The problem to be investigated is did Goldman and Sachs engage in shady trading transactions and were these transactions done in the best interest of their clients? Were Goldman and Sachs guilty of not disclosing the trade strategy to investors through their numerous practices of investment tools which they were using?
1. Go back through the case and make a list of each action or practice that could be called a gray area.
- In the 1920’s the layered investment strategy was created by Goldman. He created a company and purchased 90 percent of the company’s shares which would seem to be doing very well to the outside investors, the shares would then sell to the public ...view middle of the document...
- Auction –Rate Markets is when Wall Street firms clients would bid on securities being sold through a once a month auction that the investment firms were selling. However, these clients were not aware that the investment advisers were bidding up the value of the instruments; and the prices were reset on a weekly basis that was based on demand. (Jennings, 2010, p.78) Eventually Goldman pulled out of this scam which left the clients holding $40 billion in non-sellable securities; this was a conflict of interest on Goldman’s part due to him driving up the prices with no intentions of staying in the market or purchasing any of the securities.
- Another gray area is the structure of Collateralized Debt Obligations (CDO’s) of 2008 and “Toes-to-the-line”, an investment tool of used by Goodman. Because Goldman only shared the securities report with a few of the clients and did not follow the SEC’s requirements. Goodman formed “trading huddles” that consisted of analysts and traders; but Goodman did not include any equity research analysts that were mandated by SEC nor did he distribute the information to all of the clients. The SEC requires companies engage in “fair dealings with it customers” and that an analyst cannot issue reports on securities that run contrary to the analyst’s true beliefs about the securities. (Jennings, 2010, p.77)
- CDOs or ABACUS, Goldman would make client recommendations for them to purchase “chase collateralized debt obligations (CDOs), the mortgage backed debts by doing so this would push the mortgage backed debts high but would position itself short on securities so when the market declined, Goldman would profit from the mortgage-backed debt. Goldman purposely, did not disclose the position or strategy to investors. (Jennings, 2010, p.80) Goldman and his staff intentionally knew what they were doing, having the ACA structure the deal and excluded Wells Fargo because they invested in sub prime loans as well.
“Experts indicate that Goldman was disclosing its conflict as a way of managing client relationships and trading positions. One expert has noted that the way the markets have evolved, client and investment firm relationships are “laden with conflicts of interest.”” (Jennings, 2010, p 80)
2. Evaluate each of the actions or practices using ethical analysis models other than the question, “Is it legal?”
The Wall Street Journal Model of resolution of ethical dilemmas consists of 3 components:
A. Compliance: Are you violating any laws?
B. Contribution: What does this action contribute to my customers, shareholders, community and others?
C. Consequences: How will this action affect me, my company, family and the shareholders short and/or long term?
- The layering strategy was a short term effect because many of the individuals and the market have recovered. Goldman was slick in creating the undercover stock scheme, consumers weren’t aware of why the prices were going up nor did any of them know...