Ethical Analysis of the Goldman Sachs Abacus Deal

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In assessing the ethical issues surrounding the Goldman Sachs Abacus controversy, there are several factors that must be taken into consideration. Despite John Paulson playing a limited role in the ultimate construction of the CDO by having a hand in the asset composition selection process, as well as Goldman’s lack of disclosure in excess of the law, it is important to recognize that the counterparties to the CDSs were sophisticated investors. As sophisticated investors, making large speculative bets on derivatives, due diligence and comprehensive assessment of the risks associated with their investments is their responsibility. Additionally, being investors of this caliber, ACA and IKB presumably should have been knowledgeable about the financial instruments in which they were investing, the transactional process, and the scenarios that would result in gains or losses. As presented in both the study and the SEC’s suit, the underlying issue at the core of the controversy was the fact that Goldman was selling CDSs that they believed would fail; however, it is frequently argued and I challenge that Goldman was solely an intermediary in the transaction, as all parties involved were aware that whenever there is a long position, there is a short position on the other side of the bet. As highlighted in Davidoff’s article, it appears Goldman’s marketing materials for the notes addressed the limited transparency. The offering documents explicitly said that they were not acting as investment advisors, that there were “potential conflicts of interest,” and that they had some opposing positions open for hedging purposes. Paulson and investors met on multiple occasions with no oversight by Goldman, which to me reflects negligence on behalf of the investors, as they had both sufficient personal interaction with the counterparty and all the data necessary to make a sound investment decision at their disposal. Therefore, in regards to the ethics of the deal from Goldman’s end,...
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