Explain what gets in the way of ethical decisions in business and how would you resolve these issues?

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Business Ethics: Cases and Selected Readings, 8th Ed.

Marianne M. Jennings

Unit 2

Solving Ethical Dilemmas and Personal Introspection

What I Did in the Past Year

“I let someone else at work take the blame for something I did.”

“I used a reference during an ungraded practice exam.”

“I rolled through a stop sign, was pulled over by police and did not even realize I had done it because I had done it so frequently.”

“I told relatives who called that we would not be at home so that they wouldn’t come visit.”

What I Did in the Past Year

“I signed for work performed – when another person actually did the work, although the work performed was known to me.”

“I will admit, I stole a towel here and there not thinking it was a big deal.”

“I left early for a doctor’s appointment even though I didn’t have one.”

“I left information off of my taxes.”

More . . .

“I closed out a corrective action without having enough supporting documentation.”

“I sold a bike to a friend and it was later stolen. He asked me to inflate the sales price (on the claim form) so he could get a larger sum from the insurance company.”
“I accepted a 2-liter drink willingly given to me, but mistakenly delivered by the pizza delivery person.”

Peter Drucker

Primum Non Nocere – Above all, not knowingly do harm

Carr Dilemmas

Would you dye your hair to look younger?
What about contact lenses?
What about covering up tattoos for an interview?
Would you donate to a political candidate you do not support personally because your employer asked you to make that donation?

Carr and Rationalizations

“Everybody else does it.”

“I think all teams do that. That’s been going on forever.”

Jacksonville Coach Jack Del Rio on the Patriots’ videotaping to steal defensive signals

What is right is right even if no one is doing it.

What is wrong is wrong even if everyone is doing it. Source unknown

Jennings

How Leaders Lose Their Way

Even the largest missteps start with small, seemingly inconsequential, decisions
Review the “first step” and “initial decision” materials from Unit One
Review Andersen story

How Leaders Lose Their Way

Unwillingness to tolerate dissent
Losing their good purpose
Disregard for the rules
Sense of self comes from the trappings of success
Sense of invincibility

Defining the Issue: Define Dilemmas by Values, Not Circumstances

Avoid the either/or conundrum and its false security
The ease of resolution vs. the long-term implications
Failure to define the issue properly

Jennings

Pressure: Probability from the Financial Analysts Institute

P = f(x)

x = amount of money involved

P = probability of an ethical outcome

Jennings

A Rapid Decision: MF Global

Jon Corzine, former Goldman Sachs chairman, is CEO and chairman
Bet wrong on Greek debt
Company lacks cash
Banks and exchanges demand cash from MF Global
Employee received request for cash transfer from client accounts
Rule: You can’t touch client accounts to get the cash you need

The Puzzled MF Global Employee: October 26, 2011

“Please wire USD ($)165,000,000.” (4:53 PM)
“Approved” (4:54 PM)
“Please move $165mm using rep code CHASEFIN.” (5:04 PM)
“Approved” (5:05 PM)
Employees realize they have tapped into customer accounts

The Next Day: October 27, 2011

“Please have Chase back value.” (9:33 AM) (which means, transfer it back – cancellation notice)
MF senior manager says original transfer was “okay”
MF senior manager will not sign document from Chase stating the funds did not come from customer accounts

Consequences

MF Global declares bankruptcy on October 31st
Congressional hearings
Investigations by several federal agencies
$1.6 billion in client funds missing
Thousands of employees lose their jobs: “Trying To Land On Your Feet After Working at MF Global.”

Steps in Ethical Analysis

Do your numbers

Recall and apply the categories

Apply questions from the models

Check for the warm language labels and rationalizations

Consider other cases for precedent

Bring in other areas of business to be sure you are seeing the issues

Frame the issue carefully

Some History

Founded in 1869
Partnership with Marcus Goldman and his son-in-law, Samuel Sachs
Began as a clearinghouse for commercial paper

Legal Issues to Discuss

What are the liabilities in a partnership?
How would that personal liability structure affect the partnership’s strategies and decisions?

The Roaring Twenties

New hires felt commercial paper was stodgy
Investment trusts were launched
Small investors could purchase trust interests in pools of securities

1920s and Layering

CORPORATION OR TRUST A

CORPORATION OR TRUST B

IPO – $100 per share – Goldman buys 90%; public buys 10%

Secondary sales – Goldman sells its shares for $110

Cash used

IPO – $200 per share – Goldman buys 90%; public buys 10%

Cash used

Pattern

repeats

1990s, dot-coms, and IPOs

Standard requirement of three years of profitability before an IPO was waived
Eased back to one year
Eventually eased back to one quarter of profits
Public was not aware that underwriting standards had changed

1990s, dot-coms, and IPOs

Underwriter (Goldman) agrees to underwrite a dot-com’s initial offering
Good clients get access to IPO
Participate in the roll-out of the share initially
Have to agree to buy more after the first wave at $10-$15 per share higher
Laddering: shares are guaranteed to rise
Everyone makes money but general public does not know

eToys

IPO priced at $20
Price climbed, through laddering, to $75 per share on the first day
Goldman settled with the SEC for $40 million after then-chairman Hank Paulson condemned laddering

2008 and Layering

CDO Investment Pool A

CDO Investment Pool B

IPO – $100 per share – Goldman buys 90%; public buys 10%

Secondary sales – Goldman sells its shares for $110

Cash used

IPO – $200 per share –Goldman buys 90%; public buys 10%

Cash used

Pattern

repeats

Other Goldman Activities: Huddles and Client Disclosures

Trading huddles: analysts and traders discuss the market, shares, etc.
Analysts cannot contradict their internal opinions in external releases
Goldman analysts did not disclose the trading huddle info
They were analysts from “Fundamental Strategies Group” not the “Analysts Group”

The Goldman Opinions in Emails

CDO securities are “junk,” “s_____” or “crappy.”

Michael M. Phillips, “Senators Seek, Fail to Get an ‘I’m Sorry’,” Wall Street Journal, April 28, 2010, p. A3 at A5.

The January 10, 2010 Memo to Clients from Goldman

“We may trade, and have existing positions, based on trading ideas before we have discussed those ideas with you.”

Andrew Ross Sorkin, “At Goldman, E-Mail Message Lays Bare Conflicts in Trading,” New York Times, January 13, 2010, p. B1.

Other Goldman Activities: Auction-Rate Securities

Touted as mutual-fund grade investments
Goldman and others bid up the price
Clients were convinced that there was a vibrant market
Clients were not told about Goldman’s bidding
Clients were left holding $40 billion in worthless auction securities

Settlements

Goldman agreed to buy back $1.5 billion in auction securities
Pays $22.5 million fine
Merrill Lynch bought back $10 billion in securities and paid $125 million fine

Other Goldman: Abacus

The Cast of Characters

Fabrice Tourre:
The Fabulous Fab

John Paulson: Very Rich Guy

Goldman Agrees to Structure a Mortgage-Backed Securities Deal for Paulson

Fabulous Fab is put in charge
32 years old
$2,000,000 per year compensation
Goldman feels it has a conflict
ACA put in charge
Input on types of mortgages is odd
ACA asks, “Why would they not want Wells mortgages in the pool?”

Goldman puts together CDO deal for Paulson

What It Looked Like

Gol

Clients buy $900 million in CDO securities from Abacus for which Goldman was underwriter

Goldman

Pays AIG

$11M to insure CDOs

Goldman sells

Insurance bet to hedge fund

ACA puts mortgage pool together

AIG must pay Goldman

US bails out AIG

CDOs go south

Key was Understanding Goldman’s and Paulson’s Position

They would be positioned short
That is, they would make money if the CDOs failed (i.e., declined in value)
They did decline; Goldman and Paulson made money
Goldman clients and others who bought Abacus finished with worthless instruments

Subprime Zig vs. Zag

Chart1

Nov-06	Nov-06	Nov-06	Nov-06
Dec-06	Dec-06	Dec-06	Dec-06
Jan-07	Jan-07	Jan-07	Jan-07
Feb-07	Feb-07	Feb-07	Feb-07
Mar-07	Mar-07	Mar-07	Mar-07
Apr-07	Apr-07	Apr-07	Apr-07
May-07	May-07	May-07	May-07
Jun-07	Jun-07	Jun-07	Jun-07
Jul-07	Jul-07	Jul-07	Jul-07
Aug-07	Aug-07	Aug-07	Aug-07
Sep-07	Sep-07	Sep-07	Sep-07
Oct-07	Oct-07	Oct-07	Oct-07
Nov-07	Nov-07	Nov-07	Nov-07
8-Jan	8-Jan	8-Jan	8-Jan
8-Jun	8-Jun	8-Jun	8-Jun
8-Oct	8-Oct	8-Oct	8-Oct

Goldman

Merrill

Citigroup

Bear Stearns

199.76

91.83

50.61

156.16

201.24

91.36

55.16

165.32

212.97

95.87

54.5

169.91

215.97

92.73

54.19

169.43

204

82.14

50.64

147.32

218.37

92.02

53.42

157.02

229.23

93.83

54.84

151.07

225.72

87.68

53.44

143.2

205.94

80.04

50.73

134.72

172.76

74.9

48.39

116.3

203.53

75.3

47.2

115.46

217.69

66.26

42.36

46.41

220.54

53.87

94.05

210

175

124.1

21.35

18.98

Sheet1

	Nov-06	Dec-06	Jan-07	Feb-07	Mar-07	Apr-07	May-07	Jun-07	Jul-07	Aug-07	Sep-07	Oct-07	Nov-07	8-Jan	8-Jun	8-Oct
Goldman	199.76	201.24	212.97	215.97	204	218.37	229.23	225.72	205.94	172.76	203.53	217.69	220.54	210	175	124.1
Merrill	91.83	91.36	95.87	92.73	82.14	92.02	93.83	87.68	80.04	74.9	75.3	66.26	53.87	48	39	21.35
Citigroup	50.61	55.16	54.5	54.19	50.64	53.42	54.84	53.44	50.73	48.39	47.2	42.36	32	29	21	18.98
Bear Stearns	156.16	165.32	169.91	169.43	147.32	157.02	151.07	143.2	134.72	116.3	115.46	46.41	94.05	0	0	0
	To resize chart data range, drag lower right corner of range.

The Emails

Goldman Manager Fabrice Tourre on Mortgage Securities

“The whole building is about to collapse anytime now. . . . Only potential survivor, the Fabulous Fab . . . Standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!! [sic]”

E-mail from Goldman Trader, Fabrice Tourre, to His Girlfriend on His Sales of Subprime CDOs

“I‘m [sic] managed to sell a few abacus bonds to widows and orphans that I ran into at the airport, apparently these Belgians adore synthetic abs cdo2.”

The Congressional Hearings

Senator Claire McCaskill

“It feels like you guys are betting on the game you’re playing.”

Senate hearings on financial regulation

April 27, 2010

Senator Susan Collins

"I understand that you do not have a legal fiduciary obligation. But did the firm expect you to act in the best interests of your clients as opposed to acting in the best interests of the firm? Could you give me a yes or no to whether or not you considered yourself to have a duty to act in the best interests of your clients?"

Wall Street and the Financial Crisis: The Role of Investment Banks, Hearings of the Permanent Subcommittee on Investigations, April 27, 2010, http://hsgac.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=f07ef2bf-914c-494c-aa66-27129f8e6282

Lloyd Blankfein,
CEO of Goldman

Did Goldman Owe a Fiduciary Duty? Blankfein Responds:

"While we strongly disagree with the SEC's complaint, I also recognize how such a complicated transaction may look to many people. To them, it is confirmation of how out of control they believe Wall Street has become, no matter how sophisticated the parties or what disclosures were made. We have to do a better job of striking the balance between what an informed client believes is important to his or her investing goals and what the public believes is overly complex and risky."

Lloyd Blankfein on His Role

[I am just a banker] “doing God’s work.”

John Arlidge, “I’m Doing God’s Work. Meet Mr. Goldman,” London Times Interview, The Sunday Times, November 8, 2009, p. 1.

Professor John Coffee

“I think we’re seeing another one of those periodic eruptions because we see this story of investment bankers who seem to be playing both sides against the middle, and the investor looks like a sucker.”

David Lynch, “Goldman Hearings Strike a Defiant Note,” USA Today, April 28, 2010, p. 1B, at 2B.

Goldman Settles

$550-million fine
Legislative and regulatory reforms
What were the violations?
Which securities laws apply?

Penn State Players

Name Title/Role

Joe Paterno Head football coach at Penn State from 1966–2011

Gerry Sandusky Assistant football coach at Penn State from 1969–1999

Wendall Courtney Attorney for Sandusky charity; outside counsel for Penn State

for twenty-eight years

Alycia Chambers Psychologist in State College, PA—first contacted about abuse

Ron Schreffler Detective at Penn State University Police Department

Jerry Lauro Case worker who handled the first Sandusky complaint

Graham Spanier Penn State president during Sandusky years until 2011

Tim Curley Penn State athletic director during Sandusky years

Gary Schultz Penn State senior VP for finance and business

Thomas Harmon Penn State police chief

Jim Calhoun Penn State janitor who witnessed Sandusky incident in 2000

Michael McQueary Grad student and assistant football coach under Paterno

Cynthia Baldwin Penn State general counsel

Vicky Triponey Penn State standards and conduct officer who left the university

050100150200250Nov-06Dec-06Jan-07Feb-07Mar-07Apr-07May-07Jun-07Jul-07Aug-07Sep-07Oct-07Nov-078-Jan8-Jun8-OctGoldmanMerrillCitigroupBear Stearns