Presentation 1: Conflict on a trading floor And before a blind person you shall not put a stumbling block Leviticus, 19.
CASE (FIELD)
Conflict on a Trading Floor (A) by Joseph L. Badaracco Jr., Jerry Useem
Source: HBS Premier Case Collection
5 pages. Publication date: Oct 20, 1993. Prod. #: 394060-PDF-ENG
A junior salesperson on FirstAmerica Bank's trading floor is assisting a top salesperson, Linda, on a deal to finance the construction of a new cruise ship for Poseidon Cruise Lines. While the terms of the deal are being worked out, he realizes Linda has taken advantage of the Poseidon executives' unfamiliarity with complex financial structures to build an outrageously high profit margin into the deal. When the executives become suspicious of the prices FirstAmerica is quoting, Linda asks the protoganist to send them an intentionally misleading fax so that the deal will not be held up. Holding the personal belief that "before a blind man you shall not put a stumpling block," he does not know if he can bring himself to send the information.

Back ground:

One guy ( Mr. Big as assumed name ) had been worked on the FirstAmerica Bank’s main trading floor in New York, Specialized in cross-currency interest rate swaps as an assistant manager. March 1986

At work he worked with 3 vice president and especially Linda who has a extremely volatile and hot temper, but she was good at her work to pursuing new business, close the deal and ensuring that she received full credit for any profitable transactions.

On September 1986 he start working with Linda and get use to her style. Then start working with Poseidon Cruise Lines that deal with FirstAmerica’s Bank, mostly 20-30 million transaction. But the new deal to build the most luxury French cruise. The cost of Poseidon Cruise will be 700 million and over a five year period. And it is biggest transaction they ever do.

* Poseidon Unfamiliar with complex financial structures that will cause problem in soon future. Such challenge were happened to them 1. Provide the schedule of payment dates and amounts that comprised its bid for the project, and obligated to make these payment in francs, but in US corporation the cash flow were mostly in dollars. They are facing currency risk! 2. French government lend Poseidon in francs that lower that market value and think it could benefit Poseidon by borrow cheaply. 3. Non of CEO in Poseidon used to execute transaction in this size or complexity. And non of them worry about the possibility of hedging exchange several year in the future.

Transaction: Linda provided 3 main components to contract and Poseidon agreed by:

1. 10% of down payment at a time: $ 70 million of francs by state that FirstAmerica bank will provide best possible spot price this this purchase. 2. Every 3 months Poseidon must pay of equal monthly interest payment to the shipyard on the outstanding balance of purchase, Now FirstAmerica ank and Poseidon entered into a “cross-currency interest rate swap” convert francs to dollar 3. Principle payment were to be made at the end of the year 3 4 5, large individual payment which Linda proposed to hedge by having Poseidon purchase the francs from FirstAmerica Bank and locking in the future exchange rates.

Poseidon had look at alternative of term in contracts but Linda convinced that by having long term contract it will significantly save a lot money for Poseidon and fewer transaction to make. Convinced that the money is so large and could change entire francs in US and told Poseidon if they use many other bank it will be risk for them and get least money… Linda was a good liar.

The Question:
After a while he has aware of several issue that led him to question Linda how she do business:

1. she convince Poseidon not to talk with any other investment bank about the structure as to keep accuracy of pricing and fairness. Normally the cost of “slippage” would probably not exceed 10 basis point (1/10 of 1%) 2. The actual price that Linda quoted, she explain that the price different exist because of the credit risk oof dealing with corporate counterpart and liquidity.
She quoted 3 years for 12.80% , 5 years for 13.40% which is 80 basis point different which even much more that the current bond rate in France. Wow, it is the most profitable he ever seen. Which mean $ 12.5 million profit. And no clear reason why Poseidon agree but only they are lacked of experiences. Not end yet! Linda even stated that by agreed like that FirstAmerica Bank could profit $ 1.2 million.

The Dilemma ( The Story begin ) He performed some analysis and two executive was doubt that they would only quoted that high if the actual hovering in francs were going to be 12.5% to 13.50%

When he told Linda, she was visible shaken. And now she know she was in deep trouble. She went to see francs trader come back and told him to send the Telerate Page to Poseidon. ( Telerate was a widely used compter information service that list up to the moment in trading price and interest rate fror around the world).

The Telerate Page show: - He found up the section was for non-dollar bonds with trading restrictions, the French bonds were 10% government withholding tax if held by foreign investors, which mean $70million extra for Poseidon, plus $12,5 million quoted by Linda, plus the interest to the French government atleast another $ 70 million Poseidon would have gone into the deepest debt.

Linda should have call the executive or talk to them directly, but she ask him to do so… so she hand that paper to him and ask him to call the boss. When he start to place a call, he wondered if he could actually send the fax.

NO !!!!!!!
Mr. Big now confuse what to do, he was truly torn at that moment:
One side in his mind didn’t wand to send the fax because:

1. Linda was his direct superior, and her instruction had been very clear. It is important to respect that wishes and requests of the people in the higher position. 2. Even though he didn’t like Linda, but she was the one that interview him and ignore his lack of experience and bend the ruler to help him get the job, but now he use new experience to kill her??? 3. As an employee at the bank , he had responsibility to help his desk make as much money as possible, so how could he ignore this supreme cash ??? Linda bonus could have raise to $1 million, or $ 40,000 for him??? Poseidon transaction would also help bank show positive earning and get trust in future and many benefit for employers as well… 4. Finally and most important: he was just begun his new job, it could best potential for him to seen as a dedicated professional who could close deal and could be completely trust. To challenge the boss directly and losing extremely large money could end his career at FirstAmerica Bank. Yes, Perhaps…

He also have a moral and ethic in his mind to defend the first thought: 1. People should have an obligation to be honest, the basic honest is a crucial building block for an enjoyable and happy world. His religious back ground as a Jew, lie is prohibit, “ And before a blind person you shall not put a stumbling block” 2. The fax was his professional responsibility to the client. The bad deal for Poseidon Cruise could have kill them and it is too large to ignore. 3. Although might loose the contract but he believed that many senior FirstAmerica Bank would support the honest to the client and 4. It could have be a case study and benefit the company in the long run as well. It could become public knowledge that could have save many others.

The Conflict inside Trading Floor

As we can see, there are many participant in this game, Mr. Big is the person that could have make a big change but could he do it?

He went to talk to some people about the issue Linda had made:

Roger, Floor trader in the bank. He was a kind of person that did not take kindly to interference from junior salespeople. He responded “Hey, Whatever she wants to do, it’s her deal” he was aware of Linda’s issue and surprise that she would take such risk. He stand out as he think that Poseidon might have see the lost in that deal and back off.

Peter, the sale manager who has been appointed there as he work longest but not very aggressive trader as well as being a simple person who didn’t like to involve in something complicated. He was exercised very little control over salespeople like Linda as the deal of non US dollar was very complicated. Mr. Big got the feeling that Peter would not want to put him self in such a controversial situation. And asking to join the problem is not a good deal as well.

The Vice President, Mr. Big had seen him only once at a breakfast for new hires where he delivered a brief talk to 50 of them. For him, he felt that as a junior salesperson to approach him with the intention of “ blowing the whistle” on his boss would have been incredibly intimidating

Conclusion:

What did we learn from this case? 1. Global Business 2. Financial risk in global business 3. Misleading 4. Ethic/Moral of profession 5. Decision making

What could you do? Yes or No