David P. Baron
David discusses the case and the many questions it raises, including how sophisticated businesses such as Goldman Sachs should manage its relationships with less sophisticated clients and trading partners.
Preeminent firm
The case deals with a preeminent firm with a rich tradition, an enviable record of performance, and a strong reputation. It explores the crises that occurred during turbulent times and a developing financial crisis. The crises received extensive media coverage for an extended time and Goldman Sachs was frequently the focus of this attention, posing a risk to its reputation.
Immediate challenge
The immediate challenge for Goldman Sachs was to deal with the crises and repair its reputation, but the deeper challenge was to improve its relationships with clients and trading partners. The most interesting issue is what Goldman Sachs should assume about the sophistication of its clients and trading partners. If the business is trading, the players are in all likelihood sophisticated as is Goldman Sachs, and no additional disclosure duty is imposed on Goldman. Moreover, if the client is sophisticated, there may be no duty to disclose the role of John Paulson in selecting the securities to include in a collateralized debt obligation.
Riskier
 However, most purchasers of structured securities are not as sophisticated as Goldman Sachs. For example, is it right for Goldman to market securities, such as those designed by Fabrice Tourre, when it believes that they are riskier than they might appear to a less sophisticated client or trading partner? If, as with most institutional investors, they rely on the reputation of Goldman Sachs, should there be disclosure?
Ethics challenge
The most interesting ethics issue is what duty Goldman Sachs has to its variety of business partners and clients. This depends on Goldman’s role: is it, for example, acting as an issuer, a trader, or an agent working for a client?
Case writing tips
The main challenge when writing a case from published sources is to distinguish between the conflicting accounts and the advocacy of the players. To write a successful case, you must make sure it has a difficult issue or challenge that can generate a penetrating discussion rather than just being topical.
About the author
David P. Baron is the David S. and Ann M. Barlow Professor of Political Economy and Strategy, Emeritus at Stanford Graduate School of Business.
e dbaron@stanford.edu |
