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The Case Of Goldman Sachs's Conflict Of Interests

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“Goldman Sachs marketed four sets of complex mortgage securities to banks and other investors, but failed to tell them the investments were very risky. In addition, the bank did not mention that it was itself betting that the investments' value would fall, indicating it sold products to clients it did not believe in backing itself”( bbc.co.uk). Publication of BBC News on April 14, 2011 reported a conflict of interest between Goldman Sachs and its clients. Two years earlier, in 2009, “The New York Times” claim that Goldman Sachs created and petted complex securities known as "synthetic collateralized debt obligations, or CDO's", while at the same time they bet against them (nytimes.com). There are also similar cases, “Adelphia Communication …show more content…

The first question that should be answered is, whether a shareholder could leave an invested capital without controlling on an investment advisor, giving him full authority to place it wherever he believes that it would have a greater profit. Certainly this practice could fail for two basic reasons, the moral hazard and adverse selection. …show more content…

There are cases in which the investor (shareholder, customer, etc.) selects a consultant who has not the ability to understand his needs and he is not deliver his requirements, this could be happen because of the investor has lack of information or disinformation, hence, insiders have private information about exogenous variables which is not well known to all interrelated business partners, this asymmetric information category is known as adverse selection. There are also cases in which company's insiders deliberately mislead their clients-investors for their own interest. In that case the interests of both sides are conflicted and eventually the one with better information wins, this case is called moral hazard. (Baker W. 2010) These two aforementioned concepts of the moral hazard and adverse selection, cause the asymmetric information and agency gap. The asymmetric information and agency gap describe the information gap between departments within a firm, as well as the gap between business and customers. (Rathmell A.

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