Goldman Sachs was founded in 1869 with the humble purpose of being both an originator and a clearinghouse for commercial paper. Marcus Goldman, a German immigrant, founded the company along with his son-in-law, Samuel Sachs. The company's strategy was to provide loans for small businesses and then create a market for the loans through the sale of commercial paper. But the stodgy negotiable instruments market proved insufficient for attracting new talent, so the firm began a gradual drift from its founders' influence and its basic roots in tangible one-on-one business loans. In the late 1920s, Goldman undertook an investment strategy that would contribute to the 1929 market crash. Goldman launched the investment trust, a vehicle by which anyone could invest small or large amounts of money and hold shares in the trust, which then purchased a portfolio of stocks. The trust income then came from the returns on the stocks in the portfolio.

Prior to its becoming a publicly traded company at the time of the dot-com bubble, Goldman had been known for giving clients back their money if there was risk to reputation or relationship. In the 2000 s, however, something shifted as the market for mortgage-backed securities such as collateralized debt obligations (CDOs) grew exponentially. When Goldman entered this burgeoning market for financial instruments, it developed a different posture: a combination of defiance as well as "toes to the line" on legal issues. Goldman's October 2007 10Q reflected a shift for the firm from investment in CDOs to short sales, a bet against the mortgage-backed securities it continued to sell to its clients. "During most of 2007, we maintained a net short subprime (mortgage) position and therefore stood to benefit from declining prices in the mortgage market. \({ }^{393}\) Nobel laureate economist Joseph Stiglitz compares Goldman's business model to gambling and concludes, "Goldman's activity is of negative social value. Its recent profits came from trading, which basically amounts to profiting from insider information at the expense of others. \(\$ 94\)
In 2008, Goldman changed its status from investment bank to bank holding company, a change that brought it under the regulatory arm of the Federal Reserve Bank. At the time, Goldman indicated that it made the move because investors had lost faith in the ability of the SEC to regulate investment banks. However, the change did make Federal Reserve funds available to Goldman, the types of loans that carry \(0 \%\) interest and terms that carry no time limits. The easy availability of those funds allowed for substantial leveraging and even more expansion into the mortgage securitization market.
Diagrammatically, the structure of the CDO investment vehicles looks the same as the original 1920s model. The distinction was in the type of instrument. The financial model illustrated has not changed, nor has the risk. Because Goldman was at the foundation of all the corporations in the investment chain, any market or company misstep would cause the ripple effect and a market crash. In the 2008 stock market crash, Goldman received \(\$ 10\) billion in government funds in order to survive. \({ }^{.5}\) The CDO market is described in more detail in the "Toes-to-the-Line' Activities" section..........................

Discussion Questions 1. Go back through the case and make a list of each action or practice that could be called a gray area 2. Evaluate each of the actions or practires, using ethical analysis models other than the question "Is it legal?"
3. List all those who were affected by the Goldman gray areas you have found. Describe the impact of Goldman's strategies and products up and down the economic chain 4. What factors in the Goldman culture influenced the decisions of the employees, executives, traders and advisers?
5. During the April 2010 hearings on Goldman's CDO transactions, Senator Claire McCaskill said to Mr. Bankfein as he testified before Congress, "It feels like you guys are betting on the game you're playing," and securities law expert, Professor John Coffee, said, "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." 3 ?
The SEC complaint on the Goldman CDOs paints a picture of a company playing both sides of a dea even as it knew the hands both sides were playing Senator John Ensign, a senator from Nevada, was offended when other senators referred to Goldman's operations as akin to running a Las Vegas casino, because he said it was an insult to the casinos. Continuing the metaphor, Senator Ensign explained that Goldman was running the casino and using an eye-in-the-sky to figure out any hand played by its patrons. Gambling math does give the house a leg or two up anyway, but the SEC complaint paints a picture of investors never having a chance because the other side not only knew the hand they played but the other side, Goldman, was setting up the cards to be dealt and the nature of the deck before the game began Think back to the Albert Carr reading on ethics in business (Reading 2.3), and apply it to what happened in the CDO market. Was Goldman just bluffing, or did it have cards up its sleeve? Evaluate Mr. Blankfein's statement that Goldman does not have disclosure responsibilities to those who are "qualified" or "sophisticated" investors under SEC rules 6.Howard Chen, a banking analyst, issued these observations on the Goldman settlement: (1) He observed that there would be no management changes at Goldman and (2) said, "We do not anticipate any material long-term impact to the firm's client franchise." "' What concerns do you have about these perhaps very accurate observations about the settlement?
7.In one of his e-mails, Fabrice Tourre, who made \(\$ 1.7\) million in 2007 , the year of the Paulson deals, wrote, "... not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the US consumer with more efficient ways to leverage and finance himself, so there is a humble, noble, ethical reason for my job :) amazing how good I am in convincing myself." Describe his method of ethical analysis.