GOLDMAN SACHS DEAL WITH PAULSON & CO
The Issue: Goldman allegedly failed to disclose to investors that it was betting against subprime mortgage investments it pushed on clients. Essentially, according to the complaint, Goldman pushed a product designed to fail.
Introduction: The Goldman Sachs Group, Inc. is an American multinational investment banking firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients.
The firm provides mergers and acquisitions advice, underwriting services, asset management, and prime brokerage to its clients, which include corporations, governments and individuals. The firm also engages in market making and private equity deals, …show more content…
PRINCIPLE AGENT PROBLEM AND ANALYSIS OF ETHICAL ISSUES
1. Serving two clients on the opposite sides of the same deal
A financial institution has an ethical obligation i.e. duty to act in the best interest of its client. This obligation is one that an agent owes its principal (the client). An agency relationship is based on trust and confidence.
In essence, Paulson & Co. was the seller and IKB was the buyer of the ABACUS CDO. Goldman served both.
When serving two masters at the same time on the same deal, a financial institution is unlikely to act honestly and transparently for both parties, giving each party equal treatment. First, the financial gain from one of the parties is always more than the other. The sums of money involved are usually inordinately large. Second, the financial institution usually prizes one client relationship more than another because of past returns and expected future returns from that client. Thus, big income generating and regular clients will be favored over smaller, irregular clients.
2. Serving two clients and the institution itself in the same …show more content…
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 one’s client. On the other hand, if Goldman is acting as an agent for a client, it has an agency duty to act in the best interest of a client. These two primary goals are often in conflict. This conundrum is called the “Agency Problem”.
3. Truth Telling and Transparency
Goldman and its enablers argue that in the ABACUS case, IBK was a sophisticated investor, a “big boy”. Therefore, IBK did not need any handholding and could do its own analysis and derive its own investment conclusions. IBK should have known the risks. The bank should have known that there could be an investor on the short side of the deal.
The refutation of this argument is that honesty is demanded of an individual and institution at all times. According to Kant’s Ethical Theory, which is the theoretical foundation supporting the concept of the duties of fiduciaries and agents, one is obligated to be
The Issue: Goldman allegedly failed to disclose to investors that it was betting against subprime mortgage investments it pushed on clients. Essentially, according to the complaint, Goldman pushed a product designed to fail.
Introduction: The Goldman Sachs Group, Inc. is an American multinational investment banking firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients.
The firm provides mergers and acquisitions advice, underwriting services, asset management, and prime brokerage to its clients, which include corporations, governments and individuals. The firm also engages in market making and private equity deals, …show more content…
PRINCIPLE AGENT PROBLEM AND ANALYSIS OF ETHICAL ISSUES
1. Serving two clients on the opposite sides of the same deal
A financial institution has an ethical obligation i.e. duty to act in the best interest of its client. This obligation is one that an agent owes its principal (the client). An agency relationship is based on trust and confidence.
In essence, Paulson & Co. was the seller and IKB was the buyer of the ABACUS CDO. Goldman served both.
When serving two masters at the same time on the same deal, a financial institution is unlikely to act honestly and transparently for both parties, giving each party equal treatment. First, the financial gain from one of the parties is always more than the other. The sums of money involved are usually inordinately large. Second, the financial institution usually prizes one client relationship more than another because of past returns and expected future returns from that client. Thus, big income generating and regular clients will be favored over smaller, irregular clients.
2. Serving two clients and the institution itself in the same …show more content…
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 one’s client. On the other hand, if Goldman is acting as an agent for a client, it has an agency duty to act in the best interest of a client. These two primary goals are often in conflict. This conundrum is called the “Agency Problem”.
3. Truth Telling and Transparency
Goldman and its enablers argue that in the ABACUS case, IBK was a sophisticated investor, a “big boy”. Therefore, IBK did not need any handholding and could do its own analysis and derive its own investment conclusions. IBK should have known the risks. The bank should have known that there could be an investor on the short side of the deal.
The refutation of this argument is that honesty is demanded of an individual and institution at all times. According to Kant’s Ethical Theory, which is the theoretical foundation supporting the concept of the duties of fiduciaries and agents, one is obligated to be