During the real estate bubble from 2001 to 2008, there was a rise in subprime mortgages with
an increase in poor quality loans, where homeowners defaulted on their loan obligations. In
2007, Goldman Sachs developed the ABACUS 2007-AC1 collateralized debt obligations (CDOs)
product for investors. The product derived its performance from the subprime mortgages used
as collateral (Weiss). A hedge fund company, Paulson & Co., struck a deal with Goldman Sachs,
in which Paulson & Co. would select the mortgage securities to be included in the CDOs used in
the ABACUS product. Paulson & Co. informed Goldman Sachs that the company would bet
against the CDO, forecasting a mortgage failure. By including the mortgage securities in the
CDOs, the value of the loans would remain hidden.
Goldman Sachs employed unethical practices by intentionally not disclosing to investors that
ABACUS was designed to fail. Despite knowing the negative consequences of selling ABACUS,
Goldman Sachs chose to ignore the risks and instead tried to profit from it. As a result of the
willful negligence, Goldman Sachs had to pay a massive settlement to the SEC and make
internal changes such as introducing oversight of securities. The financial crisis brought about
regulatory changes as well for more transparency (Weiss).
Goldman Sachs did not act ethically and chose not to disclose pertinent information to its
investors. The company prioritized profits over investing for financial freedom for investors.
Weiss, Joseph W. Business Ethics: A Stakeholder and Issues Management Approach. Berrett-Koehler
Publishers. Kindle Edition.