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Foreword xiiiSherron 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 Index