This assignment reviews the value of ethics in the Goldman & Sachs ABACUS case. It list and analyzes the actions and position taken by Goldman in regard to the transactions that took place in the marketing of the securities in question. It proves that Goldman adopted a standard of complying with law enacted by the government that carries some sanctions for noncompliance, but failed to act to the best interest of its clients in the fiduciary role it was playing.
The question to be investigated is whether Goldman violated business ethics rules in the marketing strategy employed in the ABACUS deal. 1. Actions and practices that are considered gray area:
a. Investment strategy of layering in the 1920 by using its own customers to make money.
b. The strategy of laddering in the 1990s by allocating certain Initial Price Offering (IPO) at a preestablished price with its favorite customers.
c. Engaging in short sales in the 2000s by betting against securities they continue to sell to their customer.
d. Inside bidding up of the values of instruments without clients’ knowledge.
e. Analysts were involved in providing reports that were contrary to their true belief about the qualities of the securities being sold to clients.
f. Leadership ties to the executive branch of the government through political contributions. Goldman Sachs was regulated by the Security and Exchange Commission (SEC). This is conflict of interest, because SEC is a federal agency.
g. The bail out by the Obama Administration. They contributed to Obama’s campaign.
h. Conflict of interest in the selection of ABACUS portfolio. The seller was involved in the selection of the portfolio. The same person who assembled the portfolio also bid against its success.
i. Goldman failed to inform its clients IKB Bank of information known as described in item f above.
j. They practiced short sales on the securities they offered to their clients.
k. Conflict of interest by serving two clients at the same time. One being the seller Paulson & Co. and the other being IKB Bank.
l. The process of hiring ACA management seems to be a gray area, because ACA Management was not independent as the decision of the securities selections was still being made by the seller who was Paulson & Co.
m. No transparency by failure to disclose all the above information to the clients.
n. Awarding bonuses to top executives after a bail out by the Government and taxpayers.
2. Evaluation of each actions or practices using ethical analysis
Goldman’s practices since the early 1900 have been to use its own customers to make money, whether through bidding up the prices or selling short. Although this practice fits well with those who believe that a company’s only purpose is to make money and increase its shareholders wealth (Friedman, 1970), it goes against the social responsibility and moral ethic described by others in the industry. A financial institution has an ethical obligation to act in the best interest of its clients. This duty is one that any agent owes it client. This is based on the concept that a relationship between the two is based on trust and confidence (Caldwell, Hayes & Long, 2010, p. 508). If Goldman is using its client, there is no such trust and confidence.
In the Abacus case, there is definitely conflict of interest by serving two clients on the opposite sides of the same deal. In this situation, a financial institution is unlikely to act honestly and transparently for both parties. Two problems arose out of this position: first, Goldman had a financial gain from one of the parties that was always more than the other. Second, Goldman prized one client relationship more than the other, because of expected returns from that client. In this case, the big income generating client was favored over smaller clients.
Goldman failed to fully disclose material information to its clients about the seller’s involvement in picking the securities in the ABACUS debt obligations. Although they hired a middle man to try and consider themselves independent, this act still raised ethically questions for the following reasons:
a. They allowed the seller to be involved in selecting the securities without disclosing this information to the buyer. As it was known later that the seller’s intention was to short the sale. This allowed the seller to select the worst subprime securities with the highest probability of failure.
b. If they did this to give them an appearance of objectivity, this is still unethical, because it gave false reassurance to the client who believed that they had its best fiduciary interest in mind.
A second conflict of interest was serving two clients and the institution itself in the same deal. In addition to the conflict of interest that existed when serving two clients on one deal at the same time, there was also the conflict of interest of serving two clients and their own interest in the same deal. Goldman was the agent for both the seller and the buyer. Goldman was also acting as a principal on its own behalf when it bought the ABACUS securities and put the deal into its own books. According to modern finance theory, as an economic entity, Goldman’s ultimate goal is to maximize profits. Yet, maximizing profits may require not serving the best interest of your client. On the other hand, if Goldman is acting as an agent for its client, it has an agency duty to act in the best interest of a client. These two goals are often in conflict. Thus is called the “Agency Problem” (Dixon, (2012).
The last ethical problem I observed in this deal is lack of truth telling and transparency. This occurred when Goldman withheld material facts in its marketing brochure by not disclosing that the seller was on the short side of the deal, and would benefit from a decline in price of the securities involved. Ethics values demand honesty on the part of all involved. It does not matter if the other party to whom one must be honest is sophisticated or not. Honesty is a moral obligation, and full transparency is required.
At the end, based on the information in this case study, Goldman acted unethically because they failed in their fiduciary duty to act on best interest of its clients. They also failed in this duty by choosing to be in a position of conflicts of interest. They were not honest, and failed to disclose material information to their client.