Running head: BUSINESS ESSAY
Legal, Ethical, and Technical Concerns
In the Financial Reporting of Businesses
There cannot be a complete discussion regarding the legal, ethical, and technical concerns of the accounting and financial reporting of business without examining the responsibilities of the professionals involved in such reporting. As the text states, such critical and sensitive information should be handled with a supreme sense of discretion, acumen, and sound judgment. When looking at the managerial as well as the financial accounting of such companies as the Big 8 energy firms, the major banks, and the Silicon Valley firms, the professionals retained by such firms are ...view middle of the document...
The conflict involved mortgage securities Goldman Sachs had pushed on clients as sound investments, while selling these same securities short in the secondary markets knowing these securities would fail. On the face of the evidence presented, the scheme would all but bankrupt the clients, but bring in huge profits for Goldman Sachs. The security, created by the investment bank, was known as a synthetic collateralized debt obligation or CDO which Goldman Sachs called ABACUS 2007-AC1, or Abacus for short.
A CDO is similar to a collateralized mortgage obligation or CMO. A CMO is normally created by an investment bank from a large pool of individual mortgages just as a mutual fund is created from a pool of different company stocks and just as the mutual fund is broken up into units or shares of equal value, the CMO pool is broken up into similar shares of equal value. The key in picking the right mortgages to make up the CMO pool is simple; find mortgages (or debts) that have good payment histories and hence, have sound investment value. As the mortgage payments into the pool continue and the value of the underlying properties appreciate’ the value of the associated CMO shares increase as well. This is what the clients holding Abacus shares were lead to believe concerning their investment.
According to the SEC charges Goldman Sachs told investors the Abacus shares were chosen and managed by ACA Management LLC, a firm managing 22 CDO’s with close to $16 billion in assets. This is the crux of the fraud. The Abacus shares were chosen and managed by wealthy and powerful hedge fund manager, John Paulson. With an MBA from Harvard, a hedge fund that grew from $2 million to $12.5 billion in less than 15 years, and a personal net worth reported at around $6 billion, one would have the utmost confidence in any investment this individual made or managed. Unfortunately, according to the SEC filing, Mr. Paulson purposely researched and handpicked mortgages that were subprime and destined to fail. His accomplice was another Ivy Leaguer; an investment banker from Stanford University by the name of Fabrice Tourre.
The “Fabulous Fab” (as he is now known in the media) was Goldman Sachs’ point man for the Abacus shares. With his polished looks, charisma, wit, and impressive educational background (straight A student in one of the best schools in France as well as math student in one of the nation’s top universities) it was easy for him to woo wealthy and sophisticated clients into buying the shares. According to a Reuters web article, Mr. Tourre is the only Goldman Sachs principal named in the SEC complaint. (Steve Eder, 2010)
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Despite the fact that the Goldman Sachs fraud had a devastating impact on the mortgage industry as a whole, it was not the only cause of mortgage fraud with widespread ramifications affecting the entire industry. On June 17, 2010 a web article released by the associated press reported an investigation by the United States...