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
Index
