Resisting Corporate Corruption 3rd Edition, ISBN: 978-1119323747


Resisting Corporate Corruption: Cases in Practical Ethics From Enron Through The Financial Crisis, 3rd Edition, ISBN: 978-1119323747
[PDF eBook eTextbook]

594 Pages
Language: English
ISBN: 978-1119323747

Resisting Corporate Corruption teaches business ethics in a manner very different from the philosophical and legal frameworks that dominate graduate schools. The book offers twenty-eight case studies and nine essays that cover a full range of business practice, controls and ethics issues. The essays discuss the nature of sound financial controls, root causes of the Financial Crisis, and the evolving nature of whistleblower protections. The cases are framed to instruct students in early identification of ethics problems and how to work such issues within corporate organizations. They also provide would-be whistleblowers with instruction on the challenges they’d face, plus information on the legal protections, and outside supports available should they embark on that course. Some of the cases illustrate how ‘The Young are the Most Vulnerable,’ i.e. short service employees are most at risk of being sacrificed by an unethical firm. Other cases show the ethical dilemmas facing well-known CEOs and the alternatives they can employ to better combine ethical conduct and sound business strategy. Through these case studies, students should emerge with a practical toolkit that better enables them to follow their moral compass. Finally, the cases provide an in depth look at how a corporation becomes progressively corrupted (Enron), how the Financial Crisis was rooted in ethical decay at institutions as diverse as Countrywide, Goldman Sacks, Citigroup, Fannie Mae and Moody’s, and at the ethical challenges that persist in the post-Crisis, post-Dodd-Frank environment.

About the Author

Stephen V. Arbogast is Professor of Practice of Finance and Director of the Energy Center at the Kenan-Flagler Business School, University of North Carolina at Chapel Hill. From 2004-2014 he was Executive Professor of Finance at the University of Houston. From 1972-2004, he worked for ExxonMobil Corporation in various finance positions, serving overseas in Brazil and Thailand, and culminating as Treasurer of ExxonMobil Chemical Company. Since 2010 he has been a member of the Technical Review Panel of the National Renewable Energy Laboratory.

Table of contents

Foreword xiii
Sherron S. Watkins

Preface xvii

Note to Faculty: How to Use this Book xxi

Acknowledgements xxv

Section 1 The Enron Cases 1

Part 1 Demolishing Financial Control, Neutering the Gatekeepers 1

Case 1 Enron Oil Trading (A): Untimely Problems in Valhalla 3

Natural Gas Pipelines in Crisis 4

Considering the Options 6

The Meeting with Internal Audit 9

Attachment 1 Historical Recreation (HRC) 11

Attachment 2 13

Author’s Note 14

Notes 15

Essay 1 How to Do an Ethics Case Study 17

The Solution Framework: Defining the Ethics Issue 18

Tactical Planning and Alternative Business Plans 20

Personal Considerations 23

A Final Word About Financial Control 24

Case 2 Enron Oil Trading (B): An Opening for Enron Audit? 25

Author’s Note 26

Notes 26

Essay 2 How a Corporation Becomes Corrupt 27

Case 3 Enter Mark-to-Market: Exit Accounting Integrity? 31

Jeff Skilling’s Association with Enron 33

Serge Goldman Prepares to Meet Jeff Skilling 35

Author’s Note 43

Note 44

Essay 3 Necessary Ammunition: Economic Rationales

for Financial Control 45

Financial Control at the Heart of Business Success: Personal Experience 45

Summarizing the Controls/Business Success Intangibles 50

The Economic Consequences of Sound Financial Control 51

Notes 59

Part 2 Business Struggles, Accounting Manipulations

Case 4 Adjusting the Forward Curve in the Backroom 65

Conversation with T.J. Malva 66

Ethics Assessment and Tactical Options 68

Author’s Note 71

Case 5 Enron’s SPEs: A Vehicle too Far? 75

Enron and Special Purpose Entity (SPE) Vehicles 76

Chewco Investments 81

Author’s Note 90

Notes 92

Case 6 Court Date Coming in California? 93

California Decontrols Electricity 94

Enron’s ‘Star Wars’ Gambits 96

Political Fall-out in California 98

Enron Legal Investigates 98

SR Produces a Legal Opinion 99

Author’s Note 105

Notes 106

Part 3 Resisting Corruption At Enron 107

Case 7 New Counsel for Andy Fastow 109

Determining a Course of Action 111

Author’s Note 120

Notes 121

Case 8 Nowhere to Go with the “Probability of Ruin” 123

The Enron Companywide Risk Management Report 123

Kaminski and LJM 126

Meeting with Ben Glisan 128

Elsewhere in Enron 129

Author’s Note 138

Notes 138

Case 9 Lay Back … and Say What? 139

Problems Deciding What to Say 140

Skilling Decides to Call it Quits 141

Assessing the Broader State of Enron 143

Focusing on the Task at Hand 144

Author’s Note 153

Notes 154

Case 10 Whistleblowing Before Imploding in

Accounting Scandals 155

Welcome Back; Now Meet the Raptors 157

Pondering an Approach to Ken Lay 159

A Decision to go Forward 161

Author’s Note 169

Notes 171

Essay 4 Resisting Corporate Corruption: The Enron Legacy 173

Tactical Lessons for Internal Resistance 173

Tactical Lessons for Taking Ethics Issues Outside the Firm 177

Implications for the Financial Crisis Cases 179

Essay 5 Underappreciated Origins of the Financial Crisis –

A Personal Memoir 181

Jack Bennett Shakes Up Wall Street 182

Wall Street Restructures, Consolidates, and Innovates 185

Trading Dominates Banking and Client Relations Change 189

Prelude to Financial Crisis 191

Section 2 The Financial Crisis Cases Part 1 New Business Models Undermine Standards and Controls 195

Case 1 Seeking a Sustainable Business Model at Goldman Sachs 197

Banking vs. Trading at Goldman Sachs 199

Competitive Pressures Change Wall Street’s Business Models 201

Embarrassment and Unprecedented Losses 202

Hank Paulson Decides on a “Counter to Corzine” 204

Author’s Note 212

Notes 213

Case 2 Juggling Public Policy, Politics and Profits at Fannie Mae 215

Origins of a Conflicted Government Entity 216

New Law, Politics and the “Housers” Complicate Fannie Mae’s Mission 219

Reconciling Wall Street Performance and ‘Affordable Housing’ 221

Beating Back the Privatizers 222

Wall Street Mounts an End Run, and Fannie Lowers its Standards 223

The Year 1998 225

Guidance for Franklin Raines 225

Author’s Note 232

Notes 233

Case 3 Should Countrywide Join the Subprime “Race to the Bottom?” 235

Nature and Structure of the U.S. Mortgage Business, 1940–85 236

Wall Street Develops Collateralized Mortgage Obligations (CMOs) 238

“Subprime 1.0” Temporarily Sobers the Market 240

Countrywide’s Strategy in the 1990’s 241

Ameriquest Launches a Subprime “Race to the Bottom” 242

Mozilo Reconsiders Countrywide’s Subprime Strategy 243

Author’s Note 251

Notes 252

Case 4 Subprime Heading South at Bear Stearns Asset Management 253

Hedge Funds Develop on Wall Street 254

Bear Stearns Forms its Own Hedge Funds 255

Mortgage Market Trends and HGF Disclosure 258

Financial Control Issues at HGF 260

Cioffi and Tannin Respond to Growing Pressures 261

February 2007: ELF Performance Turns Negative 261

Matthew Tannin Considers His Response to Barclays Bank 262

What is a Hedge Fund? 264

Author’s Note 272

Notes 273

Part 2 Consequences For Gatekeepers and Firms

Case 5 Ratings Integrity vs. Revenues at

Moody’s Investors Services 277

RMBS/CDO Ratings: Kolchinsky Protests and is Transferred 278

Moody’s Becomes a NRSRO 280

Moody’s Culture Changes, and the Firm Goes Public 282

Subprime Mortgage Debt: The Ratings Methodology Challenge 284

The Subprime Market Begins to Unravel 285

Summer 2008 – Moody’s Prepares to Resume Ratings 287

Author’s Note 294

Notes 295

Case 6 Admission of Material Omission?

Citigroup’s SIVs and Subprime Exposure 297

Citibank’s Subprime Product Flow and its SIVs 298

Citibank Structures and Launches SubPrime SIVs 300

Citibank’s SIVs Finesse the VIE Rules 301

Conditions Worsen in the Mortgage and RMBS/CDO Markets 302

Citibank Reports Second Quarter Results 303

Third Quarter Events Hammer Citi’s Results 304

Considering Citi’s 3Q Results and IR’s Proposed

Pre-Announcement 305

Author’s Note 314

Notes 315

Case 7 Facing Reputational Risk on Goldman’s

ABACUS 2007-AC1 317

From Subprime RMBS to CDOs to SCDOs 319

Goldman’s Trading and its Clients, 2006–07 321

Fabrice Tourre Constructs ABACUS 2007-AC1 323

Tourre Prepares for the MCC ABACUS Review 324

Author’s Note 329

Notes 330

Case 8 Time to Drop the Hammer on AIG’s Controls? 331

Innovation & Controls on Wall Street 333

Management and Controls at AIG 336

Greenberg Takes a Fall for AIG’s “Cooked Books” 338

AIG-FP Confronts a Subprime Market Decline 340

FP Faces Collateral Calls on Subprime CDS 340

Ryan and PW Approach a Decision 342

Author’s Note 349

Notes 350

Part 3 Financial Firms And Resisters

Case 9 Write to Rubin? – Pressure on Underwriting Standards at Citigroup 353

National City Bank Becomes a Giant Financial Conglomerate 354

Citi Demolishes Glass-Steagall 355

Organizational Challenges at Citigroup 356

Growth and Controls within Citigroup’s Mortgage Operations 357

Bowen Considers His Next Step – Write to Rubin? 359

Author’s Note 371

Notes 372

Case 10 Lehman Brothers Repo 105 373

Lehman Gets in Trouble 374

Repo 105 to the Rescue 375

Weighing Ethics, Career and Courses of Action 377

Author’s Note 385

Notes 386

Essay 6 Wall Street and the Crisis – Causes, Contributions and Problems to Fix 387

Section 3 The Post-Crisis Cases – Reforms, Resistance, Continuing Realities

Part 1 The Dodd-Frank Act: A Primer

Case 1 Morgan Stanley Seeks a Sustainable Business

Model After the Financial Crisis 397

John Mack Returns, Big Trading Comes to Morgan Stanley 399

Mack Guides Morgan Stanley into and Through the

Financial Crisis 402

Mack Analyzes the Financial Crisis and Revamps MS Compensation 403

Mack Weights Strategic Alternatives for Morgan Stanley 405

Author’s Note 422

Notes 423

Case 2 Back to the Future on Goldman Sachs

Reputational Risk 425

KMI Moves on El Paso 426

El Paso Reacts and Goldman Faces its Conflicts 428

The Business Standards Committee on Client Conflicts 430

Blankfein Considers Goldman’s Options to

Manage its El Paso-KMI Conflicts 431

Author’s Note 440

Notes 442

Case 3 “Take Customer Cash to Survive?” Compliance and Chaos at MF Global 443

Client Protections and Segregated Accounts 444

MF Global Courts an Illiquidity Crisis 446

Corzine “Bets the House” on Euro Sovereign Debt 448

The Euro Sovereign Debt Crisis Hits 449

Markets Begin to Close in on MFGI 450

MFGI’s Final Week and a Decision on Segregated Accounts 451

Author’s Note 459

Notes 460

Case 4 Fix the LIBOR Fix? 461

LIBOR, its Fix Procedures, and Growth as a Global Benchmark 462

LIBOR Fixing Flaws and Incentives to Manipulate 463

London Banks Begin to Manipulate LIBOR Fixings 464

The Bank of England Learns LIBOR is Being Manipulated 465

The Financial Crisis Hits Barclays and LIBOR 466

Tucker Considers His Messages for Barclays 468

Author’s Note 475

Notes 476

Case 5 Too Big to Know What’s Going On at Banamex? 477

Oceanografia Defrauds Banamex 479

Managing the Global Financial Supermarket 480

Corbat Confronts the Banamex Scandal in a

Post-Financial Crisis World 484

Author’s Note 493

Notes 494

Case 6 Take CitiMortgage to the Feds? 495

CitiMortgage Ignores FHA Procedures 496

Citi Fails to Fix its FHA Non-Compliance Issues 497

Hunt Meets Her Attorney 499

Author’s Note 509

Notes 510

Case 7 Chipping Away at Dodd-Frank’s Volcker Rule? 511

Proprietary Trading, Market-Making and the Volcker Rule 512

What Happened in the Market? 514

Considering an SEC Response 515

Author’s Note 523

Notes 524

Essay 7 “And the Young Shall get Thrown Under the

Bus” – Lessons in Resisting Unethical Conduct from Enron Through the Financial Crisis 525

Essay 8 Resisting Corporate Corruption, 2016 – Improved Conditions, Unresolved Issues 531

Are the Reforms Enough? What Risks Remain Unaddressed? 536

Resisting Corporate Corruption – 2016 538

A Note on Blogs and Law Firms

A Note on Sources


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