are referred (underlying assets) are more widespread, the informative distortion of a value gives rise to distortions in an entire wide range of assets linked in the system. The damage caused cannot be quantified and is irreversible.

In the distortion of the product many threads of the system can be moved with complex operations of the mistakenly named financial engineering. The operations are presented with apparent professionalism and solidity, and the framework of societies that directly or indirectly intervene in the process, does not allow to clearly establish what their authentic entity is. A great part of speculative business is based on that non-verifiable aspect. Blurring and falsifying the clarity of information in the financial markets degrades the product and reduces credibility and effectiveness of prices that are the coordination factor of the whole system.

2) that the revenue originated in the exchange is not a consequence of the salesperson, buyer or middleman taking advantage of a power situation.

Positions of superiority in financial power and, simultaneously, in relevant and privileged information can be used wrongly to distort fair prices in the markets. Those who have that position of special power so that the other holders also sell can carry out massive sales of company shares. The significant drop in the share price can create the ideal situation for the repurchase of shares at a lower price, or for a take-over bid (TOB) that transfers ownership from the company to a third party with whom a pact has previously been made. If there is no self-regulation of ethical character by agents with special powers, the markets become the battlefield for oligopolist fights between a few with licit and illicit strategies that have nothing to do with the real economy. These damage the fairness of prices of the different values, that expel those who are in weaker situations or that foment in these the attitudes to become "free riders". Again the negative side effects of anti-ethical behaviour can be significant for all concerned.

This type of distorting behaviour is especially tempting for the middlemen that manage important volumes of funds and values. Investment and pension funds have played an increasingly important role in Spain over the last few years. But to highlight this fact it is sufficient to bear in mind that the mutual investment funds in the American market already manage about 280 billion pesetas, four times the Spanish GNP, with which they approach the level of domestic bank deposits. At the beginning of the 1980's they only represented 10% of that total of deposits. Not only capital markets, but monetary markets are also the object of this type of operations, that even for the Central Banks of most countries it is hard to counteract. Much less when narrow fluctuation bands limited their performances in defence of exchange rates, as was the case of the European Monetary System when the disturbing crisis took place in September of 1992.

3) those forms of banking that arise because it is believed to be an emergency situation for the buyer or the salesperson, are also ethically refutable.

The financial euphoria of the 1980's, together with the limitless credit facilities that dynamic societies possessed, smoothed away the property takeovers by other companies and with speculative ends. But in the current recession, speculation possibilities with companies in difficulties are enormous. In Europe alone almost 200.000 companies closed down in 1992. The companies' weaknesses are a tempting trick for managerial speculation that can count on an under valuation of some assets that it is hoped to resell at a good price in the later dismantlement of the company. In the same way that it is not ethical to pay a ridiculous wage to a worker, taking advantage of his necessity and independently of his real marginal contribution to the productive process of a company, nor is it ethical to take advantage unfairly of emergency situations, maybe temporary, of an entire organization.

4) another type of feigned goods are consequential of false illusions favouring self-deceit of third parties and the exploitation of their inexperience. Excessively fomenting vanity, self deceit or the desire for prestige of the other party can also constitute unjustified revenue.

The important problem that arises in deceit or fraud in merchandise created by inflation or insolvency of the financial institution that guarantees it, can also be included in this section. Above all in the monetary markets, where solvency is especially taken for granted and significant, the acceleration of inflationary processes generates a harmful optical illusion that can be considered as widespread fraud but particularly significant regarding less learned and informed people.

Regarding the excess of professional representation it should be indicated that the returns on variable income stocks depend on the distribution of dividends policy, on the variations experienced by the returns of this entity and on the possible capital gain originated by the increased value of those stocks. The vanity and desire for prestige of the directors of an entity can distort the returns of their company stocks, restricting the payment of dividends without reason, with the object of having greater economic power to negotiate directly.

Joseph John Franch Menéu
Gaceta de los Negocios