Ethics: Goldman Sachs Essay

Goldman Sachs, founded by German immigrants, began as a itty-bitty humble business looking to succeed. Over time their business strategy changed and they entered into ethical and legal issues they had non encountered before.In the late 1920s Goldman Sachs began maliciously investing in companies to drive their demand. They coined this term laddering from overleveraging them selves and putting the commercialize at risk. Their actions created the bubble that burst in the stock market crash of 1929.Furthermore, Goldman Sachs engaged in barter huddles. Only their preferred customers where chose to participate on this unethical schemes, and the homogeneous customers were shot changed on pecuniary scratch from unprofitable IPOs shares. It was conk that Goldman Sachs business focus was non customer based but self-based by the mantras that they use to be in possession of long-term greedy and Filthy rich by forty.In 2008 the market once again crashed equally as hard as in 1929 an d Goldman Sachs was at the root of the cause. With self-fulfillment and greed in mind, Goldman Sachs used Collateralized Debt Obligations and bet against their clients to increase profitability. Goldman Sachs progressively became more unethical in their dealings, and the second gear took notice. Goldman was accused on two accounts of fraud because of one particular portfolio of securities, named ABACUS, which they dealt with.after analyzing the slick and reviewing the unethical actions and so-called accusations against Goldman Sachs, it is clear that Goldman Sachs was operating unethically. They misre devoteed, hid randomness, and engaged in conflicts of arouse with their clients. Goldman Sachs took an unfair reward with their toes to the line mentality on their legal and ethical issues leading the atomic number 16 to establish harsher prescripts for the coasting indus drive.Goldman Sachs can be induce more ethical by adopting Warren blows front page of the news stem princ iples. When a firm finds that its giveees needs to lead themselves that their work is adding social value, the firm should questions its ethical practices. The recommendation for a firm when they find themselves condoning unethical actions is to be honest with the regulating entity and its clients. It is likely to reward them in the long run despite the immediate consequences.Goldman Sachs mise en sceneIn 1869 two German immigrants came to the US and founded Goldman Sachs with the humble purpose of being both an originator and a clearinghouse for commercial base (Jennings, 73). However, the firm started to gradually drift from its sign business strategy set by its fo beneaths and started to provide other services and undertook investment funds strategies. In the late 1920s Goldman Sachs created investment companies that it would itself invest in to drive up the market demand. As a result, investors started to invest in the comp each(prenominal) because of the perceived superi or demand. With the new proceeds, Goldman would borrow more money and create other investment company and repeat the process. As a result of this action, Goldman contributed to the stock market crash in 1929 and, with a similar strategy, the recent financial crisis in 2008 (Jennings, 73). During the Internet bubble in the 1990s, Goldman engaged in an activity known as laddering.Goldman, as the underwriter of a security, would enter an agreement with its best clients to sell a portion of IPOs shares at a predetermined equipment casualty after their initial caning. This led to a misconceived demand in the secondary market of the stock due to the predetermined secondary pricing Goldman had set with some of its clients. Furthermore, in the 2000s, Goldman would sell Collateralized Debt Obligations, for which it had a negative outlook, to its clients and issue avocation reports, developed through the existing trading huddles in the firm, to legitimate preferred customers that was dif ferent from the analyst reports that were issued to the public.Its practices has been scrutinized and particularly its toes to the line on legal issues. In intimately cases, Goldman and its clients are the two main parties involved, and it is the clients that usually end up with the little end of the stick. Goldmans actions are partly explained by the mantras that they use to confuse long-term greedy, and Filthy rich by forty. This paper is relevant for current business leaders because it presents a case where a successful firm has come under great scrutiny due to its unethical actions and questionable practices. Bending the rules and pushing the envelope unceasingly to be a profitable firm has put Goldman in an unfavorable light in society. The paper testament further discuss the ethical and legal issues Goldman has run into through its practices and ordain provide a general recommendation for how a business can avoid and deal with unethical practices.Analysis of germane(pred icate) Legal and Ethical IssuesInitial Public OfferingsGoldman created a synthetic demand in its IPOs through selling a portion of the IPO shares to its clients at a predetermined price higher then the initial price. This caused the price of the IPO shares to rotate due to fabricate demand by Goldman (Jennings, 75). The Securities and Exchange management filed a kick against Goldman alleging that they had violated persist 101 of Regulation M under the Securities Exchange Act of 1934, which statesRule 101 of Regulation M, among other things, prohibits underwriters, during a restricted period (the five-day period preceding the determinations of IPO prices and foregoing to the completion of distributions of IPO shares), from directly or indirectly bidding for, purchasing, or attempting to induce any someone to bid for or purchase any offered security in the aftermarket (SEC).Goldman clearly attempted to induce, or induced, certain clients to bid for or purchase offered securitie s in the aftermarket through its laddering practices, which clearly violates Rule 101 of Regulation M. Goldman concord to settle with the SEC by remunerateing a fine of $40 million without admitting or denying the allegations (SEC). nearly of the unethical practices present in Goldmans laddering activities were * Misrepresentation- Goldman inflated the price of the IPO shares consciously through the manu concomitantured demand and the price of the shares were misrepresented. * Lying- Goldman Sachs lied to some of its best clients and had them pay higher price than the initial price under the laddered IPOs. * Violating Rules Clearly making money from laddering is a violation of rules and therefore Goldman paid a impenetrable fine when they were caught engaging in this illegal practiceCollateralized DebtIn rear to understand Goldmans mesh in CDOs it is pertinent to explain the security. Collateralized debt is simply an Asset-Backed Security, which means that there is a physical summation backing the security under contract. For example, a house serves as collateral for a mortgage and the bank has the right to claim the house in the event that the borrower defaults on the loan. A security is considered any investment contract that gives the owner evidence of indebtedness or business participation. zero(prenominal)es, stock, bonds, debentures, warrants, subscriptions, voting trust certificates, rights to oil, gas, and minerals, and limited fusion interest are all example of securities (Jennings, 728). A Collateralized Debt Obligation is a variety of fixed-income assets that are pooled unneurotic to create one security.In 2008, some(prenominal) of these CDOs became completely worthless because they were filled with sub-prime mortgages that defaulted, and Goldman was a big role player in the CDO market. ABACUS was one particular CDO deal in which Goldman had created and sold. Fabrice Tourre, a vice president at Goldman Sachs at the time, put together the ABACUS CDO to be sold to clients. Tourre intentionally filled ABACUS with subprime mortgages so that Goldman could take a short spotlight on the security, which means betting against its success, in order to profit. This CDO deal became infamous because the SEC show a few emails written by Tourre. In one of the emails Tourre wroteMore and more leverage in the system. The whole building is more or less to collapse anytime now Only potential survivor, the fabulous Fab rice Tourre rest in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the price reduction of those monstrosities sic (Quinn)The SEC filed a civil action suit against Goldman and Tourre for their conduct under the ABACUS deal. The SECs complaint charged Goldman and Tourre with violations against portion 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5 (SEC). distributively of t he falling rule of law states, among other thingsIt shall be unlawful for any person in the offer or sale of any securities (2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to agnise the statements made, in light of the circumstances under which they were made (SEC) POSITION LIMITS As a means reasonably designed to prevent fraud and manipulation, the Commission shall, by rule or regulation, as necessary or appropriate in the public interest or for the protection of investors, establish limits (including related hedge ex emption provisions) on the size of positions in any security-based swap that may be held by any person. (SEC)It shall be unlawful for any person (a.) To employ any device, scheme, or artifice to defraud,(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statementsmade, in the light of the circumstances under which they were made, not misleading, (Taft Law)Goldman clearly violated Section 17(a) by not including the information that their ABACUS securities were based on poor mortgages. They violated Section 10(b) by taking a considerable short position in the Abacus deal. Lastly, they violated Rule 10b-5 by omitting material fact of their short position in the security. Furthermore, the SEC prohibits any analyst from issuing reports on securities that run contrary to the analysts true beliefs about the securities. Goldman denies betting against clients in an 8 page letter to it shareholder signed by CEO Lloyd Blankfien as well as President Gary Cohn. Goldman claims that they were protecting themselves and Blankfien said, Certainly we did not know the next of the housing market (SEC). Goldman agreed to pay a fine of $550 million and admitted that it failed to disclose vital information in their marketing of ABACUS securities.Goldmans actions did not reflect satin flower, integri ty, or responsibility. Some of the ethical issues present in the ABACUS deal are* Taking unfair advantage Goldman consciously made poor recommendations to their clients in order to sell the Abacus CDOs so they could make a profit on their short position. * Engaging in contravene of Interest Goldman stated We may trade, and arouse existing position, based on trading ideas before we collect discussed those ideas with you(Jennings 80). Despite this argument, they had a significant incentive to market and sell the securities in order to profit. * Hiding or Divulging information Goldman used another firm to create the Abacus CDOs in order to distance themselves from the trade conflicts that would countermand by shorting the CDO. They besides omitted crucial information about the security, which was the knowledge of the amount of high-risk mortgage securities in the Abacus CDO. * Violating Rules- Goldman was charged with securities fraud, as explained by above, and did not look ou t for the best interest of their clients.Trading HuddlesGoldmans first obstacle with their trading huddles activities came from their Fundamental Strategies Group of analysts. The group consisted of Goldman analysts employed by their Securities Divisions. These groups of desk analysts were not correct by the SEC rules because they did not involve GIR Global Investment Research Division equity research analysts. The SEC beat strict guidelines that, prohibits an analyst from issuing reports on securities that run contrary to the analysts true beliefs about the securities. (Craig) Goldman did not break any statutory laws with the Fundamental Strategies Group since they were not covered in the SEC ruling. From the uprising, Goldmans executives sent an email to all their clients, explaining their Trading Ideas and advice. The email was meant to elucidate the firm and publics conflict of interest policy. In the message, Goldman stated, You should not consider Trading Ideas as objective or freelance research or as investment advice.When we discuss Trading Ideas with you, we will not be playacting as your advisor (including, without limitation, in relation to investment, accounting, tax or legal matters) and the provision of Trading Ideas to you will not give rise to any fiduciary or equitable duties on our part (Sorkin 1). In the case of Goldman vs. Common Wealth of Massachusetts, the court ruled, Goldman failed to reasonably supervise GIR equity analysts communications to prevent and discern dissemination by GIR equity analysts of certain unpublished short term trading ideas (SEC) and were held accountable to Section 204 (a)(2)(J) of the Act, which in part states thatThe secretary may by order. deny, suspend, or revoke, any registration if he finds (1) that the order is the public interest and (2) that the applicant or registrant (J) has failed reasonably to supervise agents, investment adviser representatives or other employees to assure compliance with this chapter (SEC).Goldman failed to supervise its agents to guarantee compliance with the act. The court ruled that Goldman must have a policy that allows a GIR equity research analyst to identify an unpublished report and follow its publication through more than 14 persons. Furthermore, Goldman will be required to disclose in their basis of Use Agreement that the amount of GIR equity research report varies from client to client (Stempel). Goldman agreed to pay a fine of $10 million and stop giving favored clients trading ideas developed at internal gatherings known as trading huddles (Stempel). In addition, they were charged with not dealing in with honesty with all clients and took advantage over others, known as fair dealing with clients.While all companies try to balance on the line of pursuing profits and maintaining a moral conduct, Goldman Sachs was unable to keep their balance. After the reports of intentionally avoiding regulation from SEC Regulation AC, requiring equity resea rch analysts to certify that their issued reports represents their actual views (SEC), the company cut through ethical boundaries. With their Fundamental Strategies Group, Goldman as a whole company condoned unethical action. Instead of following the regulation of the SEC they went around it. Some of the ethical issues present in the case were* Taking unfair advantage one part of the firm issued equity research reports to the public and another part of the firm did also engage in equity research but came to a different conclusion. However, the latter report was tho issued to certain clients. By releasing one view on a subject and taking another position themselves, thereby taking unfair advantage. * Violating rules even though their Fundamental Strategies Group were not violating any laws or regulation, they failed to follow the SEC Regulation ACRecommendation and ConclusionThe cases mentioned above are merely a few of the instances where Goldman has been scrutinized by governm ent entities and the public. Its continuous practice of toes to the line on legal issues has many times resulted in lawsuits against the firm. As we can see, the legal issues they are pushing are unethical, however, they are not violating those laws. Instead, they are charged with other violations that result from operating at the line of illegal practices. Their reputation took a hit due to multiple SEC allegations and fines. To avoid these ethical situations Goldman Sachs should use the ethical principles that are taught. For example, they should have used Warren Buffets front page of the newspaper test in the case with the IPOs. Goldman Sachs should ask itself if they would be indifferent of their actions if the public would know that they intentionally manufactured demand for their IPOs. A overtone reason for their unethical conduct was due to rationalizing when they were confronted about their actions they proceeded by rationalizing and labeling their actions in order to avoid the ethical dilemmas.In the ABACUS case, Goldman stated that their clients are qualified and sophisticated enough to make market risk decisions. They most likely rationalized their actions by saying that the system is unfair and if we dont do it, someone else will. In their case with trading huddles, it was a practice carried out by other firms, however, not to the same degree as Goldman. They waited until the lawyers told them it was wrong and rationalized by thinking Its a gray area. Goldman Sachss pushed the limit of both the letter of the law, and the spirit of the law when dealing with its clients. Goldmans history of brushing erstwhile(prenominal) ethical decisions have created many problems for the firm in the past years. It is clear that pursuing this strategy has not been to their benefit. A business should not have to argue how its actions add social value it should be clear by the actions themselves.Therefore, if a business finds itself engaging in activities that do no t pass Warrant Buffets Front of the Newspaper test it should reconsider its actions and business model. A red flag should rise when employees convince themselves that they are adding social value, as in the case with Tourre, or if employees feel any annoyance with their actions. If a company finds itself condoning unethical actions and violating the law, the best solution is to make an action plan on how to present their violations to the regulating government entity most truthfully and inform their clients of the unethical conduct with an apology. Despite that these measures might have a negative impact on the firm, it is highly likely be a short-term effect. The long trust built up from their honesty and confrontation of the unethical actions could be beneficial to the firms future reputation.Work CitedCraig, Susanne. Goldmans Trading Tips Reward Its Biggest Clients. The WallStreet Journal. 24 Aug. 2009. Web. 23 Mar. 2012. . Goldman Sachs & Co. Lit. Rel. No. 19051 / JANUARY 25, 2005. U.S. Securities and Exchange Commission (Home Page). Web. 28 Mar. 2012. . Quinn, James. Goldman Sachs, Fabrice Tourre and the Complex Abacus of Toxic Mortgages. The Telegraph. Telegraph Media Group, 16 Apr. 2010. Web. 25 Mar. 2012. . Rule 10b-5 booking of Manipulative and Deceptive Devices. Law School University of Cincinnati College of Law. Web. 28 Mar. 2012. . SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CDO fastened to Subprime Mortgages. 2010-59 April 16, 2010. Web. 28 Mar. 2012. . Sorkin, Andrew. DealBook. Mergers, Acquisitions, Venture Capital, Hedge Funds. 12 Jan. 2010. Web. 28 Mar. 2012. . Statement by SEC Chairman proposition of Regulation AC. Statement by SEC Chairman Proposal of Regulation AC (Harvey L. Pitt). Web. 28 Mar. 2012. . Stempel, Jonathan. Goldman Fined $10 Million, Agrees to Stop Trading Huddles. Reuters. Thomson Reuters, 09 June 2011. Web. 28 Mar. 2012. .