Posted: September 18th, 2022
What is the purpose of a Stakeholder Register and how is it used? How can a project manager incorporate this tool into controlling the project?
Title: Managing Project Stakeholders
Authors: Tres Roeder
Publisher: John Wiley & Sons
Publication Date: 2013-04-22
One Page only
Let’s consider Case 10 (page 246 of our textbook 6th edition and attached), Goldman Sachs and its role in the subprime mortgage crisis that escalated a downward financial spiral. In particular, focus on question 4 (page 250) at the end of the case; “Do the ends justify the means in this case, as it turns out? Explain and offer evidence.” You have the benefit of hindsight, a rare commodity.
Case 10 Goldman Sachs:
Hedging a Bet and Defrauding Investors Securities Exchange Commission Charges Goldman Sachs On April 16, 2010, the Securities and Exchange Commission (SEC) charged Goldman Sachs & Co. and one of its vice presidents with defrauding investors. During this time, the U.S. economy was in a state of severe recession following the subprime mortgage crisis. Goldman Sachs was charged with defrauding investors by misstating and omitting key facts about a fi nancial product linked to subprime mortgages. The company had sold a fi nancial product to investors created by the hedge fund Paulson & Co., which had bet against the success of the product. This case details the actions leading to the largest- ever settlement paid by a Wall Street fi rm to the SEC. The ABACUS 2007- AC1 Product Development of the ABACUS 2007- AC1 product began in 2007. It was a collateralized debt obligation (CDO). CDOs are based on the per for mance of subprime residential mortgage- backed securities. Paulson & Co., one of the largest and most profi table hedge funds, approached Goldman Sachs and paid the fi rm to structure a deal in which Paulson & Co. would add the mortgage securities to their portfolio. The hedge fund took a “short position” against the ABACUS product and the mortgage securities, betting on residential mortgages to fail. Placing the securities in a CDO would temporarily hide the true value of the loans and mislead investors; and when the loans went into default, the price of the product would plummet. Those who bet against the CDO stood to make signifi – cant profi ts. On April 26, 2007, the transaction between Goldman Sachs and Paulson & Co. closed. Paulson & Co. paid Goldman Sachs $15 million to structure and market the ABACUS product. Paulson & Co. is one of the most profi table hedge funds in history, overseeing more than $32 billion in assets. Founded by John Paulson, a Harvard MBA graduate and one of the world’s wealthiest people, the hedge fund had earnings in the tens of billions in each of the most recent fi scal years. The majority of Paulson’s profi ts came from the collapse of the housing market. He predicted the billion- dollar write- downs of mortgage- backed securities and took advantage of that foresight. Paulson found subprime mortgages with adjustable rates in areas like California, Arizona, Florida, and Nevada— states that had experienced high increases in home prices that were severely infl ated and would drop signifi cantly. Goldman Sachs knew of Paulson & Co.’s strategic approach to the ABACUS 2007- AC1. In marketing the ABACUS product, Goldman Sachs stated that the securities were selected by ACA Management LLC. ACA was a reputable third party with experience in residential mortgage- backed securities. Investors were not informed that Paulson & Co. had also played a signifi cant role in selecting the 4 The Corporation and External Stakeholders 247 securities in the portfolio and that Paulson & Co. stood to benefi t if the ABACUS securities defaulted. ACA and the other investors, IKB Bank, were still responsible for due diligence regarding the investment. While Paulson & Co. engaged in the selection pro cess of the securities in the ABACUS portfolio, ACA analyzed and approved every security in the deal. ACA had the fi nal authority over the securities included in ABACUS. The fact that ACA, an objective third party, had the fi nal approval in the selection of the portfolio was important to investors. IKB, a German bank, stated that if it had known of Paulson & Co.’s role in the selection of the mortgagebacked securities and their intended short position, it would not have invested in the product. Goldman Sachs knew of the potential harmful consequences in selling the ABACUS product but chose to ignore the risks in favor of profi ts. CDOs were fi nancial products that hedge funds like Paulson & Co. could bet on with very little risk. Goldman Sachs was not the only fi rm to engage in the practice of creating CDOs. More than $250 billion of these products were sold into the market in the two years leading up to the U.S. fi nancial crisis. Many have speculated that a majority of these CDOs were deliberately designed to fail, similar to the ABACUS. The Case against Fabrice Tourre The man responsible for ABACUS was Fabrice Tourre. Tourre was a 31- year- old mid- level trader who’d been working at Goldman Sachs since 2001. Tourre foresaw the downfall of highly leveraged securities as early as 2005. He was one of the few who understood the complexity of the securities and saw an opportunity to help Goldman Sachs offset some of its impending losses. Tourre oversaw the ABACUS product from the beginning. He structured the transaction, marketed the product, and spoke directly with investors. With the knowledge that Paulson & Co. had designed ABACUS to fail, Tourre and Goldman Sachs chose not to disclose this information to investors. Tourre also misled the so- called third- party creators of ABACUS, ACA, into believing that Paulson & Co. had contributed approximately $200 million to the equity of ABACUS. Goldman Sachs again did not disclose that Paulson & Co.’s interests were contrary to ACA’s. Once the SEC lawsuit was fi led, Goldman Sachs very quickly distanced itself from Tourre; continually declined to comment on Tourre’s case; and even aided the SEC investigation of his actions. Tourre defended himself vigorously and claimed that he did not intentionally mislead investors. He stated that the marketing materials for ABACUS were incomplete and that additional information may have been needed. Many times, Tourre called himself “the Fabulous Fab.” When asked if he regretted his actions, Tourre’s only response was that he was “sad and humbled about what happened in the market.” Tourre’s actions received respect from Wall Street bankers and traders, who admired the way he foresaw the collapse in the housing market and, in turn, structured a lucrative deal for his client, Paulson & Co. In the banking industry, he was a legend. 248 Business Ethics The Downfall ABACUS was created in April of 2007. It received a AAA rating from both creditrating agencies, Moody’s and Standard & Poor’s. These agencies are never informed of the identity of the investors who participated in the deal. Due to the events surrounding the housing market bubble, the credit agencies’ ability to rate securities was called into question. During 2007, an internal conversation began within Moody’s to determine whether lower ratings should be issued on CDOs and other deals involving mortgage bonds or other assets. It was determined that more evidence was needed to prove any deterioration in the housing market. Other rating fi rms acted similarly, choosing to ignore the signs of an impending collapse and allowing many ABACUS- like structured deals to enter the market. By October 2007, 83% of the residential mortgage- backed securities in the ABACUS portfolio had been downgraded, and the remaining 17% were trending negative. By January 2008, 99% of the securities had been downgraded. The German Bank, IKB, investors into ABACUS 2007- AC1, allegedly lost more than $1 billion. In April 2010, the SEC fi led complaint charges against Goldman Sachs and Fabrice Tourre for the actions taken in structuring and marketing the ABACUS 2007- AC1. The SEC reported violations of section 17(a) of the Securities Act of 1933; section 10(b) of the Securities Exchange Act of 1934; and Exchange Act Rule 10b- 5. The SEC was seeking injunctive relief, disgorgement of profi ts, prejudgment interest, and fi nancial penalties. The chairman and CEO of Goldman Sachs, Lloyd Blankfein, spoke candidly and proclaimed that the day the suit by the SEC was fi led was “one of the worst days in my professional life.” The Settlement On July 15, 2010, Goldman Sachs entered into a settlement with the SEC, neither acknowledging any wrongdoing nor denying the SEC’s allegations. In a statement made by Goldman Sachs, the only admittance made by the fi rm was “that the marketing materials for the ABACUS 2007- AC1 transaction contained incomplete information. In par tic u lar, it was a mistake for the Goldman marketing materials to state that the reference portfolio was ‘selected by’ ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection pro cess and that Paulson’s economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.” The timing of the settlement announcement came only hours after the Senate had passed legislation to reform the U.S. fi nancial system. Many saw this as po liti cal posturing by the SEC and a message for the rest of the fi nancial industry. Goldman Sachs paid the SEC $550 million to settle the charges. It was the largest settlement ever paid to the SEC by a Wall Street fi rm. On the day the settlement was announced, Goldman Sachs’ stock price rose over 4%. The settlement agreement ended three months of uncertainty with the fi rm. Investors saw it as a positive step, noting that top management was kept intact. The $550- million 4 The Corporation and External Stakeholders 249 fi gure was far lower than the anticipated $1- billion estimate predicted by many analysts. In addition to the monetary settlement, Goldman Sachs was forced to make several internal changes. The fi rm was required to increase training for employees who deal with mortgage securities and increase oversight in the structuring and marketing of those securities. The settlement resulted in new industry- wide regulation. In its handling of Goldman Sachs, the SEC and its director of enforcement, Robert Khuzami, made it clear that the agency wanted to send a message not only to the fi rm, but to the entire industry. Follow- up Fabrice Tourre’s battle, however, did not stop there. As the New York Times stated, “Mr. Tourre was found liable in August  on six counts of civil securities fraud after a three- week jury trial in Lower Manhattan.” He has since fi led for a retrial (September 2013) because “there was a lack of evidence to support the jury’s decision on some counts and that evidence was not presented to the jury in other instances.” Tourre is still awaiting a judgment. Refl ections on Goldman Sachs and the ABACUS Product The economic environment is often one of the primary forces behind stakeholder decisions, as in this case. The way in which the economic climate is trending may be a predictor of many business decisions. This was undoubtedly the case in Goldman Sachs’ decision to structure, market, and sell CDOs. Goldman Sachs and Fabrice Tourre realized the impending collapse of the housing market and the resulting losses for the fi rm. Paulson & Co. also understood the economic climate and bet against the mortgage- backed securities that Goldman Sachs sold to investors. The government and legal environment also made it possible for Goldman Sachs to engage in unethical practices. The lack of transparency in marketing materials for the ABACUS product was not uncommon. Investment banks were not forced to disclose to rating agencies the investors in the product, nor were they required to identify the security selection pro cess. ACA, the objective third party, had the opportunity to review all the securities in the portfolio, as was their legal right, but because of the lack of a legal obligation for Goldman Sachs to disclose certain information, ACA was at a considerable disadvantage when it came time to evaluate many of the underlying assets in the portfolio. Corporate Crisis Management Phases An interesting aspect of the Goldman Sachs case was the reaction of the fi rm to the fi ling of the SEC lawsuit. The corporate social response stages in crisis management frameworks appropriately describe the experiences that characterized Goldman Sachs’ dealing with the lawsuit. During the “reaction” stage— when the crisis fi rst occurred— a fi rm is unsure of all the facts surrounding the crisis, but must look confi dent for its stakeholders. Goldman Sachs’ stock plummeted when word of the lawsuit hit Wall Street. CEO Lloyd Blankfein categorically 250 Business Ethics denied any wrongdoing, insisting that the charges were fraudulent. This led to the second stage, “defense,” when a fi rm’s reputation is at risk and speculation arises as to the future of the fi rm. In Goldman’s case, analysts were predicting billion- dollar fi nes and changes at the management level. The “insight” stage soon follows as a fi rm is forced to consider the fact that they may be at fault. To appease the SEC, Goldman Sachs not only conducted an internal review of the ABACUS product, but also of many similar products. This led to the fourth stage, “accommodation,” when a fi rm acknowledges wrongdoing, apologizes, and reassures the public of its stability. Goldman Sachs apparently turned trader Fabrice Tourre into a scapegoat, distancing itself from him and claiming that he had control over the ABACUS product. The fi rm also settled with the SEC for a record sum, but still far short of the predicted estimates. The SEC vowed to implement regulation that would increase transparency in the marketing of complex securities, and Goldman Sachs pledged to increase oversight in the structuring and selling of these securities. Goldman Sachs’ stock is higher at the time of writing than it was previous to the lawsuit. Questions for Discussion 1. Was Goldman Sachs just taking advantage of a situational opportunity in the marketplace in this case? Explain and justify your answer. 2. Who, if anyone, was to blame for the illegal actions taken in this case and why or why not? 3. Who paid and at what “price” for the fi nancial/economic and social costs of the transactions and results of transactions here? 4. Do the ends justify the means in this case, as it turns out? Explain and offer evidence. 5. What ethical and social responsibility lessons can you offer from this case and the aftermath? Explain
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