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Ethical Analysis of the Actions of General Electric Capital Report (Assessment)

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Updated: Mar 29th, 2022

An analysis of the case reveals two distinct unethical actions on the part of GEC (General Electric Capital), the first involves intentional misinformation on the part of the company when it issued the first $11 billion long term debt to investors while the second unethical action was a gross lack of consideration for investors due to the sudden devaluation of the initial offering bought by them. When examining the subsequent actions of GEC immediately after issuing the initial $11 billion offerings it becomes obvious that from the start they were aiming to issue $61 billion in total debt and not just $11 billion. Given the period between the initial offering and the subsequent filling of the $50 billion long term debt it is highly unlikely that such an action was done on the spur of a moment since proper calculation and issuance would take more than just 3 days, thus it is apparent that the initial offering was utilized as a means of “testing the waters” so to speak to examine whether public demand for the long term debt would be substantial or not.

The inherent problem with such a method is that it punishes the first actors who take on the initial public offering since the value of the initial debt offered devaluates as a direct result of the second long-term debt issue (Florin & Simsek, 2007). The reason behind this is due to the increased risk involved with larger amounts of debt along with the possibility of default occurring due to the volatility of economic markets. The method utilized by GEC is unethical since not only does it devaluate the current holdings bought by the buyers but it places them in a situation where they accepted greater risk yet paid more to do so as compared to secondary buyers.

Another factor that should be taken into account in this particular case is the gross lack of consideration on the part of the company for the situation of investors. What must be understood is that investors base their decisions on investment from the perspective that companies will act in a rational manner that is conducive towards promoting their company as a good vehicle for investment. Investors take a considerable degree of risk when investing with a company and as such, it is only right that companies place the best interests of investors at the forefront of their operating principles. Such types of behavior are advocated by companies such as Convergys, which is a global leader in relationship management, as well as by billionaire investor Warren Buffet. In this particular case, GEC showed a total lack of consideration wherein through a lack of sufficient information given the result was investors taking on more risk than previously anticipated and seeing the result of their investment devaluate almost instantly as a direct result of the actions of the company. It is based on the examples provided that it can be stated with certainty that the actions of GEC were wholly unethical.

When examining the particulars of this case it does seem that the board made a financial rather than an ethical decision in light of the actions of Bernie Ebbers. What must be understood in this particular case is that the decision of the board to loan Ebbers the money was due to the possible stock sell-off that would have occurred if the banks had sold the stock of Ebbers. As seen in the particulars of the case presented it was noted that the price of WorldCom stock had sunk, if the bank had sold off the stock of Ebbers into the market this could have resulted in a possible freefall of the stock price especially when taking into consideration the fact that the stock itself came from the CEO of WorldCom. If the market had learned that the sudden sale of stocks had come from Ebbers this could have caused negative market speculation as to the current strength of WorldCom which would have devaluated the stocks of investors in the company. As such by ensuring that the issued stock to Ebbers does not cause any form of negative market speculation the decision made by the board can be considered sound. On the other hand, what should also be taken into consideration is the fact that the company and the board should not be liable for the financial problems of Ebbers. The $400 million loaned to Ebbers could have been utilized for expansion or other profitable ventures and as such represents a gross unethical decision on the part of the board even though it was done to protect the current price of WorldCom shares in the market.

Reference

Florin, J., & Simsek, Z. (2007). The effects of moral hazard and adverse selection on the pricing and underpricing of initial public offerings. Venture Capital, 9(2), 127- 143.

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