Ethics of Penn Square and Dow Corning

Topics: Breast implant, Dow Corning, Dow Chemical Company Pages: 5 (1644 words) Published: September 3, 2012
Ethics of Penn Square and Dow Corning

Ethics of Penn Square Bank and the Dow Corning Bankruptcy Penn Square Bank: What were the ethical pressures on the firm concerning documentation, credit extension, and revenue recognition that lead to the final collapse? What should have been done to reduce or offset these pressures?

Penn Square Bank was a small commercial bank in Oklahoma City which made high-risk financial loans during the late 1970s in the oil boom. The bank ultimately collapsed during the early 1980s due to their financing practices. The bank was overestimating and valuing its customer’s gas and oil reserves that let at that time to fund a bigger credit line. In addition, the bank didn't request clients to complete proper loan paperwork or proper security to back the financial loans. Penn Square bank utilized their links with bigger banks all over the United States of America to offer the loans to them, and became a middle-man of types and was earning money from the loan application charges and loan administration charges charged to the big out of state banks. By 1981 a fiscal downturn slowed down the interest in oil and Penn Square became the focus of bank investigators (Caskey, 1985). During the investigation, they found out that the borrowers were not making their interest payments on their personal lines of credit nor were the vast majority of borrowers in a position to payback their financial loans. Also, the financial loans were approved on the value of the security as opposed to the borrower’s capability to pay back the debt. Rumors started to flow concerning the banks problems that triggered a run on the bank and compelled Penn Square to depend on brokered money (Caskey, 1985). Authorities required that Penn Square raise additional capital to pay for the unsecured loans in their portfolio but eventually they couldn't. Their practices triggered Seattle First National Bank to have losses that surpassed their capital, as well as the losses at Continental Illinois, the 8th biggest bank in the United States Of  America, totaled more than half a billion dollars, that needed an involvement of the Federal Reserve in any other case the worry was that the country might encounter a nationwide financial as well as economic disaster (Caskey, 1985). Ethical pressure on Penn Square Bank concerning documentation was that they did not keep the documentation required to operate the bank. The pressure was that the cost of keeping documents would be prohibitive. The bank was not able to manage its credit risk because it did not have a sound financial recordkeeping system. From the deontological ethical perspective, it is the duty of Penn Square Bank to maintain adequate documentation. The action of not keeping adequate documents is an action of low moral worth. The policy of credit extension of Penn Square Bank to insiders as well as to oil and gas companies was unethical. From the virtue ethics perspective, if Penn Square Bank gave loans to firms that were connected to insiders or gave loans to gas and oil companies without doing due diligence studies, it is not an act of good character. Consider the giving of credit from the view of consequential ethics. Giving loans to inappropriate borrowers can lead to the consequences of bad debts, financial problems for Penn Square Bank, and even liquidation of the company. Penn Square Bank's assets had grown 15 times between 1974 and 1982. Revenue recognition was essential to keep up the growth. The ethical pressure was that if the bank stopped recognizing revenue then the depositors would clamor for their deposits leading to a run on the bank, forcing the bank to recognize higher revenues. To offset the ethical pressure to keep fewer documents, Penn Square Bank should have asserted that there was legal requirement to keep full documents, irrespective of the costs and time involved in keeping them. To offset the ethical pressure to extend credit to...
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