What is Up with Wall Street?
The problem to be investigated is what are the responsibilities of an investment bank outside of the sphere of legal compliance and more towards an ethical imperative in dealing with its investors. Wall Street investment bank Goldman Sachs is by all accounts the most hated bank in America (Smith, 2012). The media has contributed to this opinion within society but Goldman Sachs documented business practices and ethical attitudes contribute to this opinion as well. In the period since the bank’s creation, Goldman reputation changed from being the bank that not everyone might like to the bank that everyone despises. In the bank’s history up to the 1990’s, their ...view middle of the document...
Grey Areas of Ethical Behavior
Layered investment Strategy
To gain a clear understanding the practices of Goldman and the public opinion they hold today, it is necessary to review some of the questionable ethical practices from their history. In the 1920’s, Goldman initiated and engaged in an investment practice known as a layered investment strategy. Under this investment strategy, Goldman created a new corporate entity the Goldman Sachs Trading Corporation and issued one million shares of stock valued at $100 per share. Goldman then purchased all the initial shares with its own money driving up the share price and demand. Goldman then sold ninety percent of those shares at $104 to the public. The act of purchasing its own shares continued to drive up the share price and Goldman continued to sell the inflated shares to the public.
The result of this practice was a pyramid of borrowed money, one built on the assets of the previous offering. The investors were unaware that the stacked offerings were at risk to a decline in performance in of the Goldman pyramid offerings. To illustrate the point, review the following example. You take a dollar and borrow nine against it; then you take that $10 fund and borrow $90; then you take your $100 fund and, so long as the public is still willing to lending, borrow and invest $900. If the last fund you created starts to lose value, you no longer have the money to pay back your investors in any of the funds, and everyone takes a monetary loss (Tabbi, 2009).
Any ethical analysis of this situation must account for the societal views of the time. During the 1920s, the concept of business ethics was in its infancy and in most cases a complete afterthought to business leaders of the time (Noe & Rebello, 1994). Still using the measure of “do the right thing” (Joyner & Payne, 2002), it is easy to see that this is a violation of that ethical credo. One cannot consider this as ethical as the initial intent of the layered investment strategy offerings was to create maximum profits for Goldman by creating false demand for a product whose price was artificially inflated to convince customers to invest. The long-term impact of these offerings did not consider the possible consequences to the investor’s initial equity position. Additionally Goldman never provided insight into the nature of the pyramid financing mechanism used to create these funds. The questionable financial creativity of this behavior appears to be the beginning of future ethically questionable behavior of the firm.
Internet Initial Public Offerings of the 1990’s
Goldman instituted the practice of laddering during the Internet stock bubble phenomenon of the middle to late 1990’s. Laddering is a practice where the Goldman underwriter requires the broker to buy additional shares of the Initial Public Offering (IPO) in the aftermarket. This requirement was a condition for receiving shares at the offer price and as an unethical practice inflates the...