“INTEGRITY AND HONESTY ARE AT THE HEART OF OUR BUSINESS. We expect our people to maintain high ethical standards in everything they do, both in their work for the firm and in their personal lives.”  ~ Goldman Sachs Business Principles (here)

As many folks know from news reports following the aftermath of the financial crisis, Goldman Sachs was the poster child for Big Bank shenanigans.  Its rap sheet, which is laid out in lurid detail here, is, in the vernacular, “as long as your arm.”

Deserving of particular attention is the “Abacus” scam.   Abacus was the name of the junk investment Goldman sold its customers, while at the same time, disparaging it internally and betting against its success. Guess who made out like a bandit on that one?  Goldman, don’tcha know?  They were compensated when they packaged and sold the investment, and again when they shorted it.

You see, Goldman neglected to disclose to their Abacus investors that the hand-picked junk was selected by another client, John Paulson, who was making a $1B bet against that investment.  It was a sort of “reverse cherry-picking” selection process. Abacus was doomed to fail, and Goldman, who created it, got paid twice. Senator Carl Levin, Chairman of the Senate Committee investigating the financial crisis [perhaps the best resourced and comprehensive governmental report to date – PCQ], called Goldman’s actions “deceptive and immoral.”

According to a Reuters 2010 article (Factbox: How Goldman’s ABACUS Deal Worked) the SEC’s complaint laid out the scam as follows:

1) Hedge fund manager John Paulson tells Goldman Sachs in late 2006 he wants to bet against risky subprime mortgages using derivatives. The risky mortgage bonds that Paulson wanted to short were essentially subprime home loans that had been repackaged into bonds. The bonds were rated “BBB,” meaning that as the home loans defaulted, these bonds would be among the first to feel the pain.

2) Goldman Sachs knows that German bank IKB would potentially buy the exposure that Paulson was looking to short. But IKB would only do so if the mortgage securities were selected by an outsider.

3) Goldman Sachs knows that not every asset manager would be willing to work with Paulson, according to the complaint. In January 2007, Goldman approaches ACA Management LLC, a unit of a bond insurer.

ACA agrees to be the manager in a deal, and to help select the securities for the deal with Paulson. In January and February 2007, Paulson and ACA work on the portfolio, coming to an agreement in late February.

Goldman never tells ACA or other investors that Paulson is shorting the securities, and ACA believes that Paulson in fact wanted to own some of the riskiest parts of the securities, according to the complaint.

Goldman’s marketing materials for the deal never mention Paulson’s having shorted more than $1 billion of securities. Goldman receives about $15 million in fees.

Almost everyone who touched the scam lost except Goldman and Paulson.

Goldman paid $550 million to the Securities and Exchange Commission for this little stunt; but did not have to admit wrongdoing.

So it was with some puzzlement that I read the following article in the Wall Street Journal, titled “Goldman Firing About 20 Junior Staffers for Cheating on Tests.” Huh? I would think the cheaters would have been promoted, not fired.

Here’s the story, which is even more revealing: First, it seems these “tests” are little more than quizzes. They are about an hour long; they are not pass-fail; they don’t appear to be career determinants; and don’t seem to be much more than routine exercises, testing employee familiarity with policy and practice, and with little long-term consequence. In short, one has to ask: “Was it worth cheating over?”

After all, these “junior staffers” were not idiots in an industry where there were no barriers to entry. According to an October 16, 2015 Industry Insider post here:

For that analyst class, the investment-banking giant had more than 43,000 candidates apply for 1,900 analyst positions. The bank accepted 4% of them, making it harder to get a job at Goldman than to be accepted to Harvard University.

Interestingly, peer reaction to the firings seems slightly sympathetic to the cheaters. Here is one quote from the WSJ article:

Several current and former Goldman employees described the tests as annoying yet unavoidable chores left to the last minute. Nevertheless, analysts who failed to meet the deadlines or score well enough could risk drawing the ire of their supervisors, people familiar with the matter said. Sharing answers, those people said, became a routine way to save time during an often hectic workweek. (Emphasis added.)

Hmmm. So apparently, cheating on the little stuff is understandable after a tough work week.  And so what should we expect to happen when these budding big bankers have to take high-stakes regulatory licensing exams? Will they suddenly grow a conscience?

Am I surprised by this revelation?  Not really.  As they say, “The apple doesn’t fall far from the tree.” ~PCQ