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Resisting Corporate Corruption, 3rd Edition

Book Description

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.

Table of Contents

  1. Cover
  2. Title page
  3. Copyright page
  4. Foreword
  5. Preface
  6. Note to Faculty: How to Use this Book
  7. Acknowledgements
  8. 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
        1. Natural Gas Pipelines in Crisis
        2. Considering the Options
        3. The Meeting with Internal Audit
        4. Author’s Note
        5. Notes
      2. Essay 1: How to Do an Ethics Case Study
        1. The Solution Framework: Defining the Ethics Issue
        2. Tactical Planning and Alternative Business Plans
        3. Personal Considerations
        4. A Final Word About Financial Control
      3. Case 2: Enron Oil Trading (B): An Opening for Enron Audit?
        1. Author’s Note
        2. Notes
      4. Essay 2: How a Corporation Becomes Corrupt
      5. Case 3: Enter Mark-to-Market: Exit Accounting Integrity?
        1. Jeff Skilling’s Association with Enron
        2. Serge Goldman Prepares to Meet Jeff Skilling
        3. Author’s Note
        4. Note
      6. Essay 3: Necessary Ammunition: Economic Rationales for Financial Control
        1. Financial Control at the Heart of Business Success: Personal Experience
        2. Summarizing the Controls/Business Success Intangibles
        3. The Economic Consequences of Sound Financial Control
        4. Notes
    2. Part 2: Business Struggles, Accounting Manipulations
      1. Case 4: Adjusting the Forward Curve in the Backroom
        1. Conversation with T.J. Malva
        2. Ethics Assessment and Tactical Options
        3. Author’s Note
      2. Case 5: Enron’s SPEs: A Vehicle too Far?
        1. Enron and Special Purpose Entity (SPE) Vehicles
        2. Chewco Investments
        3. Author’s Note
        4. Notes
      3. Case 6: Court Date Coming in California?
        1. California Decontrols Electricity
        2. Enron’s ‘Star Wars’ Gambits
        3. Political Fallout in California
        4. Enron Legal Investigates
        5. SR Produces a Legal Opinion
        6. Author’s Note
        7. Notes
    3. Part 3: Resisting Corruption at Enron
      1. Case 7: New Counsel for Andy Fastow
        1. Determining a Course of Action
        2. Author’s Note
        3. Notes
      2. Case 8: Nowhere to Go with the ‘Probability of Ruin’
        1. The Enron Companywide Risk Management Report
        2. Kaminski and LJM
        3. Meeting with Ben Glisan
        4. Elsewhere in Enron
        5. Author’s Note
        6. Notes
      3. Case 9: Lay Back … and Say What?
        1. Problems Deciding What to Say
        2. Skilling Decides to Call it Quits
        3. Assessing the Broader State of Enron
        4. Focusing on the Task at Hand
        5. Author’s Note
        6. Notes
      4. Case 10: Whistleblowing Before Imploding in Accounting Scandals
        1. Welcome Back; Now Meet the Raptors
        2. Pondering an Approach to Ken Lay
        3. A Decision to Go Forward
        4. Author’s Note
        5. Notes
      5. Essay 4: Resisting Corporate Corruption: The Enron Legacy
        1. Tactical Lessons for Internal Resistance
        2. Tactical Lessons for Taking Ethics Issues Outside the Firm
        3. Implications for the Financial Crisis Cases
      6. Essay 5: Underappreciated Origins of the Financial Crisis – A Personal Memoir
        1. Jack Bennett Shakes Up Wall Street
        2. Wall Street Restructures, Consolidates, and Innovates
        3. Trading Dominates Banking and Client Relations Change
        4. Prelude to Financial Crisis
  9. Section 2: The Financial Crisis Cases
    1. Part 1: New Business Models Undermine Standards and Controls
      1. Case 1: Seeking a Sustainable Business Model at Goldman Sachs
        1. Banking vs. Trading at Goldman Sachs
        2. Competitive Pressures Change Wall Street’s Business Model
        3. Embarrassment and Unprecedented Losses
        4. Hank Paulson Decides on a ‘Counter to Corzine’
        5. Author’s Note
        6. Notes
      2. Case 2: Juggling Public Policy, Politics and Profits at Fannie Mae
        1. Origins of a Conflicted Government Entity
        2. New Law, Politics and the ‘Housers’ Complicate Fannie Mae’s Mission
        3. Reconciling Wall Street Performance and ‘Affordable Housing’
        4. Beating Back the Privatizers
        5. Wall Street Mounts an End Run, and Fannie Lowers its Standards
        6. The Year 1998
        7. Guidance for Franklin Raines
        8. Author’s Note
        9. Notes
      3. Case 3: Should Countrywide Join the Subprime ‘Race to the Bottom?’
        1. Nature and Structure of the U.S. Mortgage Business, 1940–85
        2. Wall Street Develops Collateralized Mortgage Obligations (CMOs)
        3. ‘Subprime 1.0’ Temporarily Sobers the Market
        4. Countrywide’s Strategy in the 1990s
        5. AmeriQuest Launches a Subprime ‘Race to the Bottom’
        6. Mozilo Reconsiders Countrywide’s Subprime Strategy
        7. Author’s Note
        8. Notes
      4. Case 4: Subprime Heading South at Bear Stearns Asset Management
        1. Hedge Funds Develop on Wall Street
        2. Bear Stearns Forms its Own Hedge Funds
        3. Mortgage Market Trends and HGF Disclosure
        4. Financial Control Issues at HGF
        5. Cioffi and Tannin Respond to Growing Pressures
        6. February 2007: ELF Performance Turns Negative
        7. Matthew Tannin Considers His Response to Barclays Bank
        8. Author’s Note
        9. Notes
    2. Part 2: Consequences for Gatekeepers and Firms
      1. Case 5: Ratings Integrity vs. Revenues at Moody’s Investors Services
        1. RMBS/CDO Ratings: Kolchinsky Protests and is Transferred
        2. Moody’s Becomes a NRSRO
        3. Moody’s Culture Changes, and the Firm Goes Public
        4. Subprime Mortgage Debt: The Ratings Methodology Challenge
        5. The Subprime Market Begins to Unravel
        6. Summer 2008 – Moody’s Prepares to Resume Ratings
        7. Author’s Note
        8. Notes
      2. Case 6: Admission of Material Omission? Citigroup’s SIVs and Subprime Exposure
        1. Citibank’s Subprime Product Flow and its SIVs
        2. Citibank Structures and Launches Subprime SIVs
        3. Citibank’s SIVs Finesse the VIE Rules
        4. Conditions Worsen in the Mortgage and RMBS/CDO Markets
        5. Citibank Reports Second Quarter Results
        6. Third Quarter Events Hammer Citi’s Results
        7. Considering Citi’s 3Q Results and IR’s Proposed Pre-Announcement
        8. Author’s Note
        9. Notes
      3. Case 7: Facing Reputational Risk on Goldman’s ABACUS 2007-AC1
        1. From Subprime RMBS to CDOs to SCDOs
        2. Goldman’s Trading and its Clients, 2006–07
        3. Fabrice Tourre Constructs ABACUS 2007-AC1
        4. Tourre Prepares for the MCC ABACUS Review
        5. Author’s Note
        6. Notes
      4. Case 8: Time to Drop the Hammer on AIG’s Controls?
        1. Innovation and Controls on Wall Street
        2. Management and Controls at AIG
        3. Greenberg Takes a Fall for AIG’s ‘Cooked Books’
        4. AIG-FP Confronts a Subprime Market Decline
        5. FP Faces Collateral Calls on Subprime CDS
        6. Ryan and PWC Approach a Decision
        7. Author’s Note
        8. Notes
    3. Part 3: Financial Firms and Resisters
      1. Case 9: Write to Rubin? – Pressure on Underwriting Standards at Citigroup
        1. National City Bank Becomes a Giant Financial Conglomerate
        2. Citi Demolishes Glass-Steagall
        3. Organizational Challenges at Citigroup
        4. Growth and Controls within Citigroup’s Mortgage Operations
        5. Bowen Considers His Next Step – Write to Rubin?
        6. Author’s Note
        7. Notes
      2. Case 10: Lehman Brothers Repo 105
        1. Lehman Gets in Trouble
        2. Repo 105 to the Rescue
        3. Weighing Ethics, Career and Courses of Action
        4. Author’s Note
        5. Notes
      3. Essay 6: Wall Street and the Crisis – Causes, Contributions and Problems to Fix
  10. Section 3: The Post-Crisis Cases – Reforms, Resistance, Continuing Realities
    1. Part 1: The Dodd-Frank Act: A primer
      1. Case 1: Morgan Stanley Seeks a Sustainable Business Model after the Financial Crisis
        1. John Mack Returns, Big Trading Comes to Morgan Stanley
        2. Mack Guides Morgan Stanley into and Through the Financial Crisis
        3. Mack Analyzes the Financial Crisis and Revamps MS Compensation
        4. Mack Weights Strategic Alternatives for Morgan Stanley
        5. Author’s Note
        6. Notes
      2. Case 2: Back to the Future on Goldman Sachs Reputational Risk
        1. KMI Moves on El Paso
        2. El Paso Reacts and Goldman Faces its Conflicts
        3. The Business Standards Committee on Client Conflicts
        4. Blankfein Considers Goldman’s Options to Manage its El Paso-KMI Conflicts
        5. Author’s Note
        6. Notes
      3. Case 3: ‘Take Customer Cash to Survive?’ Compliance and Chaos at MF Global
        1. Client Protections and Segregated Accounts
        2. MF Global Courts an Illiquidity Crisis
        3. Corzine ‘Bets the House’ on Euro Sovereign Debt
        4. The Euro Sovereign Debt Crisis Hits
        5. Markets Begin to Close in on MFGI
        6. MFGI’s Final Week and a Decision on Segregated Accounts
        7. Author’s Note
        8. Notes
      4. Case 4: Fix the LIBOR Fix?
        1. LIBOR, its Fix Procedures, and Growth as a Global Benchmark
        2. LIBOR Fixing Flaws and Incentives to Manipulate
        3. London Banks Begin to Manipulate LIBOR Fixings
        4. The Bank of England Learns LIBOR is Being Manipulated
        5. The Financial Crisis Hits Barclays and LIBOR
        6. Tucker Considers His Messages for Barclays
        7. Author’s Note
        8. Notes
      5. Case 5: Too Big to Know What’s Going on at Banamex?
        1. Oceanografía Defrauds Banamex
        2. Managing the Global Financial Supermarket
        3. Corbat Confronts the Banamex Scandal in a Post-Financial Crisis World
        4. Author’s Note
        5. Notes
      6. Case 6: Take CitiMortgage to the Feds?
        1. CitiMortgage Ignores FHA Procedures
        2. Citi Fails to Fix its FHA Noncompliance Issues
        3. Hunt Meets Her Attorney
        4. Author’s Note
        5. Notes
      7. Case 7: Chipping Away at Dodd-Frank’s Volcker Rule?
        1. Proprietary Trading, Market-Making and the Volcker Rule
        2. What Happened in the Market?
        3. Considering an SEC Response
        4. Author’s Note
        5. Notes
      8. Essay 7: ‘And the Young Shall be Thrown Under the Bus’ – Lessons in Resisting Unethical Conduct from Enron Through the Financial Crisis
      9. Essay 8: Resisting Corporate Corruption, 2017 – Improved Conditions, Unresolved Issues
        1. Are the Reforms Enough? What Risks Remain Unaddressed?
        2. Resisting Corporate Corruption – 2016
        3. To Resist Corporate Corruption – One Thing Remains
  11. A Note on Blogs and Law Firms
  12. A Note on Sources
  13. Index
  14. The Financial Crisis Cases
  15. The Post-Financial Crisis Cases
  16. End User License Agreement