“It takes many good deeds to build a good reputation, and only one bad one to lose it. ” (Ben Franklin). Goldman Sachs was the most prestigious investment bank with over one hundred years of good business history and on September 21st, 2008 it reorganized itself as a bank holding company. As a bank holding company, it engaged in global investment management, investment banking, securities, and other financial services. An unfortunate series of scandals had put its good reputation in a downward spiral. Goldman engaged in a series of scandals from the collapsed of AIG, ABACUS-AC1 synthetic CDO, and Facebook private investment.
What ethical issues had Goldman Sachs disregarded which led to its loss of reputation dilemma? Goldman was accused of causing the collapse of AIG. Goldman’s agreement with AIG allowed calling for collateral payments under two conditions, “first, if AIG lost its AAA credit rating and second, if Goldman believed the value of the underlying securities being insured had fallen. ” (Cohan, 2011, p. 1) On July 27th, 2007 was the start of the dispute between Goldman and AIG about the valuation of collateral CDO. According to Joseph Cassano CEO of AIG, “Goldman was having a hard time getting the estimate numbers themselves.
Goldman called for $1. 8 billion on July 27, 2007, and then reduced the value several times to $450 million within two weeks. ” (Cohan, 2011, p. 1) Nevertheless, Goldman premature action call which based on its excessively low valuation triggered others to act. Consequently, AIG was over leveraged and eventually collapsed. Goldman violated the “standard two of market manipulation. ” (Standards of practice handbook, 2014, p. 2) According to the Times article, “Goldman was using its close relationship with AIG to manipulate the housing market and encourage a panic selloff of mortgage-backed assets, in art by pressing the insurer to make billions of dollars in collateral payments based on Goldman’s low-ball estimates of the value of mortgage-backed CDOs it had insured with AIG. ” (Grey, 2010, p. 1)
The challenges to the Goldman’s practices were not due to a failure of the public to understand the complex transactions, but it was because Goldman unethical activities that “deceived investors about its ABACUS product and its marketing materials. ” (Securities and Exchange Commission v. Goldman Sachs & Co. and Fabrice Tourre, 2010) According to SEC complaint 10 CV 3229, “the involvement of Paulson & Co. n structuring the CDO and its hand selection was never disclosed to investors. The materials were misleading investors that the CDO was entirely selected by an independent party. ” (Securities and Exchange Commission v. Goldman Sachs & Co. and Fabrice Tourre, 2010) Goldman failed to fulfill the fiduciary duty to its clients.
In addition, it violated the CFA standard two of market manipulation, “by engaged in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants. (Standards of practice handbook, 2014, Chapter 2) Furthermore, Goldman places its interest before its clients by serving the seller Paulson & Co. and buyer IKB in the same deal. Goldman decided not to disclose the information that Paulson shorting the Abacus to IKB because of its long business relationship history. This is clearly a case of conflicts of interest that violated CFA standard four. How can Goldman explain its activities to the public, media, member of congress, to the SEC, and to its clients when its activities were not transparent?
The answer is it cannot. Furthermore, according to Richard Herring, the finance professor at Wharton said about the CDO, “They are so complicated that, in practice, it’s virtually impossible with publicly available information to dig down to the underlying securities — mortgages, credit card loans, etc. — that need to be valued. ” (Knowledge@Wharton, 2010, p. 1) Just two years after the toxic assets Abacus case, Goldman was again walking on the fine line between legal and unethical.
In Facebook private investment offering deal, Goldman structured the deal to get around SEC rules that impose disclosure requirements on corporations with more than 500shareholders. However, SEC reaction to the deal forced Goldman to abandon the U. S. offering. Goldman handpicked clients for the Facebook private investment deal so this begs the question, how can Goldman’s clients get a fair deal. In addition, Goldman violated the standard three on “duties to clients and prospective clients on fair dealing” (Standards of practice handbook, 2014, Chapter 3).
Its action discriminated U. S. clients in favor of non-U. S. clients. According to fair dealing, Goldman unfairly treated U. S. clients since they were on the same service level agreement. Furthermore, Goldman also violated the standard one of “professionalism on knowledge of the law” (Standards of practice handbook, 2014, Chapter 1). Goldman clearly understood the shareholder limitation of private market investment nevertheless it was planning to create a special purpose vehicle to bypass that rule by pooling clients’ investments as one.
The complaints from Facebook’s deal were not as severe as those involving in Abacus case nevertheless its reputation too suffered. In April 2010, “the SEC filed securities fraud charges against Goldman Sachs for alleged in connection with the structuring and marketing of a synthetic CDO. ” (Securities and Exchange Commission v. Goldman Sachs & Co. and Fabrice Tourre, 2010) As a result, Goldman’s “shares price fell 13 % which erased about 12 billion of market capitalization. ” (Timone, 2010, p. 1) Evidently, the lost in its reputation had very serious impact on its stock value and trading business.
It was in Goldman best interest to settle the Abacus case and to cut down the litigation time even though it would be difficult for SEC to prove that “Goldman withheld information that a short seller was a key part of the deal. The SEC would have to prove that the omission was material which was legally significant. ” Instead, “Goldman agreed to pay $550 million to settle federal claims that it misled investors in a subprime mortgage product” (Chan & Story, 2010, para. 1) which only equal to its 14 days profit in 2010. However, Goldman did not admit or deny the wrongdoing in the SEC settlement.
The lost in stock value is sometime temporary if a company able to correct the underlying issues and in Goldman Sachs case is its reputation. Goldman’s chairman and CEO, Lloyd Blankfein acknov ledged that there was “a disconnect between how we as a firm view ourselves and how the broader public perceives our role and activities in the market. “(Moyer, 2011, p. 1) At the annual shareholders meeting on same year May 7, 2010, Blankfein, “announced that the firm’s intention to create the Business Standards Committee to conduct an extensive review of our business standards and practices. ” (http:// www. goldmansachs. om/who-we-are/business-standards/ ittee-report/business-standards-committee-report. html)
The Business Standards Committee issued 39 recommendations that Goldman Sachs pledged to implement in 2011. However, the jury is still out if Goldman will be able to fulfill these recommendations. “A Boston Consulting Group query of the best 250 Goldman clients worldwide dispiritedly showed a goodly number no longer trusted mighty Goldman. ” (Lenzner, 2014, p. 1) According to a recent poll in 2015 results, “Goldman’s corporate reputation has risen from a dismal very poor to a humble poor. ” (Davis, 2015, para. )
Despite the fact that Goldman’s reputation improved, nevertheless its actions were not sufficient to deal with its reputation concerns. In addition to the 39 recommendations, the separation of duties for chairman and CEO should greatly improve its corporate governance and transparent of independence audit. In conclusion, Goldman’s reputation greatly suffered from these scandals, its business culture had become toxic. Its actions in the scandals of AIG, ABACUS, and Facebook were undoubtedly unethical. These highly publicized scandals harmed millions of people from the sophisticated financial intuitions to the unsophisticated pensioners.
Furthermore, U. S. taxpayers paid billions of dollars in 2008 for financial crisis bailouts and the very same people who created these irresponsible acts continue to get bonuses or the golden parachute. So why is the Goldman so prone to scandals? The Goldman business culture had changed from long-term greedy to short-term greedy. According to Goldman Sachs legendary Gus Levy, “Short-term greedy types are solely interested in making as much money as possible right now and are likely willing to cut corners. “(Biderman, 2012, p. )
Contrary, “Long-term greedy means being a professional, which includes doing your homework, keeping your word, cleaning up messes, honoring relationships with clients and employees, in other words, doing the right thing for no reason all the time. ” (Biderman, 2012, p. 1) Goldman’s long-term greedy principles are consistent with the CFA code of ethics and should be adhere. Goldman must return to the long-term greedy culture and this will need to start from its leadership team. They must lead by example of doing the right thing, weed out the morally bankrupt people and make its clients the main focus of the business again.