Model Paper.

Model Paper.

Facts

• Goldman Sachs was founded in 1869 and its purpose was to be an originator and a clearinghouse for commercial paper.
• Marcus Goldman and his son-in-law, Samuel Sachs, founded the company.
• The company’s strategy was to provide loans for small businesses and then create a market for the loans through the sale of commercial paper.
• In the late 1920’s, Goldman began an investment strategy that would contribute to the market crash in 1929.
• This investment trust allowed people to invest small/large amounts of money and hold shares in the trust, which would then purchase a portfolio of stocks.
  • The trust income then came from the returns on the stocks in the portfolio.
• Goldman used their own customers to make money using a layered investment strategy.
• The strategy works like: “Goldman creates an investment company and buys 90% of the shares in that company with its own money. Because the shares have sold so well, the public wants a piece of the company. So, the shares that Goldman initially bought for, say $100, it is able to turn around and sell to the public for $110.” (Jennings, 2017, p. 85).
  • The public was not aware that Goldman itself had purchased the shares and driven the price up.
• Goldman would continue to buy shares on the secondary market and continue to increase the price per share.
• With the money Goldman made on the initial corporation, they would create a new corporation and use the same strategy to drive up the prices, and then would continue to create another one with even more demand and even higher prices.
• “Goldman nearly collapsed when the stock market crashed in 1929” (Jennings, 2017, p. 86).
• Goldman business strategies can be compared to that of the Holland tulip market, in regards that they were “selling air.” (Jennings, 2017, p. 87).
• “Selling air” took on a double meaning in the 1990’s, when Goldman became the “Wall Street giant” by taking Internet companies public (Jennings, 2017, p. 87).
• In 1999, the same year Goldman went public, they also financed 47 companies.
• “The standard underwriting practice of requiring that a company show three years of profitability before being taken public was no longer enforced” (Jennings, 2017, p. 87).
• Some of the IPOs that Goldman had underwrote hadn’t seen any profits and their business plans determined that profits were not in the immediate future.
• In the 90’s Goldman began a practice that would affect their clients.
  • The practice was laddering, which “is an agreement between Goldman and its best clients for the allocation of a certain portion of the IPO at a pre-established price.” (Jennings, 2017, p. 87).
• Under a laddering agreement, the clients had to agree to buy a certain amount of shares later during the IPO “rollout” which priced $10 to $15 higher.
  • To get some of the IPO, clients were required to participate through laddering.
• Goldman “knows the fixed hand” but others who are in the market and are evaluating the IPO are not aware that the price increase isn’t caused by the legitimate demands for the company’s shares. (Jennings, 2017, p. 87).
• “The market demand, spurred by the predetermined secondary pricing, is synthetic, a result of Goldman’s manufactured demand.” (Jennings, 2017, p. 87).
• Goldman underwrote the company eToys. They laddered eToys shares which had an original price of $20 and raised them to $75 by the end of the first day. By 2001, eToys had filed for bankruptcy. Hank Paulson (then Goldman Chairman) denied any charges of securities fraud. They settled the SEC charges on laddering by agreeing to pay a $40 million fine.
• Before becoming a publicly traded company during the time of the internet phenomenon, Goldman was known for giving back their clients their money if there was a risk to reputation or relationship.
• In the 2000’s, the market for mortgage-backed securities such as collateral debt obligations (CDOs) grew rapidly.
  • When Goldman entered this market, they developed a “different posture” which was a combination of defiance along with “toes to the line” on legal issues. (Jennings, 2017, p. 88).
• Award winning economist, Joseph Stiglitz compares “Goldman’s business model to gambling and concludes ‘Goldman’s activity is of negative social value. Its recent profits came from trading which basically amounts to profiting from insider information at the expense of others.’” (Jennings, 2017, p. 88).
• In 2008 Goldman changed their status from investment bank to bank holding company.
  • This change brought it under the regulatory arm of the Federal Reserve Bank.
• In the 2008 stock market crash, Goldman received $10 billion in government funds to stay afloat.
  • “The CDO market is described in more detail as the ‘Toes-to-the-line Activities’ section.”  (Jennings, 2017, p. 88).
• Goldman had two sayings “long-term greedy” (don’t kill the marketplace) and “filthy rich by forty” (Jennings, 2017, p. 88).
• Without personal liability for any company losses, a lot of people believe that Goldman’s investment strategies changed dramatically.
• Goldman alums, Henry Paulson and Robert Rubin, served as Secretary of the Treasury.
• New Jersey Governor, Jon Corzine made his large fortune at Goldman Sachs.
• Goldman employees contributed roughly $1 million to Obama’s presidential campaign.
• Former White House Counsel, Gregory Craig (who left the Obama administration after 1 year of service) served on Goldman Sachs defense team for the 2009 SEC charges.
• There are five former Goldman executives that are a part of the Trump administration including cabinet secretaries.
• Goldman held what are known as “trading huddles.” Analysts and traders were found meeting to determine short and long investments on certain shares.
• The difference between Goldman’s huddles and the huddles of other investment firms was that Goldman’s huddles didn’t include equity research analysts, which are analysts that are subject to the SEC rules.
• Instead, the individuals who participated in the huddle were a part of Goldman’s “Fundamental Strategy Group.” This group was exempt from SEC rules.
• Goldman was the fifth largest underwriter of the market, and when they pulled out of the market, the market for these securities diminished.
• Clients were left holding $40 billion in securities they had been told were as good as cash.
• Goldman and others had agreed to buy back their clients’ auction-rate securities, but Goldman only agreed to buy back the securities of their smaller investors, so the larger investors were left holding unsellable securities.
• In January 2010, Goldman Sachs admitted that the company made recommendations to clients that they had already positioned themselves to profit from.
• In April 2010, the SEC filed a suit against Goldman for their conduct in a CDO deal known as ABACUS.
• The complaint alleges that John Paulson (a financial wizard who was said to plan to position himself short on the securities Goldman would sell to its clients) chose mortgage pools that were “crappy.” The mortgages were chosen because having these securities “tank” was important to Goldman and Paulson because of their position on the mortgage instrument markets (Jennings, 2017, p. 91).
• Fabrice Tourre and Goldman had a third party, ACA Management, structure the deal so that they themselves were far enough away from choosing the mortgage pool for the instruments.
• Fabrice Tourre was found guilty of civil fraud in August 2013, and was denied a request for a new trial.
• In 2008, Goldman Sachs received $10 billion from the U.S. government as part of the national bailout of financial firms (Jennings, 2017, p. 93).
• In 2008, the company paid no bonuses and by the end of 2009, they had a record year for their profits.
• As a result of the earnings record, the firm’s compensation and bonus plans meant that its bonus pool totaled $20 billion (Jennings, 2017, p. 93).
• Goldman CEO Lloyd Blankfein indicated that the firm’s top 30 executives would not be getting a cash bonus for 2009 (Jennings, 2017, p. 93).
• Blankenfein and the top 4 executives received $9 million in stock as their bonus (Jennings, 2017, p. 93).
• The SEC charges affected Goldman because of its nature and because Goldman did not disclose two 10Q filings that followed indicating that they received a Wells notice from the SEC in regards to the possible charges.
• In April 2010, when the charges were announced, its market cap fell by $12.4 billion and a loss of $21 billion.
• Within two months, their share prices dropped from $190 to $145.
• On July 16, 2010, the SEC announced that they had come to a settlement with Goldman Sachs. The company agreed to pay $550 million in penalties and client reimbursements.
• In 2016, Goldman agreed to pay a $5 billion penalty in a settlement with the Justice Department for its “aggressive underwriting” or the mortgage backed securities deals (Jennings, 2017, p. 94).
• Goldman also agreed to pay a $2.385 billion civil penalty and provide $1.8 billion in loan forgiveness.

Issue #1

Did Goldman Sachs have in place the proper policies and procedures for reporting unethical behavior?

Rule

Duty based ethics is when a person performs an action because it is their duty, without regard to the consequences.

Analysis

In this case, Goldman Sachs failed in their duty to report unethical behavior. The culture of the company itself had a large influence on this. For instance, the company had two sayings: “long-term greedy” (don’t kill the marketplace) and “filthy rich by forty” (Jennings, 2017, p. 88). This company was very profit driven and deceived their clients about their demand in success. Goldman Sachs used different business strategies to make it appear to the public that they were the place a person should invest. Laddering “is an agreement between Goldman and its best clients for the allocation of a certain portion of the IPO at a pre-established price.” (Jennings, 2017, p. 87).

Laddering is one of multiple business strategies that Goldman used to deceive the public in regards to actuality of their share price value. From the executives down to lower level employees, the majority of Goldman Sachs employees had participated in unethical behavior in some way, shape, or form. Under a laddering agreement, clients had to agree to buy a certain amount of shares during Goldman’s IPO “rollout” which were priced $10 to $15 higher than actuality.

The agreement that Goldman’s clients were required to make is an example of profits being the main goal of the company over client interest. Another example can be seen within the Auction-Rate Market. Goldman was the fifth largest underwrite of the market, so when they withdrew the market for these securities had nearly diminished. This action left clients holding $40 billion in securities they were told were as good as cash. Goldman had agreed to buy back their clients’ auction-rate securities, but with a slight catch. They only agreed to buy back the securities of their smaller investors, so the larger investors were left holding unsellable securities (Jennings, 2017, p. 90). The amount of employees that were aware of this dilemma is unknown, but what is known is that not one person with the knowledge of this event reported the behavior. Most corporations have a Human Resources department which is a place where employees can discreetly report any unethical behavior or problems they may be having within the workplace. Various things could have occurred. Based on the evidence throughout this case, it seems as though anyone wanting to come forward was persuaded to step back.

Employees were most likely asked to step back in regards to ethical issues/situations on more than one occasion. Goldman Sachs conducted a CDO deal known as ABACUS. In April 2010, the SEC filed a suit against Goldman for their conduct in this deal. The complaint alleges that John Paulson (a financial wizard who was said to plan to position himself short on the securities Goldman would sell to its clients) chose mortgage pools that were “crappy.” The mortgages were chosen because having these securities “tank” was important to Goldman and Paulson because of their position on the mortgage instrument markets (Jennings, 2017, p. 91). It is clearly seen that Goldman failed in their duty to properly handle their clients along with their money. When a due diligence team showed an abnormally high percentage of mortgage loans with credit and paperwork deficiencies, some emails from Goldman employees were exposed in regards to the situation. For instance, one employee wrote “How do we know that we caught everything?” and the response was “We don’t” (Jennings, 2017, p. 95). This indicates that a wide variety of employees were a part of Goldman’s large scheme to reach the top.

Conclusion

I conclude the following:

1. Goldman Sachs employees were not shown how to properly handle unethical situations or how to conduct themselves when trying to de-escalate one of these situations.
2. The culture of Goldman Sachs revolved around the unethical behavior produced by the executives in an attempt to become the number one investment firm.
3. Goldman Sachs proved to the public on various occasions that they were looking out for their own best interests through the business strategies they used as well as the information they discreetly hid from the public.

Issue #2

Was the government’s involvement with Goldman Sachs a business strategy to assist in case of criminal accusations?

Rule

Utilitarianism revolves around business, and what is best for the business. It looks out for economic interest in a situation and believes that time is money.

Analysis

In this case, since Goldman had no personal liability for company losses, a lot of people believe that their investment strategy had changed dramatically. Basically, if the company had been sued, the plaintiff could not go after their personal belongings. Goldman Sachs had insiders within the government, and it can be thought that this was a strategy to lessen the penalties of any charges. For example, Goldman alums, Henry Paulson and Robert Rubin served as Secretary of Treasury. New Jersey Governor, Jon Corzine made his large fortune at Goldman Sachs. During Barack Obama’s presidential campaign, Goldman employees contributed roughly $1 million to it. Once Donald Trump was elected, there were five Goldman executives that were a part of the Trump administration including cabinet secretaries.

Cabinet secretaries are an important factor in governing the SEC. When the SEC brought charges forth in 2009 towards Goldman Sachs, former White House Counsel, Gregory Craig (who left the Obama administration after 1 year of service) served on Goldman Sachs defense team. Gregory Craig was asked if he was violating the Obama administration rules on conflicts that prohibited former administration officials from working for companies as lobbyists for two years. Craig responded with “I am a lawyer, not a lobbyist” (Jennings, 2017, p.89).

With the economic interest of the company present, it seems as though along with utilitarianism, strict constructionism can be identified in this conflict of interest as well. It seems as though that Gregory Craig had violated the rules that were a part of the Obama administration, but swept it under the rug by labeling himself as a lawyer instead of a lobbyist.

The association that Goldman Sachs had with Gregory Craig helped them in legal situations due to the ties he had with the government. From an outside perspective, it appears that Goldman Sachs used their involvement with the government to help them get out of  “sticky” situations with as little damage as possible. By having a former White House Counsel member assist them with charges brought forth, it seems as though he would have enough influence to convince the right people to go “easy” on Goldman Sachs. Economically, this was in their best interest if the amount of unethical behavior they participated in is taken into account. Looking at their involvement with the government from the business aspect of things, this inevitably could have saved them money, if you consider the amount of money they could have been fined if they didn’t have the government assistance they did compared to the amount they were actually fined.

Conclusion

I conclude the following:

1. Goldman Sachs’ main priority was to create profit over their clients best economical interest.
2. Goldman Sachs used a wide variety of business strategies to get a leg up in the market and as a corporation, including the strategy of befriending the government.
3. The unethical behavior Goldman Sachs participated in had never been properly reported or handled, which led the company to continue on with this type of behavior and to promote its employees to go along with in order to stay number one.

References

Jennings, M. (2017). Case 2.10. In Business Ethics: Case Studies and Selected Readings                 (pp. 85-95). Boston, MA: Cengage Learning.