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http://ssrn.com/abstract=1747647
 
 

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Computerization and the ABACUS: Reputation, Trust, and Fiduciary Duties in Investment Banking


Steven Davidoff Solomon


University of California, Berkeley - School of Law

Alan D. Morrison


University of Oxford - Said Business School; University of Oxford - Merton College

William J. Wilhelm


University of Virginia - McIntire School of Commerce

January 24, 2011

Journal of Corporation Law, Forthcoming

Abstract:     
On April 16, 2010 the Securities and Exchange Commission (SEC) filed a civil complaint against Goldman Sachs in the U.S. District Court for the Southern District of New York. The complaint alleged that Goldman violated the anti-fraud provisions of the federal securities laws, in connection with a 2007 synthetic collateralized debt obligation (CDO) transaction, ABACUS 2007-AC1 SPV (ABACUS). Goldman agreed a $500 million settlement with the SEC on July 15, 2010. We analyze the ABACUS transaction and the SEC's complaint against Goldman Sachs in the context of recent technological changes within the investment banking market. Investment banking was historically a relationship-based business, sustained by reputationally intermediated tacit contracts. Recent advances in information technology and financial economics have codified many formerly tacit elements of investment banking. As a result, some investment banking deals are now transacted at arm's length, and rely more upon formal contracts; we argue that, for this type of deal, there is a stronger case for legal rules regulating the investment bank-counterparty relationship. However, some deals continue to be arbitrated by tacit rules and norms and, for these deals, legal rules are less appropriate, because it is very hard for a third party to ascertain tacit understandings made in the context of a long-lived relationship. An attempt to introduce legal rules into reputationally intermediated relationships may even impair the counterparties' ability to arrive at informal arrangements, and so to trade. The supervision of deals like ABACUS should therefore reflect the extent to which they are transactional or relational; we argue that in neither case is there justification for the application of legal rules or the gap-filling standard of fiduciary duties.

Number of Pages in PDF File: 25

Keywords: Fiduciary Duty, Reputation, Trust, Investment Bank, Securitization

JEL Classification: G24, G28, G30, K20

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Date posted: January 26, 2011 ; Last revised: April 10, 2012

Suggested Citation

Davidoff Solomon, Steven and Morrison, Alan D. and Wilhelm, William J., Computerization and the ABACUS: Reputation, Trust, and Fiduciary Duties in Investment Banking (January 24, 2011). Journal of Corporation Law, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1747647

Contact Information

Steven M. Solomon
University of California, Berkeley - School of Law ( email )
215 Boalt Hall
Berkeley, CA 94720-7200
United States
Alan Morrison (Contact Author)
University of Oxford - Said Business School ( email )
Department of Finance
Park End Street
Oxford OX1 1HP
United Kingdom
+44 18 6527 6343 (Phone)
+44 18 6527 6310 (Fax)
University of Oxford - Merton College
Merton Street
Oxford OX1 4JD
United Kingdom
+44 18 6527 6343 (Phone)
William J. Wilhelm
University of Virginia (UVA) - McIntire School of Commerce ( email )
Rouss & Robertson Halls, East Lawn
P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-924-7666 (Phone)
434-924-7074 (Fax)
HOME PAGE: http://gates.comm.virginia.edu/wjw9a/
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