A v Normal No Spacing Heading 1 Heading 2 --------Whilt prilaisiai? Is.lf.'it price "w of their review, Yem i'lod B.llph discIyen:d what Vera called "Interesting busint's practices" in billing. Ellt sXJnlpes, (indy, billed all of her computer time to :\11 "cost-plus" customers. These Ctistomers had contracts in which they dereed to p.1 Y all caterin-costs plus attain placentare profit for CCC In one month, Cindy recovered, 11.1 of her computer lime frum iiEx'ell customers. Cinly billed full "kitchen time" to the JC cost-plus customers. Kitchen limete in overhead amount for kitchen facilihes.computed on a per day or per hour btlsi For Txuple, if a dmncr preparation takes a full day, Cindy bills th-Cushmw.file-me-thirtieth oth-monthly anst of her kitchen facilities. Hower. It Hould be was for Cindy to tiewste the kitchen solely to alle cllstomer fin mallYcassthe same dinner is prepared l'im Il.timeously for eight to tell customers. All the (LJStamt>(S. txould be billed for) fut dy Cindy "Is tomer chose il-soda "endor and paid the landar directly, but Cindy's bill to those CuStomers siell included charges for soda When Vera asked Gnd-1 about these bills for soda, Cmd enlibusines-Discussion Questions 1. Evaluate all of Cindy's billing practices from an afountipe perspective 2. Evaluate all of Cinds billing practicEs from an ethical perspective 3. Cindy claims she is just following industry practice Is this a el.Per moral stand for her Qeration 4. Could Cindy's practices pro..HOSLy in the future? 5- If you were Vera, what would you do? CASE 5.12: SALOMON BROTHERS AND BONO PRICING Before the summer of 1991, Salomon Brothers, an investment banking fim founded in 1911, was the most powerful dealer on Wall Street in the $2.3 Inllion L S government bond market. Bond market regulations protbit any finn from acquiring more than 35 percent of the Treasury notes ilad bonds at government auctions. This 35 percent rule." Is It is known, exists to prevent one fimm (rom buying enough of the market to unilatefillly dictate the prices of the insumt'ats. On August 9. 1991. Salomon annoull a cold, hard look at: Do the intermediaries, the people who stand behind the Treasury and the ultimate purchasers of these bonds, have too much power"Zs For some time, primary dealers like Salomon had been advising the Treasury on how to run the market. Tlle dealers could comer the market as follows: 1. The firm puts in a bid for its maximum 35 percent share of the government bonds being auctioned. To ensure that the bid is accepted, it is made slightly above the going price of the bonds already being quoted in the "when issued" market 2. The firm simultaneously puts in a bid, at a similarly high price, for more bonds on behalf of its major customers. 3, The bids are accepted by the Treasury Department. 4. In a prearranged transaction, the firm purchases at cost the bonds it bought on behalf of its customers. When the fion has enough bond-to control thi' supply, it has cornered the market. 5. When other bond dealers want to buy the bonds, perhaps to coxershort positions (bandshey, sold that they did not own), the fim can name its pricey Up unt the trading scandal broke, Salomon had the lop profits of all the Wall Street hems: $451 million for the first half of 1991. At the scandal broke, Salomon's stock went from 536 persbace in August to S23 by the end of September. l\ 30 percent drop. Clients of Salomon began looking elsewhere. By mid-September, Maryland's S13 billion state pension fund was talking with Goldman Sachs and other fins Salomon sold S40 billion in securities between May 1991 and September 1991, reducing its assets to $105 billion. 5 Jomon's accounting reserves for litigation by Treasury investors, Salomon shareholders, and competitors were estimated at $1 billion, or one-third of Salomon-net worth Salomo ook a conservative $200 million reserve in October, with the resulting reduction.in earnings in what was otherwise a banner year. Warren E. Buffet, whose firm owned $700 million in Salomon Olwertible shares, wa-nAlned interim chairman of the dealer in August 1991. He went before the Hou-Submittee on Teles"left Milny.PL.1-es Reeling: Wall $1",/ Jellmalt 31 DIY and the Fed Uwe Long CNC 11'1 to 'Primary Deater" Walt Simlllmllll 25 Senthe 1991. Al. 16. Get Wel's I'I "L. "The Salomon Shocker How Bad Will Il Gel B-We Wol. U Aug-Lisi 1911,547. UNIT FIVE SUSINESS AND ITS COMPETITION 112 by the fim. His I.2timans, indi....ted Sildomoll had $10.6 billion, (Jr 9. DEG! busines-Discussion Questions 1. Evaluate all of Cindy's billing practices from an afountipe perspective 2. Evaluate all of Cinds billing practicEs from an ethical perspective 3. Cindy claims she is just following industry practice Is this a el.Per moral stand for her Qeration 4. Could Cindy's practices pro..HOSLy in the future? 5- If you were Vera, what would you do? CASE 5.12: SALOMON BROTHERS AND BONO PRICING Before the summer of 1991, Salomon Brothers, an investment banking fim founded in 1911, was the most powerful dealer on Wall Street in the $2.3 Inllion L S government bond market. Bond market regulations protbit any finn from acquiring more than 35 percent of the Treasury notes ilad bonds at government auctions. This 35 percent rule." Is It is known, exists to prevent one fimm (rom buying enough of the market to unilatefillly dictate the prices of the insumt'ats. On August 9. 1991. Salomon annoull a cold, hard look at: Do the intermediaries, the people who stand behind the Treasury and the ultimate purchasers of these bonds, have too much power"Zs For some time, primary dealers like Salomon had been advising the Treasury on how to run the market. Tlle dealers could comer the market as follows: 1. The firm puts in a bid for its maximum 35 percent share of the government bonds being auctioned. To ensure that the bid is accepted, it is made slightly above the going price of the bonds already being quoted in the "when issued" market 2. The firm simultaneously puts in a bid, at a similarly high price, for more bonds on behalf of its major customers. 3, The bids are accepted by the Treasury Department. 4. In a prearranged transaction, the firm purchases at cost the bonds it bought on behalf of its customers. When the fion has enough bond-to control thi' supply, it has cornered the market. 5. When other bond dealers want to buy the bonds, perhaps to coxershort positions (bandshey, sold that they did not own), the fim can name its pricey Up unt the trading scandal broke, Salomon had the lop profits of all the Wall Street hems: $451 million for the first half of 1991. At the scandal broke, Salomon's stock went from 536 persbace in August to S23 by the end of September. l\ 30 percent drop. Clients of Salomon began looking elsewhere. By mid-September, Maryland's S13 billion state pension fund was talking with Goldman Sachs and other fins Salomon sold S40 billion in securities between May 1991 and September 1991, reducing its assets to $105 billion. 5 Jomon's accounting reserves for litigation by Treasury investors, Salomon shareholders, and competitors were estimated at $1 billion, or one-third of Salomon-net worth Salomo ook a conservative $200 million reserve in October, with the resulting reduction.in earnings in what was otherwise a banner year. Warren E. Buffet, whose firm owned $700 million in Salomon Olwertible shares, wa-nAlned interim chairman of the dealer in August 1991. He went before the Hou-Submittee on Teles"left Milny.PL.1-es Reeling: Wall $1",/ Jellmalt 31 DIY and the Fed Uwe Long CNC 11'1 to 'Primary Deater" Walt Simlllmllll 25 Senthe 1991. Al. 16. Get Wel's I'I "L. "The Salomon Shocker How Bad Will Il Gel B-We Wol. U Aug-Lisi 1911,547. UNIT FIVE SUSINESS AND ITS COMPETITION 112 by the fim. His I.2timans, indi....ted Sildomoll had $10.6 billion, (Jr 9. DEG!