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Advanced Corporate Finance: Goldman Sachs Add in library

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Question:

Identify and substantiate a conflict of interest in corporate finance (either a generic problem or through one relevant case study) and suggest solutions to address the issues it entails?
 
 

Answer:

Introduction

In the modern business scenario, the major cause of concern for the business organizations is regarding the issue of conflict of interest with the management and the respective stakeholders in an effective manner. This conflict of interest generally arises with several issues of the investors and respective issues of the organization (Elali and Trainor, 2009). In addition to this, conflict of interest may arise due to the ineffective nature of information in an effective manner. This assignment deals with the case study of the organization Goldman Sachs and its issues of conflict of interest with the organization and its respective stakeholders.

Conflict of interest in Goldman Sachs and its issues

The organization Goldman Sachs has faced a major issue regarding their corporate decision of sub-prime securities. The organization purchased multiple amounts of housing securities from the financial market. All the given subprime products were turned into mortgage backed securities. They were hedging the total amount of mortgage funds and at the same time the investors purchased those securities. The investors of the organization purchased those funds and went into losses. This was mainly due to the lack of communication of information to the respective investors in an effective manner.  In addition to this, it can be deduced that the issue of conflict of interests arise in the given case as the management of the organization did not release any information to the public at large. Another major issue for the organization is regarding with the partnership with the hedge fund organization Paulson and Company. This organization took a short position with the respective mortgages product. This is the reason why the stocks of the organization dropped down below 13 percent. This was a possible blow for the investors as they suffer losses effectively. This was a conflicting interest on behalf of the management and the investors of the organization (Sec.gov, 2015)

It has been seen that in case of financial markets, the issue of conflict of interest arise due to the excessive rate of competition and similar kind of products in the respective market. Subprime products and different kinds of mortgage products are easily available in the market. Therefore, it is extremely easy for the investors if they go in favour of buying those hedge products from the financial securities market. In addition to this, it can be considered as an unethical behaviour on behalf of the management. It can be only opined that investment bankers Goldman Sachs successfully avoided several losses in the possible subprime crisis. However, it can be inferred that it is great unethical act of judgement on behalf of the organization to hedge against the funds of their respective investors. It can be only deduced the product of the housing mortgage funds can be considered as extremely new in the current market. However, it was extremely unethical on the part of Goldman Sachs to force and motivate their investors to buy those product against the given market portfolio in the respective market. In addition to this, the market portfolio of Abacus suffered the most in the US financial crisis. Such portfolio was backed by Goldman Sachs due to the household mortgage that was created in the market. The action of such hosing mortgage was settled by Security exchange market commission by suiting a file against the organization Goldman Sachs $550 billion. In addition to this, it can be deduced that the organization marketed this subprime product for their benefit. This was the major issue of conflict of interest between the stakeholders and the management of the organization (Helbaek et al. 2010). Another possible issue of that the organization Goldman Sachs is regarding flow of data and information. The organization also misleads its respective stakeholders regarding all the information of the subprime products. Goldman Sachs implemented the process of asymmetric information to induce their investors and stakeholders to buy the respective mortgage loan products. Another possible issue that can be a cause of concern is regarding the growing scale of economies of the respective financial markets. This can also be considered as a moral hazard on behalf of the respective organization (Helbæk, et al. 2010).

 

Possible solutions to address the issues of the organization

There are several possible solutions that can be recommended to the respected organization Goldman Sachs. In the first case, the organization is required to implement the process of press release to the respective stakeholders about all the possible operational activities of the organization. In addition to this, it can be also inferred that if the organization Goldman Sachs could have carried all its ethical activities in an effective manner, then, the possible issue related to the hedge funds activities could have been avoided. It is the part of ethical behaviour of the organization to inform their stakeholders about all the possible activities in an ethical manner. In addition to this, the organization must not use the process of asymmetric information to inform their respective stakeholders.

The organization Goldman Sachs also requires tightening the process of their conflict of interest with their respective shareholders and investors. The organization must not provide any misleading information to the respective stakeholders and investors about the possible hedge funds. Apart from this, it can be deduced that that the organization is not required tying up their business activities with any hedge fund organization like Paulson and Company. This is mainly because the funding structure of the organization will get diversified due to the respective structure of funding of market portfolio. In addition to this, it can be deduced that the organization is required to implement all the rules and regulations of ethical codes and standards in order to minimize the variances of conflict of interest (Ramirez, 2007)

If all the ethical codes, rules and regulations are applied in a systematic manner, then, all the information can be passed to the respective stakeholders in a systematic manner. On the other hand, the organization is required to measure and monitor all the business activities in an effective manner. If addition to this, it can be deduced that the management of Goldman Sachs needs to evaluate short term and long term business goals in terms of the respective hedge funds. However, in addition to this, the organization is required to built a trust or bonding among its respective stakeholders. If an effective trust and bonding is implemented by the organization, then, then the confidence of the stakeholders will increase and conflict of interest of the respective stakeholders can be minimized. On the contrary, if the organization fails to implement any supplementary process of codes and ethics within their system, then, the overall system will fail and several issues regarding conflict of interest will arise in an ethical manner. However, it is important for the business organization Goldman Sachs to address all the respective conflicts among their internal and external business environment (Ross, Westerfield and Jaffe, 2002). On the other hand, the organization is required to amend all the rules and regulations regarding their work ethics. All the regulations are also required to comply with the respective rules and regulations. With the help of this, then organization Goldman Sachs may avoid all conflicting issues with the required investors. In addition to this, the management of the organization may also restructure their organizational management system to navigate the issues of conflicts within their respective management.

Conclusion

From the above case study, it can be deduced that the issue of conflict of interest can be a case of concern for every business organizations like Goldman Sachs. The organization performed an unethical behaviour and was penalised for it. This is mainly because for the process of passing wrong information. Several recommendations has been suggested to the organization to minimize these problems.

 

References

Elali, W. and Trainor, T. (2009). Advanced corporate finance. Toronto: Pearson Addison Wesley.

Helbak, M., Lindest, S. and McLellan, B. (2010). Corporate finance. New York: McGraw-Hill.

Hillier, D. (2010). Corporate finance. London: McGraw-Hill Higher Education.

Mitchell, L., Cunningham, L. and Solomon, L. (1996). Corporate finance and governance. Durham, N.C.: Carolina Academic Press.

Ogden, J., Jen, F. and O'Connor, P. (2003). Advanced corporate finance. Upper Saddle River, N.J.: Prentice Hall.

Ramirez, J. (2007). Accounting for derivatives. Chichester: John Wiley & Sons.

Ross, S., Westerfield, R. and Jaffe, J. (2002). Corporate finance. Boston, Mass.: McGraw-Hill/Irwin.

Ross, S., Westerfield, R. and Jaffe, J. (2010). Corporate finance. New York: McGraw-Hill/Irwin.

Sec.gov, (2015). Press Release: Goldman Sachs to Pay Record $550 Million to Settle SEC Charges Related to Subprime Mortgage CDO; 2010-123; Jul. 15, 2010. [online] Available at: https://www.sec.gov/news/press/2010/2010-123.htm [Accessed 14 Jun. 2015].

Wood, S. and Mador, J. (2013). Uncapping Conflict of Interest?. Science, 340(6137), pp.1172-1173.

 
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