Goldman Sachs

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The Goldman Sachs Group, Inc.
Type Public
Traded as NYSEGS
Dow Jones Industrial Average Component
S&P 500 Component
Industry Banking, Financial Services
Founded 1869 (1869)
Founder(s) Marcus Goldman,
Samuel Sachs
Headquarters 200 West Street,
New York, New York, U.S.
Area served Worldwide
Key people Lloyd C. Blankfein
(Chairman and CEO)
Gary D. Cohn
(President and COO)
Products Asset management, commercial banking, commodities, investment banking, investment management, mutual funds, prime brokerage
Revenue Decrease US$ 34.21 billion (2013)[1]
Operating income Increase US$ 11.737 billion (2013)[1]
Net income Increase US$ 8.040 billion (2013)[1]
Total assets Decrease US$ 911.50 billion (2013)[1]
Total equity Increase US$ 75.716 billion (2013)[1]
Employees 32,900 (2013)[1]
Website GoldmanSachs.com

The Goldman Sachs Group, Inc. is an American multinational investment banking firm that engages in global investment banking, securities, investment management, and other financial services primarily with institutional clients.

Goldman Sachs was founded in 1869 and is headquartered at 200 West Street in the Lower Manhattan area of New York City, with additional offices in international financial centers. The firm provides mergers and acquisitions advice, underwriting services, asset management, and prime brokerage to its clients, which include corporations, governments and individuals. The firm also engages in market making and private equity deals, and is a primary dealer in the United States Treasury security market. It is recognized as one of the premier investment banks in the world,[2][3] but has sparked a great deal of controversy over its alleged improper practices, including the loosening of financial industry underwriting guidelines which had been intact since the 1930s,[4] and in particular its actions since the 2007–2012 global financial crisis.[4]

Former Goldman executives who moved on to government positions include: Robert Rubin and Henry Paulson who served as United States Secretary of the Treasury under Presidents Bill Clinton and George W. Bush, respectively; Mario Draghi, President of the European Central Bank; Mark Carney, Governor of the Bank of Canada 2008–13 and Governor of the Bank of England from July 2013.

Contents

History[edit]

1869–1930[edit]

Goldman Sachs was founded in New York in 1869 by the German-born Marcus Goldman.[5][6] In 1882, Goldman's son-in-law Samuel Sachs joined the firm.[7] In 1885, Goldman took his son Henry and his son-in-law Ludwig Dreyfuss into the business and the firm adopted its present name, Goldman Sachs & Co.[8] The company made a name for itself pioneering the use of commercial paper for entrepreneurs and joined the New York Stock Exchange (NYSE) in 1896.[9] By 1898, the firm's capital stood at $1.6 million, and was growing rapidly.[9]

Goldman entered the IPO market in 1906 when it took Sears, Roebuck and Company public.[9] The deal occurred due to Henry Goldman's personal friendship with the owner of Sears, Julius Rosenwald.[9] Other IPOs followed, including F. W. Woolworth and Continental Can.[9]

In 1912, Henry S. Bowers became the first non-family member and non-Jew to become partner.[9]

In 1917, under growing pressure from the other partners in the firm due to his pro-German stance, Henry Goldman resigned.[9] Control of the firm was now in the hands of the Sachs family.[9]

Waddill Catchings joined the company in 1918.[9]

In 1920, the firm moved from 60 Wall Street to $1.5 million 12-storey premises on 30-32 Pine Street.[9]

By 1928, Catchings was the Goldman partner with the single largest stake in the firm.[9]

On December 4, 1928, the firm launched the Goldman Sachs Trading Corp. a closed-end fund. The fund failed during the Stock Market Crash of 1929, amid accusations that Goldman had engaged in share price manipulation and insider trading.[9] Fortunately for the firm, insider trading would not be made illegal in the United States until 1934.[9]

1930–1980[edit]

In 1930, the firm ousted Catchings, and Sidney Weinberg assumed the role of senior partner and shifted Goldman's focus away from trading and towards investment banking.[9] It was Weinberg's actions that helped to restore some of Goldman's tarnished reputation. On the back of Weinberg, Goldman was lead advisor on the Ford Motor Company's IPO in 1956, which at the time was a major coup on Wall Street. Under Weinberg's reign the firm also started an investment research division and a municipal bond department. It also was at this time that the firm became an early innovator in risk arbitrage.

Gus Levy joined the firm in the 1950s as a securities trader, which started a trend at Goldman where there would be two powers generally vying for supremacy, one from investment banking and one from securities trading. For most of the 1950s and 1960s, this would be Weinberg and Levy. Levy was a pioneer in block trading and the firm established this trend under his guidance. Due to Weinberg's heavy influence at the firm, it formed an investment banking division in 1956 in an attempt to spread around influence and not focus it all on Weinberg.

In 1969, Levy took over as Senior Partner from Weinberg, and built Goldman's trading franchise once again. It is Levy who is credited with Goldman's famous philosophy of being "long-term greedy", which implied that as long as money is made over the long term, trading losses in the short term were not to be worried about. At the same time, partners reinvested almost all of their earnings in the firm, so the focus was always on the future.[10] That same year, Weinberg retired from the firm.

Another financial crisis for the firm occurred in 1970, when the Penn Central Transportation Company went bankrupt with over $80 million in commercial paper outstanding, most of it issued through Goldman Sachs. The bankruptcy was large, and the resulting lawsuits, notably by the SEC, threatened the partnership capital, life and reputation of the firm.[11] It was this bankruptcy that resulted in credit ratings being created for every issuer of commercial paper today by several credit rating services.[12]

During the 1970s, the firm also expanded in several ways. Under the direction of Senior Partner Stanley R. Miller, it opened its first international office in London in 1970, and created a private wealth division along with a fixed income division in 1972. It also pioneered the "white knight" strategy in 1974 during its attempts to defend Electric Storage Battery against a hostile takeover bid from International Nickel and Goldman's rival Morgan Stanley.[13] This action would boost the firm's reputation as an investment advisor because it pledged to no longer participate in hostile takeovers.

John L. Weinberg (the son of Sidney Weinberg), and John C. Whitehead assumed roles of co-senior partners in 1976, once again emphasizing the co-leadership at the firm. One of their initiatives[14] was the establishment of 14 business principles that the firm still claims to apply.[15]

1980–1999[edit]

On November 16, 1981, the firm acquired J. Aron & Company, a commodities trading firm which merged with the Fixed Income division to become known as Fixed Income, Currencies, and Commodities. J. Aron was a player in the coffee and gold markets, and the current CEO of Goldman, Lloyd Blankfein, joined the firm as a result of this merger. In 1985 it underwrote the public offering of the real estate investment trust that owned Rockefeller Center, then the largest REIT offering in history. In accordance with the beginning of the dissolution of the Soviet Union, the firm also became involved in facilitating the global privatization movement by advising companies that were spinning off from their parent governments.

In 1986, the firm formed Goldman Sachs Asset Management, which manages the majority of its mutual funds and hedge funds today. In the same year, the firm also underwrote the IPO of Microsoft, advised General Electric on its acquisition of RCA and joined the London and Tokyo stock exchanges. 1986 also was the year when Goldman became the first United States bank to rank in the top 10 of mergers and acquisitions in the United Kingdom. During the 1980s the firm became the first bank to distribute its investment research electronically and created the first public offering of original issue deep-discount bond.

Robert Rubin and Stephen Friedman assumed the Co-Senior Partnership in 1990 and pledged to focus on globalization of the firm and strengthening the Merger & Acquisition and Trading business lines. During their reign, the firm introduced paperless trading to the New York Stock Exchange and lead-managed the first-ever global debt offering by a U.S. corporation. It also launched the Goldman Sachs Commodity Index (GSCI) and opened a Beijing office in 1994.

Also in 1994, Jon Corzine assumed leadership of the firm as CEO, following the departure of Rubin and Friedman.

Another momentous event in Goldman's history was the Mexican bailout of 1995. Rubin drew criticism in Congress for using a Treasury Department account under his personal control to distribute $20 billion to bail out Mexican bonds, of which Goldman was a key distributor.[16] On November 22, 1994, the Mexican Bolsa stock market had admitted Goldman Sachs and one other firm to operate on that market.[17] The 1994 economic crisis in Mexico threatened to wipe out the value of Mexico's bonds held by Goldman Sachs.

The firm joined David Rockefeller and partners in a 50–50 joint ownership of Rockefeller Center during 1994, but later sold the shares to Tishman Speyer in 2000. In 1996, Goldman was lead underwriter of the Yahoo! IPO and in 1998 it was global coordinator of the NTT DoCoMo IPO.

In 1999, Henry Paulson took over as Senior Partner.

Since 1999[edit]

One of the largest events in the firm's history was its own IPO in 1999. The decision to go public was one that the partners debated for decades. In the end, Goldman decided to offer only a small portion of the company to the public, with some 48% still held by the partnership pool.[18] 22% of the company was held by non-partner employees, and 18% was held by retired Goldman partners and two longtime investors, Sumitomo Bank Ltd. and Hawaii's Kamehameha Activities Assn (the investing arm of Kamehameha Schools). This left approximately 12% of the company as being held by the public. With the firm's 1999 IPO, Paulson became Chairman and CEO of the firm. As of 2009, after further stock offerings to the public, Goldman is 67% owned by institutions (such as pension funds and other banks).[19]

In 1999, Goldman acquired Hull Trading Company, one of the world's premier market-making firms, for $531 million. More recently, the firm has been busy both in investment banking and in trading activities. It purchased Spear, Leeds, & Kellogg, one of the largest specialist firms on the New York Stock Exchange, for $6.3 billion in September 2000. It also advised on a debt offering for the Government of China and the first electronic offering for the World Bank. In 2003 it took a 45% stake in a joint venture with JBWere, the Australian investment bank. In 2009 The Private Wealth Management arm of JBWere was sold into a joint venture with National Australia Bank. Goldman opened a full-service broker-dealer in Brazil in 2007, after having set up an investment banking office in 1996. It expanded its investments in companies to include Burger King, McJunkin Corporation,[20] and in January 2007, Alliance Atlantis alongside CanWest Global Communications to own sole broadcast rights to the all three CSI series. The firm is also heavily involved in energy trading, including oil, on both a principal and agent basis.

In May 2006, Paulson left the firm to serve as U.S. Treasury Secretary, and Lloyd C. Blankfein was promoted to Chairman and Chief Executive Officer. Former Goldman employees have headed the New York Stock Exchange, the World Bank, the U.S. Treasury Department, the White House staff, and firms such as Citigroup and Merrill Lynch.

Actions in the 2007–2008 mortgage crisis[edit]

During the 2007 subprime mortgage crisis, Goldman was able to profit from the collapse in subprime mortgage bonds in the summer of 2007 by short-selling subprime mortgage-backed securities. Two Goldman traders, Michael Swenson and Josh Birnbaum, are credited with being responsible for the firm's large profits during the crisis.[21][22] The pair, members of Goldman's structured products group in New York, made a profit of $4 billion by "betting" on a collapse in the sub-prime market, and shorting mortgage-related securities. By summer 2007, they persuaded colleagues to see their point of view and convinced skeptical risk management executives.[23] The firm initially avoided large subprime writedowns, and achieved a net profit due to significant losses on non-prime securitized loans being offset by gains on short mortgage positions. Its sizable profits made during the initial subprime mortgage crisis led the New York Times to proclaim that Goldman Sachs is without peer in the world of finance.[24] The firm's viability was later called into question as the crisis intensified in September 2008.

On October 15, 2007, as the crisis had begun to unravel, Allan Sloan, a senior editor for Fortune magazine, said:[25]

So let's reduce this macro story to human scale. Meet GSAMP Trust 2006-S3, a $494 million drop in the junk-mortgage bucket, part of the more than half-a-trillion dollars of mortgage-backed securities issued last year. We found this issue by asking mortgage mavens to pick the worst deal they knew of that had been floated by a top-tier firm – and this one's pretty bad.

It was sold by Goldman Sachs – GSAMP originally stood for Goldman Sachs Alternative Mortgage Products but now has become a name itself, like AT&T and 3M.

This issue, which is backed by ultra-risky second-mortgage loans, contains all the elements that facilitated the housing bubble and bust. It's got speculators searching for quick gains in hot housing markets; it's got loans that seem to have been made with little or no serious analysis by lenders; and finally, it's got Wall Street, which churned out mortgage "product" because buyers wanted it. As they say on the Street, "When the ducks quack, feed them."

On September 21, 2008, Goldman Sachs and Morgan Stanley, the last two major investment banks in the United States, both confirmed that they would become traditional bank holding companies, bringing an end to the era of investment banking on Wall Street.[26][27] The Federal Reserve's approval of their bid to become banks ended the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders, and capped weeks of chaos that sent Lehman Brothers into bankruptcy and led to the rushed sale of Merrill Lynch & Co. to Bank of America Corp.[28][29]

According to a 2009 BrandAsset Valuator survey taken of 17,000 people nationwide, the firm's reputation suffered in 2008 and 2009, and rival Morgan Stanley was respected more than Goldman Sachs, a reversal of the sentiment in 2006. Goldman refused to comment on the findings.[30]

TARP and Berkshire Hathaway investment[edit]

On September 23, 2008, Berkshire Hathaway agreed to purchase $5 billion in Goldman's preferred stock, and also received warrants to buy another $5 billion in Goldman's common stock, exercisable for a five-year term.[31] Goldman also received a $10 billion preferred stock investment from the U.S. Treasury in October 2008, as part of the Troubled Asset Relief Program (TARP).[32]

Andrew Cuomo, then Attorney General of New York, questioned Goldman's decision to pay 953 employees bonuses of at least $1 million each after it received TARP funds in 2008.[33] That same period, however, CEO Lloyd Blankfein and six other senior executives opted to forgo bonuses, stating they believed it was the right thing to do, in light of "the fact that we are part of an industry that's directly associated with the ongoing economic distress".[34] Cuomo called the move "appropriate and prudent", and urged the executives of other banks to follow the firm's lead and refuse bonus payments.

In June 2009, Goldman Sachs repaid the U.S. Treasury’s TARP investment, with 23% interest (in the form of $318 million in preferred dividend payments and $1.418 billion in warrant redemptions).[35] On March 18, 2011, Goldman Sachs acquired Federal Reserve approval to buy back Berkshire's preferred stock in Goldman.[36] In December 2009, Goldman announced their top 30 executives will be paid year-end bonuses in restricted stock, with clawback provisions, that must go unsold for five years.[37][38]

Use of Federal Reserve's Emergency Liquidity Programs[edit]

During the 2008 Financial Crisis, the Federal Reserve introduced a number of short-term credit and liquidity facilities to help stabilize markets. Some of the transactions under these facilities provided liquidity to institutions whose disorderly failure could have severely stressed an already fragile financial system.[39]

Goldman Sachs was one of the heaviest users of these loan facilities, taking out numerous loans from March 18, 2008 – April 22, 2009. The Primary Dealer Credit Facility (PDCF), the first Fed facility ever to provide overnight loans to investment banks, loaned Goldman Sachs a total of $589 billion against collateral such as corporate market instruments and mortgage-backed securities.[40] The Term Securities Lending Facility (TSLF), which allows primary dealers to borrow liquid Treasury securities for one month in exchange for less liquid collateral, loaned Goldman Sachs a total of $193 billion.[41]

Goldman Sachs's borrowings totaled $782 billion in hundreds of transactions over these months.[42] This number is a total of all transactions over time and not the outstanding loan balance. The loans have been fully repaid in accordance with the terms of the facilities.[43][44]

Apple corporate bond sale[edit]

In April 2013, Goldman Sachs Group Inc. together with Deutsche Bank led Apple's largest corporate-bond deal in Apple Inc.'s history.[45] The $17 billion offering, which was the largest bond sale on record,[46] was Apple’s first since 1996. Goldman Sachs managed both of Apple’s previous bond offerings in the 1990s.[46]

Twitter IPO[edit]

Goldman Sachs was the lead underwriter (lead left) for Twitter’s initial public offering in 2013. At the time, Goldman’s position as lead underwriter was considered “one of the biggest tech prizes around”.[47]

On November 6, 2013, the day before Twitter was to be first traded on the NYSE, Goldman Sachs, as the lead left bank, issued 70 million shares of Twitter priced at $26 per share.[48] Twitter’s shares closed on the first day of trading at $44.90 per share, up 73%. This gave Twitter a company valuation of about $31 billion.[49]

According to regulatory filings the underwriting banks received 3.25 percent of the $1.82 billion raised by Twitter’s IPO. That came to approximately $59.2 million which was shared among the underwriters, with the lead left bank, Goldman Sachs, receiving a larger, proportionate share. Of the 70 million shares offered on November 7 in Twitter’s IPO, Goldman Sachs was responsible for placing 27 million, entitling them to 39 percent of the entire fee pool, or about $22.8 million. Chief economist and strategist at ZT Wealth said, “Goldman being the first name on the S-1 has little to do with fees. This is about Goldman rebalancing itself as a serious leader and competing with Morgan Stanley’s dominant position in technology.”[50]

Corporate affairs[edit]

Goldman Sachs Tower, at 30 Hudson Street, in Jersey City.

As of 2013, Goldman Sachs employed 31,700 people worldwide.[37] In 2013, the firm reported earnings of $9.34 billion and record earnings per share of $160.66.[51] It was reported that the average total compensation per employee in 2006 was $622,000.[52] Also, the average compensation paid by Goldman, Sachs & Co. to each employee in the first three months of 2013 was $135,594.[53] However, these numbers represent the arithmetic mean of total compensation and is highly skewed upwards as several hundred of the top recipients command the majority of the Bonus Pools, leaving the median that most employees receive well below this number.[54]

In Business Week's recent release of the Best Places to Launch a Career 2008, Goldman Sachs was ranked No.4 out of 119 total companies on the list.[55] The current Chief Executive Officer is Lloyd C. Blankfein. The company ranks No.1 in Annual Net Income when compared with 86 peers in the Investment Services sector. Blankfein received a $67.9 million bonus in his first year. He chose to receive "some" cash unlike his predecessor, Paulson, who chose to take his bonus entirely in company stock.[56]

Investors have been complaining that the bank has near 11,000 more staffers than it did in 2005, but performances of workers were drastically in decline. In 2011, Goldman's 33,300 employees generated $28.8 billion in revenue and $2.5 billion in profit, but it represents a 25 percent decline in revenue per worker and a 71 percent decline in profit per worker compared with 2005. The staff cuts in its trading and investment banking divisions are possible as the company continues to reduce costs to raise profitability. In 2011, the company reduced its workforce by 2,400 positions.[57]

On April 30, 2002, Goldman Sachs Group Inc was charged because extended the fraud-on-the-market doctrine of Basic Inc. v. Levinson, and one of analysts' misrepresentations affecting the market price of securities.,[58] and paid $12,500,000 for settlement.

On July 15, 2003, Goldman Sachs & Co had a lawsuit for artificially inflating the RSL's stock price by issuing untrue or materially misleading statements in research analyst reports, and paid $3,380,000.00 for settlement.

Goldman Sachs is divided into three businesses units: Investment Banking, Trading and Principal Investments, and Asset Management and Securities Services.[59]

Organization[edit]

Investment banking[edit]

Investment banking is divided into two divisions and includes Financial Advisory (mergers and acquisitions, investitures, corporate defense activities, restructuring and spin-offs) and Underwriting (public offerings and private placements of equity, equity-related and debt instruments). Goldman Sachs is one of the leading M&A advisory firms, often topping the league tables in terms of transaction size. The firm gained a reputation as a white knight in the mergers and acquisitions sector by advising clients on how to avoid hostile takeovers, moves generally viewed as unfriendly to shareholders of targeted companies. Goldman Sachs, for a long time during the 1980s, was the only major investment bank with a strict policy against helping to initiate a hostile takeover, which increased the firm's reputation immensely among sitting management teams at the time. The investment banking segment accounts for around 17 percent of Goldman Sachs's revenues.[60]

The firm has been involved in brokering deals to privatize major highways by selling them to foreign investors, in addition to advising state and local governments – including Indiana, Texas, and Chicago – on privatization projects.[61]

Trading and principal investments[edit]

Trading and Principal Investments is the largest of the three segments, and is the company's profit center.[62] The segment is divided into four divisions and includes Fixed Income (The trading of interest rate and credit products, mortgage-backed securities, insurance-linked securities and structured and derivative products), Currency and Commodities (The trading of currencies and commodities), Equities (The trading of equities, equity derivatives, structured products, options, and futures contracts), and Principal Investments (merchant banking investments and funds). This segment consists of the revenues and profit gained from the Bank's trading activities, both on behalf of its clients (known as flow trading) and for its own account (known as proprietary trading).

On average, around 68 percent of Goldman's revenues and profits are derived from trading.[62] Upon its IPO, Goldman predicted that this segment would not grow as fast as its Investment Banking division and would be responsible for a shrinking proportion of earnings. The opposite has been true however, resulting in now-CEO Blankfein's appointment to President and Chief Operating Officer after John Thain's departure to run the NYSE and John L. Thornton's departure for an academic position in China.

Distressed-debt investment[edit]

In June 2013, Goldman Sachs's Special Situations Group, the proprietary investment unit of the investment bank, purchased a $863 million portion of Brisbane-based Suncorp Group Limited's loan portfolio.[63] The finance, insurance, and banking corporation is one of Australia's largest banks (by combined lending and deposits) and its largest general insurance group.[64] In 2013, distressed-debt investors, seeking investment opportunities in the Asia-Pacific region, particularly in Australia, acquired discounted bonds or bank loans of companies facing distressed debt, with the potential of profitable returns if the companies' performance or their debt-linked assets improves. In 2013, Australia was one of the biggest markets for distressed-debt investors in the region.[63]

Asset management and securities services[edit]

Goldman Sachs Headquarters, at 200 West Street, in Manhattan.

As the name suggests, the firm's Asset Management and Securities Services segment is divided into two components: Asset Management and Securities Services. The Asset Management division provides investment advisory and financial planning services and offers investment products (primarily through separately managed accounts and commingled vehicles) across all major asset classes to a diverse group of institutions and individuals worldwide.[65] The unit primarily generates revenues in the form of management and incentive fees. The Securities Services division provides clearing, financing, custody, securities lending, and reporting services to institutional clients, including hedge funds, mutual funds, and pension funds. The division generates revenues primarily in the form of interest rate spreads or fees.[65]

In 2009, the Goldman Sachs Asset Management hedge fund was the 9th largest in the United States, with $20.58 billion under management.[66] This was down from $32.5 billion in 2007, after client redemptions and weaker investment performance.[67][68]

On September 14, 2011, Goldman Sachs stated it was shutting down the Global Alpha fund, once the firm's largest hedge fund. The announcement followed a reported decline in fund balances to less than $1.7 billion in June 2011 from $11 billion in 2007. The decline was caused by investors withdrawing from the fund following earlier substantial market losses. The firm said it expected most of the fund assets to be liquidated by mid-October 2011.[69]

In September 2013, Goldman Sachs Asset Management announced it had entered into an agreement with Deutsche Asset & Wealth Management to acquire its stable value business, with total assets under supervision of $21.6 billion as of June 30, 2013.[70]

GS Capital Partners[edit]

GS Capital Partners is the private equity arm of Goldman Sachs. It has invested over $17 billion in the 20 years from 1986 to 2006. One of the most prominent funds is the GS Capital Partners V fund, which comprises over $8.5 billion of equity.[71] On April 23, 2007, Goldman closed GS Capital Partners VI with $20 billion in committed capital, $11 billion from qualified institutional and high net worth clients and $9 billion from the firm and its employees. GS Capital Partners VI is the current primary investment vehicle for Goldman Sachs to make large, privately negotiated equity investments.[72]

Major private equity assets[edit]

Predictions regarding emerging markets[edit]

In December 2005, four years after its report on the emerging "BRIC" economies (Brazil, Russia, India, and China), Goldman Sachs named its "Next Eleven"[74] list of countries, using macroeconomic stability, political maturity, openness of trade and investment policies and quality of education as criteria: Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, Turkey, South Korea and Vietnam.[75]

According to Thompson Reuters league table data, Goldman Sachs was the most successful foreign investment bank in Malaysia from 2011-2013. In 2013, the bank took a 21 percent market share in Malaysia's investment banking segment, double that of its nearest rival.[76]

Corporate citizenship[edit]

During 2001-2009, the Goldman Sachs Global Leaders Program (GSGLP) identified 1,050 exceptional undergraduate students from 100 participating universities and colleges around the globe, awarded them "Global Leaders" in recognition of their academic excellence and leadership potential. Global Leaders study a diverse range of fields from economics to medical science. GSGLP alumni have gone on to win Rhodes, Truman, Marshall, Gates and Cambridge scholarships and Fulbright Fellowships.[77]

Goldman Sachs has received favorable press coverage for conducting business and implementing internal policies related to reversing global climate change.[78] According to the company website, the Goldman Sachs Foundation has given $114 million in grants since 1999, with the goal of promoting youth education worldwide.[79]

The company also has been on Fortune Magazine's 100 Best Companies to Work For list since the list was launched in 1998, with emphasis placed on its support for employee philanthropic efforts.[80] The 2013 list cited the reason that the reported average annual compensation for an employee was more than $300,000.[81] In November 2007, Goldman Sachs established a donor advised fund called Goldman Sachs Gives that donates to charitable organizations around the world, while increasing their maximum employee donation match to $20,000.[82] The firm's Community TeamWorks is an annual, global volunteering initiative that in 2007 gave over 20,000 Goldman employees a day off work from May through August to volunteer in a team-based project organized with a local nonprofit organization.[83]

In March 2008, Goldman launched the 10,000 Women initiative to train 10,000 women from predominantly developing countries in business and management.[84]

In November 2009, Goldman pledged $500 million to aid small businesses in their newly created 10,000 Small Businesses initiative. The initiative aims to provide 10,000 small businesses with assistance – ranging from business and management education and mentoring to lending and philanthropic support. The networking will be offered through partnerships with national and local business organizations, as well as employees of Goldman Sachs.[85] In addition to Goldman CEO Lloyd Blankfein, Berkshire Hathaway's Warren Buffett and Harvard Business School professor Michael Porter will chair the program's advisory council.[84]

Goldman Sachs employees have been noted as highly loyal to their organization.[83][86]

In 2013, Goldman Sachs developed a “junior banker task force” of executives from around the world to improve analysts’ work environment and career development.[87]

Goldman underwrote and managed the Grand Parkway System Toll Revenue Bond for the Houston, Texas area in 2013. The bond was valued at $2.9 billion and was issued to finance the Grand Parkway System which will join suburban communities to major roads. The improved parkway system will insure that the Houston area will be able to accommodate what is the fastest growing metropolitan area in the country.[88][89]

Goldman invested $16 million to help build a 45,000 square-foot campus for 1,000 middle-school and high-school students in Lincoln Heights in Los Angeles for the Alliance College-Ready Public Schools charter system. The school opened in the fall of 2012.[90][91]

The CEO of the Global Impact Investing Network (GIIN), Luther Ragin, wrote in an article published in Investment Europe, that impact investing is meeting financial and philanthropic expectations, and that during 2014 Goldman Sachs sponsored a $250 million Social Impact Fund.[92] Returns on the fund, which will be launched by the Urban Investment Group, are linked to the success of a variety of projects with high social value, including affordable housing projects, pre-school education, and an educational project for prisoners designed to reduce recidivism.[93] Between 2001 and 2014 over $3 billion of Goldman Sachs capital has been utilized for impact investing.[94]

Social Impact Bonds[edit]

In August 2012, Goldman Sachs created the first social impact bond in the United States. The “bond” is actually a $9.6 million loan to support the delivery of therapeutic services to 16- 18-year-olds incarcerated on Rikers Island. The loan will be repaid based on the actual and projected cost savings realized by the New York City Department of Correction as a result of the expected decrease in recidivism.[95][96]

In June 2013, Goldman Sachs launched its second social impact bond. This bond is a loan of up to $4.6 million for a childhood education program in Salt Lake City, Utah. The United Way of Salt Lake said that the investment deal, by Goldman Sachs and J.B. Pritzker, could potentially benefit up to 3,700 children over multiple years and save state and local government millions of additional dollars.[97][98][99]

Regulatory bodies[edit]

Large American and European banks, including Goldman Sachs, Morgan Stanley, and Deutsche Bank are part of the Washington D.C.-based Institute of International Finance. They argued against Basel III claiming it would hurt them and economic growth. The OECD estimated that implementation of Basel III would decrease annual GDP growth by 0.05–0.15%,[100][101] blaming regulation as responsible for slow recovery from the late-2000s financial crisis.[100][102] Basel III was also criticized as negatively affecting the stability of the financial system by increasing incentives of banks to game the regulatory framework.[103] The American Banker's Association,[104] community banks organized in the Independent Community Bankers of America, and some of the most liberal Democrats in the U.S. Congress, including the entire Maryland congressional delegation with Democratic Sens. Cardin and Mikulski and Reps. Van Hollen and Cummings, voiced opposition to Basel III in their comments submitted to FDIC,[105] saying that the Basel III proposals, if implemented, would hurt small banks by increasing "their capital holdings dramatically on mortgage and small business loans."[106] Others have argued that Basel III did not go far enough to regulate banks as inadequate regulation was a cause of the financial crisis.[107] On January 6, 2013 the global banking sector won a significant easing of Basel III Rules, when the Basel Committee on Banking Supervision extended not only the implementation schedule to 2019, but broadened the definition of liquid assets.[108]

Tax Rate[edit]

Goldman Sachs expected in December 2008 to pay $14 million in taxes worldwide for 2008 compared with $6 billion the previous year, after making $2.3 billion profit and paying $10.9 billion in employee pay and benefits. The company’s effective tax rate dropped to 1% from 34.1% in 2007, due to tax credits and, according to Goldman Sachs, "changes in geographic earnings mix" thus reducing the company's tax obligation.[109][110] Many critics argue that the reduction in Goldman Sach's tax rate was achieved by shifting its earnings to subsidiaries in low- or no-tax nations. Goldman Sachs had 28 such subsidiaries at the time, including 15 in the Cayman Islands.[111]

Controversies[edit]

Goldman has been called "Wall Street's No. 1 dealmaker",[112] and the world's "best investment bank".[113] It has been described by business journalists Bethany McLean and Joe Nocera as the investment bank that "always seemed to be in the sweet spot of every market", so successful that it aroused the envy of other investment bankers.[114] In the 1980s its prestige was such that business school students thought of being hired by the firm "as the ultimate accomplishment", (according to Floyd Harris, the chief financial correspondent of the New York Times[115]), and "up to the 1990s", Goldman's reputation was "very high", to the point that "they were believed to be able to outperform everyone else in every way." (according to Suzanne McGee,[116] author of Chasing Goldman Sachs,[117])

But it has also been harshly criticized, particularly in the aftermath of the 2007–2012 global financial crisis where some alleged that it misled its investors and profited from the collapse of the mortgage market. That time -- "one of the darkest chapters" in Goldman's history (according to the New York Times[118]—brought investigations from the Congress, the Justice Department, and a lawsuit from the SEC[119][120]—to whom it agreed to pay $550 million to settle.[121] It was "excoriated by the press and the public" (according to journalists McLean and Nocera[122]) -- this despite the non-retail nature of its business that would normally have kept it out of the public eye.[123][124] Visibility and antagonism came from the $12.9 billion Goldman received—more than any other firm—from AIG counterparty payments provided by the New York Federal Reserve bailout; the $10 billion in TARP money it received from the government (though the firm paid this back to the government); and a record $11.4 billion set aside for employee bonuses in the first half of 2009.[125][126] While all the investment banks were scolded by congressional investigations, the company was subject to "a solo hearing in front of the Senate Permanent Subcommitee on Investigations" and a quite critical report.[123][127] In a widely publicized story,[128] Matt Taibbi in Rolling Stone characterized the firm as a "great vampire squid" sucking money instead of blood, allegedly engineering "every major market manipulation since the Great Depression ... from tech stocks to high gas prices"[128][129][130][131]

Goldman Sachs has denied wrongdoing. It has stated that its customers were aware of its bets against the mortgage-related security products it was selling to them, and that it only used those bets to hedge against loses,[132] and was simply a market maker. The firm also promised a "comprehensive examination of our business standards and practices", more disclosure and better relationships with clients.[133]

Goldman has also been accused of an assortment of other misdeeds, varying from a general decline in ethical standards,[134][135] working with dictatorial regimes,[136] cosy relationships with the US federal government, via a "revolving door" of former employees[137] insider trading by some of its traders,[138] and driving up prices of commodities prices through futures speculation.[139] Goldman has denied wrongdoing in these cases.

Sale of Dragon Systems to Lernout & Hauspie[edit]

In 2000, Goldman Sachs advised Dragon Systems on its sale to the Belgian company, Lernout & Hauspie. L&H later collapsed due to accounting fraud. Jim and Janet Baker, founders and together 50% owners of Dragon, filed a lawsuit against Goldman Sachs, alleging that the firm did not warn Dragon or the Bakers of the accounting problems of the acquirer, and that this led to the loss of their portion of the sale price of $580 million, which was paid entirely in the form of the acquirer's stock. On January 23, 2013 a federal jury rejected the Bakers’ claims and found Goldman Sachs not liable to the Bakers for negligence, intentional and negligent misrepresentation, and breach of fiduciary duty.[140]

Involvement in the European sovereign debt crisis[edit]

Goldman is being criticized for its involvement in the 2010 European sovereign debt crisis. Goldman Sachs is reported to have systematically helped the Greek government mask the true facts concerning its national debt between the years 1998 and 2009.[141] In September 2009, Goldman Sachs, among others, created a special credit default swap (CDS) index to cover the high risk of Greece's national debt.[142] The interest-rates of Greek national bonds have soared to a very high level, leading the Greek economy very close to bankruptcy in March and May 2010 and again in June 2011.[143] Lucas Papademos, Greece's former prime minister, ran the Central Bank of Greece at the time of the controversial derivatives deals with Goldman Sachs that enabled Greece to hide the size of its debt.[144] Petros Christodoulou, General Manager of the Public Debt Management Agency of Greece is a former employee of Goldman Sachs.[144] Mario Monti, Italy's former prime minister and finance minister, who headed the new government that took over after Berlusconi's resignation, is an international adviser to Goldman Sachs.[144] So is Otmar Issing, former board member of the Bundesbank and the Executive Board of the European Bank.[144] Mario Draghi, the new head of the European Central Bank, is the former managing director of Goldman Sachs International.[144] António Borges, Head of the European Department of the International Monetary Fund in 2010-2011 and responsible for most of enterprise privatizations in Portugal since 2011, is the former Vice Chairman of Goldman Sachs International.[144] Carlos Moedas, a former Goldman Sachs employee, is the current Secretary of State to the Prime Minister of Portugal and Director of ESAME, the agency created to monitor and control the implementation of the structural reforms agreed by the government of Portugal and the troika composed of the European Commission, the European Central Bank and the International Monetary Fund. Peter Sutherland, former Attorney General of Ireland is a non-executive director of Goldman Sachs International. These ties between Goldman Sachs and European leaders are an ongoing source of controversy.[144]

Ex-employee criticism[edit]

Greg Smith resignation letter[edit]

In his March 2012 resignation letter, printed as an op-ed in The New York Times, the former head of Goldman Sachs US equity derivatives business in Europe, the Middle East and Africa (EMEA) attacked the company's CEO and president for losing the company's culture, which he described as "the secret sauce that made this place great and allowed us to earn our clients' trust for 143 years". Smith said that advising clients "to do what I believe is right for them" was becoming increasingly unpopular. Instead there was a "toxic and destructive" environment in which "the interests of the client continue to be sidelined", senior management described clients as "muppets" and colleagues callously talked about "ripping their clients off".[134][135] In reply, Goldman Sachs said that "we will only be successful if our clients are successful", claiming "this fundamental truth lies at the heart of how we conduct ourselves" and that "we don't think [Smith's comments] reflect the way we run our business."[145] Later that year, Smith published a book titled Why I left Goldman Sachs.[146]

According to the New York Times’ own research after the Op-Ed was printed, almost all the claims made in Smith’s incendiary Op-Ed–about Goldman Sachs’s turned out to be “curiously short” on evidence. The New York Times never issued a retraction or admit to any error in judgment in initially publishing Smith’s Op-Ed.[147]

Steven Mandis criticism[edit]

In 2014 a book by former Goldman portfolio manager Steven George Mandis was published entitled What Happened to Goldman Sachs: An Insider’s Story of Organizational Drift and Its Unintended Consequences.[148][149] Mandis also has a PhD dissertation about Goldman at Columbia University. Mandis left in 2004 after working for the firm for twelve years.[150] Like Greg Smith, Mandis sees Goldman as morphing from client-focused to profit-focused during his time there. With nostalgia, Mandis laments the deterioration of a “culture of teamwork, integrity, a spirit of humility, and always doing right by our clients”.[150]

Cristina Chen-Oster and Shanna Orlich Lawsuit[edit]

In 2010, two former female employees filed a lawsuit against Goldman Sachs for gender discrimination. Cristina Chen-Oster and Shanna Orlich claimed that the firm fostered an "uncorrected culture of sexual harassment and assault" causing women to either be "sexualized or ignored". The suit cited both cultural and pay discrimination including frequent client trips to strip clubs, client golf outings that excluded female employees, and the fact that female vice presidents made 21% less than their male counterparts.[151]

California bonds[edit]

On November 11, 2008, the Los Angeles Times reported that Goldman Sachs had both earned $25 million from underwriting California bonds, and advised other clients to short those bonds.[152] While some journalists criticized the contradictory actions,[153] others pointed out that the opposite investment decisions undertaken by the underwriting side and the trading side of the bank were normal and in line with regulations regarding Chinese walls, and in fact critics had demanded increased independence between underwriting and trading.[154]

Personnel "revolving-door" with US government[edit]

During 2008 Goldman Sachs received criticism for an apparent revolving door relationship, in which its employees and consultants have moved in and out of high level U.S. Government positions, creating the potential for conflicts of interest. The large number of former Goldman Sachs employees in the US government has been jokingly referred to "Government Sachs".[137] Former Treasury Secretary Paulson was a former CEO of Goldman Sachs. Additional controversy attended the selection of former Goldman Sachs lobbyist Mark Patterson as chief of staff to Treasury Secretary Timothy Geithner, despite President Barack Obama's campaign promise that he would limit the influence of lobbyists in his administration.[155] In February 2011, the Washington Examiner reported that Goldman Sachs was "the company from which Obama raised the most money in 2008" and that its "CEO Lloyd Blankfein has visited the White House 10 times."[156]

Former New York Fed Chairman's ties to the firm[edit]

Stephen Friedman, a former director of Goldman Sachs, was named Chairman of the Federal Reserve Bank of New York in January 2008. Although he had retired from Goldman in 1994, Friedman continued to own stock in the firm. Goldman's conversion from a securities firm to a bank holding company in September 2008 meant it was now regulated by the Fed and not the SEC. When it became apparent that Timothy Geithner, then president of the New York Fed, would leave his role there to become Treasury Secretary, Friedman was granted a temporary one-year waiver of a rule that forbids "class C" directors of the Fed from direct interest with those it regulates. Friedman agreed to remain on the board until the end of 2009 to provide continuity in the wake of the turmoil caused by Lehman Brothers' bankruptcy. Had the waiver not been granted, the New York Fed would have lost both its president and its chairman (or Friedman would have had to divest his Goldman shares).[157] This would have been highly disruptive for the New York Fed's role in the capital markets, and Friedman later said he agreed to stay on the NY Fed board out of a sense of public duty, but that his decision was "being mischaracterised as improper".[158]

Media reports in May 2009 concerning Friedman's involvement with Goldman, and in particular, his purchase of the firm's stock when it traded at historical lows in the fourth quarter of 2008,[157] fueled controversy and criticism over what was seen as a conflict of interest in Friedman's new role as supervisor and regulator to Goldman Sachs. These events prompted his resignation on May 7, 2009. Although Friedman's purchases of Goldman stock did not violate any Fed rule, statute, or policy, he said that the Fed did not need this distraction. He also stated his purchases, made while approval of a waiver was pending, were motivated by a desire to demonstrate confidence in the company during a time of market distress.[159]

Insider trading cases[edit]

In 1986, David Brown was convicted of passing inside information to Ivan Boesky on a takeover deal.[160] Robert M. Freeman, who was a senior Partner, who was the Head of Risk Arbitrage, and who was a protégé of Robert Rubin, was also convicted of insider trading, for his own account and for the firm's account.[161]

In April 2010, Goldman director Rajat Gupta was named in an insider-trading case. It was said Gupta had "tipped off a hedge-fund billionaire", Raj Rajaratnam of Galleon Group, about the $5 billion Berkshire Hathaway investment in Goldman in September, 2008. According to the report, Gupta had told Goldman the month before his involvement became public that he wouldn't seek re-election as a director.[138] In early 2011, with the delayed Rajaratnam criminal trial about to begin,[162] the United States Securities and Exchange Commission (SEC) announced civil charges against Gupta covering the Berkshire investment as well as confidential quarterly earnings information from Goldman and Procter & Gamble (P&G). Gupta was board member at P&G until voluntarily resigning the day of the SEC announcement, after the charges were announced. "Gupta was an investor in some of the Galleon hedge funds when he passed the information along, and he had other business interests with Rajaratnam that were potentially lucrative.... Rajaratnam used the information from Gupta to illegally profit in hedge fund trades.... The information on Goldman made Rajaratnam's funds $17 million richer.... The Proctor & Gamble data created illegal profits of more than $570,000 for Galleon funds managed by others, the SEC said." Gupta was said to have "vigorously denied the SEC accusations". He is also a board member of AMR Corp.[163]

Gupta was convicted in June 2012 on insider trading charges stemming from Galleon Group case on four criminal felony counts of conspiracy and securities fraud. He was sentenced in October 2012 to two years in prison, an additional year on supervised release and ordered to pay $5 million in fines.[164]

First Quarter 2009 and December 2008 financial results[edit]

In April 2009, there was controversy that Goldman Sachs had "puffed up" its Q1 earnings by creating a December "orphan month" into which it shifted large writedowns, so they did not appear in any "quarterly number"[165]—a notification that was legal but some felt misleading.[115] In its first full quarter as a bank holding company, the firm reported a $780M net loss for the single month of December alongside Q1 net earnings of $1.81B (Jan–Mar)[166][167]

The accounting change to a calendar fiscal year, which created the stub month, was required when the firm converted to a bank holding company and declared in Item 5.03 of its Form 8-K U.S. Securities and Exchange Commission (SEC) filing of December 15, 2008.[168] The December loss also included a $850M writedown on loans to bankrupt chemical maker LyondellBasell, as reported in late December (the chemical maker formally declared bankruptcy on January 6 but the loan would have been marked-to-market – it became clear in mid/late-December that Lyondell would not be able to meet its debt obligations).[169][170]

Most financial analysts and the mainstream financial press (Bloomberg L.P., Reuters, etc), aware of the accounting change and deteriorating market conditions into December, were unsurprised by the December loss (Merrill Lynch took at least $8.1B of losses in the same period).[171] However, their lack of reaction and reporting of what was a widely expected result may have contributed to the surprise attributing this as a sign that the firm was trying to hide losses in December. On the contrary, the results of December 2008 were discussed up front and in detail by CFO David Viniar in the first few minutes of the firm's Q1 2009 conference call, and were fully declared on page 10 of its earnings release document.[166][172]

On April 22, 2009, Morgan Stanley also reported[173] a $1.3B net loss for the single month of December, alongside a $177M loss for the first quarter (Jan–Mar).[174] However, whereas Goldman Sachs's first-quarter earnings (Jan–Mar) were well-above forecasts[175] (which led to the speculation that the firm may have 'conveniently' shifted losses into December), Morgan Stanley's results for the same Jan–Mar period were below consensus estimates.[176] This, in addition to Morgan Stanley's losses in December, would appear to support Goldman's rejection of the notion that they deliberately shifted losses into December.[167] Like Goldman Sachs, Morgan Stanley converted to a bank holding company after the bankruptcy of Lehman Brothers in September 2008.

At the end of 2009, the firm was on track to complete its most profitable year since its founding.[38][177]

Involvement with the bailout of AIG[edit]

American International Group (AIG) was bailed out by the US government in September 2008 after suffering a liquidity crisis, whereby the Federal Reserve initially lent $85 billion to AIG to allow the firm to meet its collateral and cash obligations.

In March 2009, it was reported that, in 2008, Goldman Sachs, (alongside other major US and international financial institutions), had received billions of dollars during the unwind of credit default swap (CDS) contracts purchased from AIG, including $12.9 billion from funds provided by the US Federal Reserve to bail out AIG.[178][179][180] (As of April, 2009, US Government loans to AIG totaled over $180 billion). The money was used to repay customers of its security-lending program and was paid as collateral to counterparties under credit insurance contracts purchased from AIG. However, due to the size and nature of the payouts there was considerable controversy in the media and amongst some politicians as to whether banks, including Goldman Sachs, may have benefited materially from the bailout and if they had been overpaid.[115][181] The New York State Attorney General Andrew Cuomo announced in March 2009 that he was investigating whether AIG's trading counterparties improperly received government money.[182]

Firm's response to criticism of AIG payments[edit]

Goldman Sachs has maintained that its net exposure to AIG was 'not material', and that the firm was protected by hedges (in the form of CDSs with other counterparties) and $7.5 billion of collateral.[183] The firm stated the cost of these hedges to be over $100M.[184] According to Goldman, both the collateral and CDSs would have protected the bank from incurring an economic loss in the event of an AIG bankruptcy (however, because AIG was bailed out and not allowed to fail, these hedges did not pay out.)[185] CFO David Viniar stated that profits related to AIG in Q1 2009 "rounded to zero", and profits in December were not significant. He went on to say that he was "mystified" by the interest the government and investors have shown in the bank's trading relationship with AIG.[186]

Considerable speculation remains that Goldman's hedges against their AIG exposure would not have paid out if AIG was allowed to fail. According to a report by the United States Office of the Inspector General of TARP, if AIG had collapsed, it would have made it difficult for Goldman to liquidate its trading positions with AIG, even at discounts, and it also would have put pressure on other counterparties that "might have made it difficult for Goldman Sachs to collect on the credit protection it had purchased against an AIG default."[187] Finally, the report said, an AIG default would have forced Goldman Sachs to bear the risk of declines in the value of billions of dollars in collateral debt obligations.

Goldman argues that CDSs are marked to market (i.e. valued at their current market price) and their positions netted between counterparties daily. Thus, as the cost of insuring AIG's obligations against default rose substantially in the lead-up to its bailout, the sellers of the CDS contracts had to post more collateral to Goldman Sachs. The firm claims this meant its hedges were effective and the firm would have been protected against an AIG bankruptcy and the risk of knock-on defaults, had AIG been allowed to fail.[184] However, in practice, the collateral would not protect fully against losses both because protection sellers would not be required to post collateral that covered the complete loss during a bankruptcy and because the value of the collateral would be highly uncertain following the repercussions of an AIG bankruptcy.[citation needed] As with the bankruptcy of Lehman Brothers, wider and longer-term systemic and economic turmoil brought on by an AIG default would probably have affected the firm and all other market participants.[citation needed]

Final AIG meetings on September 15 at the New York Federal Reserve[edit]

Some have said, incorrectly according to others,[188] that Goldman Sachs received preferential treatment from the government by being the only Wall Street firm to have participated in the crucial September meetings at the New York Fed, which decided AIG's fate. Much of this has stemmed from an inaccurate but often quoted New York Times article.[189] The article was later corrected to state that Blankfein, CEO of Goldman Sachs, was "one of the Wall Street chief executives at the meeting" (emphasis added). Bloomberg has also reported that representatives from other firms were indeed present at the September AIG meetings.[190] Furthermore, Goldman Sachs CFO David Viniar has stated that CEO Blankfein had never "met" with his predecessor and then-US Treasury Secretary Henry Paulson to discuss AIG;[191] However, there were frequent phone calls between the two of them.[192] Paulson was not present at the September meetings at the New York Fed. It is also a lesser known fact that Morgan Stanley was hired by the Federal Reserve to advise them on the AIG bailout.[193]

According to the New York Times, Paulson spoke with the CEO of Goldman Sachs two dozen times during the week of the bailout, though he obtained an ethics waiver before doing so.[194] While it is common for regulators to be in contact with market participants to gather valuable industry intelligence, particularly in a crisis, the Times noted he spoke with Goldman's Blankfein more frequently than with other large banks. Federal officials say that although Paulson was involved in decisions to rescue A.I.G, it was the Federal Reserve that played the lead role in shaping and financing the A.I.G. bailout.[194]

$60 million settlement for Massachusetts subprime mortgages[edit]

On May 10, 2009, the Goldman Sachs Group agreed to pay up to $60 million to end an investigation by the Massachusetts attorney general’s office into whether the firm helped promote unfair home loans in the state. The settlement will be used to reduce the mortgage payments of 714 Massachusetts residents who had secured subprime mortgages funded by Goldman Sachs. Michael DuVally, a spokesman for Goldman, said it was “pleased to have resolved this matter,” and declined to comment further. This settlement may open the door to state government actions against Goldman throughout the United States aimed at securing compensation for predatory mortgage lending practices.[195]

Abacus mortgage-backed CDOs[edit]

In April 2010, the SEC charged Goldman Sachs and one of its vice presidents, Fabrice Tourre, with securities fraud. The SEC alleged that Goldman had told buyers of one of its investment deals (a type called a "synthetic CDO"), that the underlying assets in the deal had been picked by an independent CDO manager, ACA Management. In fact, a short investor betting that the CDO would default (Paulson & Co. hedge fund group) had played a “significant role” in the selection,[119] and the package of securities turned out to become "one of the worst-performing mortgage deals of the housing crisis".[196] On July 15, 2010, Goldman settled, agreeing to pay the SEC and investors $550 million.[121] In August 2013 Tourre was found liable on six of seven counts by a federal jury.[197][198]

Unlike many investors and investment bankers, Goldman Sachs anticipated the Subprime mortgage crisis that developed in 2007-8.[132] Some of its traders became "bearish" on the housing boom beginning in 2004 and developed mortgage-related securities, originally intended to protect Goldman from investment losses in the housing market. In late 2006, Goldman management changed the firm’s overall stance on the mortgage market, from positive to negative. As the market began its downturn, Goldman "created even more of these securities", no longer just hedging or satisfying investor orders but "enabling it to pocket huge profits" from the mortgage defaults, (according to business journalists Gretchen Morgenson, Bethany McLean and Joe Nocera).[199] [200]

The complex securities were known as synthetic CDOs (collateralized debt obligations). They were called synthetic because unlike regular CDOs, the principle and interest they paid out came not from mortgages or other loans, but from premiums to pay for insurance against mortgage defaults—the insurance known as "credit default swaps". Goldman and some other hedge funds held a "short" position with the securities, paying the premiums, while the investors (insurance companies, pension funds, etc.) receiving the premiums were the "long" position. The longs were responsible for paying the insurance "claim" to Goldman and any other shorts if the mortgages or other loans defaulted.

Through April 2007 Goldman issued over 20 CDOs in its "Abacus" series[201] worth a total of $10.9 billion. All together Goldman packaged, sold, and shorted a total of 47 synthetic CDOs, with an aggregate face value of $66 billion between July 1, 2004, and May 31, 2007.[202]

But while Goldman was praised for its foresight, some argued its bets against the securities it created gave it a vested interest in their failure. These securities performed very poorly (for the long investors) and by April 2010, Bloomberg reported that at least $5 billion worth of the securities either carried "junk" ratings, or had defaulted.[203] One CDO examined by critics which Goldman bet against, but also sold to investors, was the $800 million Hudson Mezzanine CDO issued in 2006. Goldman executives stated that the company was trying to remove subprime securities from its books in the Senate Permanent Subcommittee hearings. Unable to sell them directly it included them in the underlying securities of the CDO and took the short side, but critics (McLean and Nocera) complained the CDO prospectus did not explain this but described its contents as "`assets sourced from the Street`, making it sound as though Goldman randomly selected the securities, instead of specifically creating a hedge for its own book."[204] The CDO did not perform well and by March 2008 -- just 18 months after its issue -- so many borrowers had defaulted that holders of the security paid out "about $310 million to Goldman and others who had bet against it."[132] Goldman's head of European fixed-income sales lamented in an email made public by the Senate Permanent Subcommittee on Investigations, the `real bad feeling across European sales about some of the trades we did with clients` who had invested in the CDO. `The damage this has done to our franchise is very significant.`[204]

Critics also complain that while Goldman's investors were large, ostensibly sophisticated banks and insurers, at least some of the CDO securities and their losses filtered down to small public agencies — "money used to run schools and fix potholes and fund municipal budgets"[205]—via debt sold by a structured investment vehicle of IKB bank, an ABACUS investor. [206]

In public statements Goldman claimed that it shorted simply to hedge and was not expecting the CDOs to fail. It also denied that its investors were unaware of Goldman's bets against the products it was selling to them.[132]

Goldman is also alleged to have tried to pressure the credit rating service Moody's to rate its products higher than the fundamentals called for.[132][207]

2010 SEC civil fraud lawsuit[edit]

The particular synthetic CDO that the SEC's 2010 fraud suit charged Goldman with misleading investors with was called Abacus 2007-AC1. Unlike many of the Abacus securities, 2007-AC1 did not have Goldman Sachs as a short seller, in fact it lost money on the deal.[208] That position was taken by the customer (John A. Paulson) who hired Goldman to issue the security (according to the SEC's complaint). Paulson and his employees selected 90 BBB-rated mortgage bonds[196][209] that they believed were most likely to lose value and so the best bet to buy insurance for.[121] Paulson and the manager of the CDO, ACA Management, worked on the portfolio of 90 bonds to be insured (ACA allegedly unaware of Paulson's short position), coming to an agreement in late February 2007.[209] Paulson paid Goldman approximately $15 million for its work in the deal.[210] Paulson ultimately made a $1 billion from the short investments, the profits coming from the losses of the investors and their insurers. These were primarily IKB Deutsche Industriebank ($150 million loss), and the investors and insurers of another $900 million—ACA Financial Guaranty Corp,[211] ABN Amro, and the Royal Bank of Scotland.[212][213]

The SEC alleged that Goldman "materially misstated and omitted facts in disclosure documents" about the financial security,[119] including the fact that it had "permitted a client that was betting against the mortgage market [the hedge fund manager Paulson & Co.] to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party," ACA Management.[212][214] The SEC further alleged that "Tourre also misled ACA into believing ... that Paulson's interests in the collateral section [sic] process were aligned with ACA's, when in reality Paulson's interests were sharply conflicting."[212]

In reply Goldman issued a statement saying the SEC's charges were "unfounded in law and fact", and in later statements maintained that it had not structured the portfolio to lose money,[215] that it had provided extensive disclosure to the long investors in the CDO, that it had also lost money ($90 million), that ACA selected the portfolio without Goldman suggesting Paulson was to be a long investor, that it did not disclose the identities of a buyer to a seller and vice versa as it was not normal business practice for a market maker,[215] and that ACA was itself the largest purchaser of the Abacus pool, investing $951 million. Goldman also stated that any investor losses resulted from the overall negative performance of the entire sector, rather than from a particular security in the CDO.[215][216]

While some journalists and analysts have called these statements misleading,[217] others believed Goldman's defense was strong and the SEC's case was weak.[218][219][220]

Some experts on securities law (such as Duke University law professor James Cox), believed the suit had merit because Goldman was aware of the relevance of Paulson's involvement and took steps to downplay it. Others, (including Wayne State University law professor Peter Henning), noted that the major purchasers were sophisticated investors capable of accurately assessing the risks involved, even without knowledge of the part played by Paulson.[221]

Critics of Goldman Sachs point out that Paulson went to Goldman Sachs after being turned down for ethical reasons by another investment bank, Bear Stearns who he had asked to build a CDO for him. Ira Wagner, the head of Bear Stearns’s CDO Group in 2007, told the Financial Crisis Inquiry Commission that having the short investors select the referenced collateral as a serious conflict of interest and the structure of the deal Paulson was proposing encouraged Paulson to pick the worst assets.[222][223] Describing Bear Stearns's reasoning, one author compared the deal to "a bettor asking a football owner to bench a star quarterback to improve the odds of his wager against the team."[224] Goldman claimed it lost $90 million, critics maintain it was simply unable (not due to a lack of trying) to shed its position before the underlying securities defaulted.[208] While Goldman lost $100 million on the deal, critics maintain Goldman was simply unable (not due to a lack of trying) to shed its position in time to avoid incurring any losses.[208]

Critics also question whether the deal was ethical, even if it was legal.[205][225] Goldman had considerable advantages over its long customers. According to McLean and Nocera there were dozens of securities being insured in the CDO—for example, another ABACUS[226]—had 130 credits from several different mortgage originators, commercial mortgage-backed securities, debt from Sallie Mae, credit cards, etc. Goldman bought mortgages to create securities, which made it "far more likely than its clients to have early knowledge" that the housing bubble was deflating and the mortgage originators like New Century had begun to falsify documentation and sell mortgages to customers unable to pay the mortgage-holders back[227]—which is why the fine print on at least one ABACUS prospectus warned long investors that the 'Protection Buyer' (Goldman) `may have information, including material, non-public information` which it was not providing to the long investors.[227]

Critics also worry about the attention drawn in Europe to the losses of European banks that might undermine the position of the US "as a safe harbor for the world's investors."[225]

In the end, SEC suit did not go to court.[228] On July 15, 2010, three months after it filing, Goldman agreed to pay $550 million – $300 million to the U.S. government and $250 million to investors, one of the largest penalties ever paid by a Wall Street firm.[121] The company did not admit or deny wrongdoing, but did admit that its marketing materials for the investment “contained incomplete information,” and agreed to change some of its business practices regarding mortgage investments.[121]

Other prosecutorial actions[edit]

On April 14, 2011, the United States Senate's Permanent Subcommittee on Investigations released a 635-page report entitled, Wall Street and the Financial Crisis: Anatomy of a Financial Collapse which described some of the causes of the financial crisis. The report alleged that Goldman Sachs may have misled investors and profited from the collapse of the mortgage market at their expense.[229] The Chairman of the Subcommittee referred the report to the U.S. Department of Justice to determine whether Goldman executives had broken the law,[230] and two months later the Manhattan district attorney subpoenaed Goldman for relevant information on possible securities fraud,[118][231] but on August 9 the Justice Department announced it had decided not to file charges against Goldman Sachs or its employees for trades made during the subprime mortgage portfolio.[232]

The 2010 Goldman settlement did not cover charges against Goldman vice president and salesman for ABACUS,[208] Fabrice Tourre.[121] Tourre unsuccessfully sought a dismissal of the suit[233][234][235][236] which then went to trial in 2013. On August 1, jurors found Tourre guilty of six of seven charges—including that he misled investors about the mortgage deal.[198]

Alleged commodity price manipulation[edit]

A provision of the 1999 financial deregulation law, the Gramm-Leach-Bliley Act, allows commercial banks to enter into any business activity that is "complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally."[237] In the years since the laws passing, Goldman Sach and other investment banks (Morgan Stanley, JPMorgan Chase) have branched out into ownership of a wide variety of enterprises including raw materials, such as food products, zinc, copper, tin, nickel and, aluminum.

Some critics (such as Matt Taibbi) believe that allowing a company to both "control the supply of crucial physical commodities, and also trade in the financial products that might be related to those markets," is "akin to letting casino owners who take book on NFL games during the week also coach all the teams on Sundays."[237] New York Times journalist David Kocieniewski accused Goldman Sachs (and other Wall Street firms) of "capitalizing on loosened federal regulations" to manipulate "a variety of commodities markets", citing "financial records, regulatory documents and interviews with people involved in the activities." (The commodity highlighted by Kocieniewski and also mentioned Taibbi also mentioned was aluminum.[139])

Goldman Sachs Commodity Index and the 2005–2008 Food Bubble[edit]

Goldman Sachs's creation of the Goldman Sachs Commodity Index has been implicated by some in the 2007–2008 world food price crisis.

In a 2010 article in Harper's magazine, Frederick Kaufman argued that Goldman's creation of the Goldman Sachs Commodity Index[238] helped passive investors (pension funds, mutual funds and others) enter the markets, through its own fund and through other commodity funds (sponsored by JPMorgan, Chase, AIG, etc.) following Goldman's lead. These funds disturbed the normal relationship between supply and demand, making prices more volatile and defeating the purpose of the exchanges (price stabilization) in the first place.[239][240][241]

In a June 2010 article, The Economist defended Goldman Sachs and other oil index-tracking funds citing a report by the Organisation for Economic Co-operation and Development that found commodities without futures markets and ignored by index-tracking funds also saw price rises during the period.[242]

See also 2000s commodities boom for a discussion on specific causes of the 2000s commodities boom.

Aluminum price and supply[edit]

In August 2013, Goldman Sachs was subpoenaed by the federal Commodity Futures Trading Commission as part of an investigation into complaints that Goldman-owned metals warehouses had "intentionally created delays and inflated the price of aluminum."[243] In December 2013 it was announced that 26 cases accusing the Goldman Sachs Group Inc. -- along with JPMorgan Chase & Co., the two investment banks' warehousing businesses, and the London Metal Exchange in various combinations—of violating U.S. antitrust laws, would be assigned to U.S. District Judge Katherine B. Forrest in Manhattan.[244]

Following Goldman's purchase of the aluminum warehousing company Metro International[245] in 2010, the wait of warehouse customers for delivery of aluminum supplies to their factories—to make beer cans, home siding and other products—went from an average of six weeks to more than 16 months, "according to industry records."[130][139]

The cause of this was alleged to be Goldman's ownership of a quarter of the national supply of aluminum—a million and a half tons—in network of 27 Metro International warehouses Goldman owns in Detroit, Michigan.[139][246]

"Aluminum industry analysts say that the lengthy delays at Metro International since Goldman took over are a major reason the premium on all aluminum sold in the spot market has doubled since 2010."[139] The price increase has cost "American consumers more than $5 billion"[247] according to former industry executives, analysts and consultants.[139]

To avoid hoarding and price manipulation, the London Metal Exchange requires that "at least 3,000 tons of that metal must be moved out each day". Goldman has dealt with this requirement by moving the aluminum—not to factories, but "from one warehouse to another"—according to the Times.[139]

According to Lydia DePillis of Wonkblog, when Goldman bought the warehouses it "started paying traders extra to bring their metal" to Goldman's warehouses "rather than anywhere else. The longer it stays, the more rent Goldman can charge, which is then passed on to the buyer in the form of a premium."[248][249] The effect is "amplified" by another company in the Netherlands (Glencore) is "doing the same thing in its warehouse in Vlissingen".[249]

Michael DuVally, a spokesman for Goldman Sachs, has said the cases are without merit[244] and Robert Lenzner at Forbes says Goldman's control is only 3% of the global market and so too small to give it pricing power.[250]

Oil futures speculation[edit]

Investment banks, including Goldman, have also been accused of driving up the price of petrol/gasoline by speculating in the oil futures market. In August 2011, "confidential documents" were leaked "detailing the positions"[251] in the oils futures market of several investment banks[252]—including Goldman Sachs—on one day (June 30, 2008), just before the peak in high petrol/gasoline prices. The presence of positions by investment banks on the market was significant for the fact that the banks have deep pockets, and so the means to significantly sway prices, and unlike traditional market participants, neither produced oil nor ever took physical possession of actual barrels of oil they bought and sold. It was "a development that many say is artificially raising the price of crude" according to Kate Sheppard of Mother Jones.[251] However another source states "Just before crude oil hit its record high in mid-2008, 15 of the world’s largest banks were betting that prices would fall, according to private trading data...."[253]

In April 2011, a couple of observers—Brad Johnson of the blog Climate Progress[254] and Alain Sherter of CBS News MoneyWatch[255]—noted that Goldman Sachs was warning investors of a dangerous spike in the price of oil. Climate Progress quoted Goldman as warning "that the price of oil has grown out of control due to excessive speculation” in petroleum futures, and that “net speculative positions are four times as high as in June 2008.” when the price of oil peaked.[256]

It stated that "Goldman Sachs told its clients that it believed speculators like itself had artificially driven the price of oil at least $20 higher than supply and demand dictate."[254] Sherter noted that Goldman's concern over speculation did not prevent it (along with other speculators) from lobbying against regulations by the Commodity Futures Trading Commission to establish "position limits," which would cap the number of futures contracts a trader can hold, and thus prevent speculation.[255]

According to Joseph P. Kennedy II, by 2012, prices on the oil commodity market had become influenced by "hedge funds and bankers" pumping "billions of purely speculative dollars into commodity exchanges, chasing a limited number of barrels and driving up the price".[257] The problem started, according to Kennedy, in 1991, when

just a few years after oil futures began trading on the New York Mercantile Exchange, Goldman Sachs made an argument to the Commodity Futures Trading Commission that Wall Street dealers who put down big bets on oil should be considered legitimate hedgers and granted an exemption from regulatory limits on their trades. The commission granted an exemption that ultimately allowed Goldman Sachs to process billions of dollars in speculative oil trades. Other exemptions followed[257]

and "by 2008, eight investment banks accounted for 32% of the total oil futures market."[257]

Initial public offering kickback bribes[edit]

Goldman Sachs is accused of asking for kickback bribes from institutional clients who made large profits flipping stocks which Goldman had intentionally undervalued in initial public offerings it was underwriting. Documents under seal in a decade-long lawsuit concerning eToys.com's initial public offering (IPO) in 1999 but released accidentally to the New York Times show that IPOs managed by Goldman were underpriced and that Goldman asked clients able to profit from the prices to increase business with it. The clients willingly complied with these demands because they understood it was necessary in order to participate in further such undervalued IPOs.[258] Companies going public and their initial consumer stockholders are both defrauded by this practice.[259]

Taylor-related civil and criminal cases[edit]

Fraud related to trading losses and concealment of futures positions in 2007 resulted in $1.5 million in penalties paid by the firm to regulators in 2012. The penalties were for not properly supervising trader Matthew Marshall Taylor. Taylor himself was expected to plead guilty to criminal charges when he surrendered to the FBI in 2013.[260][261]

Russian consulting agreement[edit]

Goldman Sachs came under criticism in 2013 for entering into a three year consulting agreement with the Russian direct investment fund and Russia's economy ministry of Vladimir Putin's government to "attract foreign investment". Human Rights Foundation Chairman Garry Kasparov commented on the agreement, saying, "Goldman Sachs’s deal with Putin ranks among the worst examples ever of a company seeking to bolster its profits by laundering the financial reputation of a country led by a corruptly elected despot."[136][262][263]

Danish utility sale[edit]

Goldman Sachs’s purchase of an 18% stake in state-owned Dong Energy -- Denmark's largest electric utility—set off a "political crisis" in Denmark. The sale—approved in January 30, 2014—sparked protest in the form of the resignation of six cabinet ministers and the withdrawal of a party (Socialist People’s Party) from Prime Minister Helle Thorning-Schmidt's leftist governing coalition.[264] According to Bloomberg Businessweek, "the role of Goldman in the deal struck a nerve with the Danish public, which is still suffering from the aftereffects of the global financial crisis." Protesters in Copenhagen gathered around a banner "with a drawing of a vampire squid—the description of Goldman used by Matt Taibbi in Rolling Stone in 2009".[264] Opponents expressed concern that that Goldman would have some say in Dong's management, and that Goldman planned to manage its investment through "subsidiaries in Luxembourg, the Cayman Islands, and Delaware, which made Danes suspicious that the bank would shift earnings to tax havens."[264]

Libya investment losses[edit]

In January 2014, the Libyan Investment Authority (LIA) filed a lawsuit against Goldman for $1 billion after the firm lost of 98% of the $1.3 billion the LIA invested with Goldman in 2007.[265][266] Goldman made more than $1 billion in derivatives trades with the LIA funds which lost almost all their value but earned Goldman $350 million in profit.[267] In August 2014 Goldman dropped a bid to end the suit in a London court.[265]

List of officers and directors[edit]

As of March 23, 2014.[268]

Name Nationality Current Position Since Total Annual Compensation Long-Term Incentive Plans All Other Fiscal Year Total Options Value of Options
Lloyd Blankfein United States Chairman & Chief Executive Officer 2003
Gary D. Cohn United States President, COO & Director 2006 $600,000 $163,841 $3,661,729 828,259 $61,033,100
Harvey M. Schwartz United States CFO & Executive Vice President 2013 - - - - -
John S. Weinberg United States Vice Chairman 2006 $600,000 $79,736 $26,002,896 430,905 $30,624,806
Mark Schwartz United States Vice Chairman & Chairman of Goldman Sachs, Asia Pacific 2012 - - -
Michael Sherwood United Kingdom Vice Chairman, Co-CEO – International 2008
Alan Cohen United States Executive Vice President, Global Head – Compliance 2004
Gregory Palm United States Executive Vice President, General Counsel, Co-Head – Legal Department 1999
John F.W. Rogers United States Executive Vice President, Chief of Staff and Secretary to the Board 2001
Edith W. Cooper United States Executive Vice President and Global Head of Human Capital Management 2008
David A. Viniar United States Director 2013 - - - - - -
Mark Edward Tucker United Kingdom Director 2012 - - - - - -
Adebayo O. Ogunlesi Nigeria Director 2012 - - - - - -
M. Michele Burns United States Director 2011
Claes Dahlbäck Sweden Director 2003
Peter Oppenheimer United States Director 2014
William W. George United States Director 2002
James A. Johnson United States Director 1999
Lakshmi N. Mittal India Director 2008
James J. Schiro United States Director 2009
Debora Spar United States Director 2011

Headquarters and other major offices[edit]

Goldman Sachs's global headquarters is located in New York City at 200 West Street. Its European headquarters are in London and its Asian headquarters are in Tokyo and Hong Kong. Other major offices are in Jersey City, Bangalore, and Salt Lake City.[269]

In 1957 the head office moved to 20 Broad Street, New York.[9]

Goldman Sachs research papers[edit]

Here is a list of notable Goldman Sachs research papers:

  • Global Economics Paper No: 93 (South Africa Growth and Unemployment: A Ten-Year Outlook): Makes economic projections for South Africa for the next 10 years. Published on May 13, 2003.
  • Global Economics Paper No: 66 (The World Needs Better Economic BRICs): Introduced the BRIC concept, which became highly popularized in the media and in economic research from this point on. Also made economic projections for 2050 for the G7 and South Africa as well. These were the first long-term economic projections which covered the GDP of numerous countries. Published on October 1, 2003.[270]
  • Global Economics Paper No: 134 (How Solid are the BRICs): Introduced the Next Eleven concept. Published on December 1, 2005.[271]
  • Global Economics Paper No: 173 (New EU Member States—A Fifth BRIC?): Makes 2050 economic projections for the new EU member states as a whole. Published on September 26, 2008.[272]
  • Global Economics Paper No: 188 (A United Korea; Reassessing North Korea Risks (Part I): Makes 2050 economic projections for North Korea in the hypothetical event that North Korea makes large free-market reforms right now. Published on September 21, 2009.[273]
  • The Olympics and Economics 2012: Makes projections for the number of gold medals and told Olympic medals that each country wins at the 2012 Olympics using economic data and previous Olympic data. Published in 2012.[274]

See also[edit]

References[edit]

Notes
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  205. ^ a b Bethany McLean, Joe Nocera. All the Devils Are Here: The Hidden History of the Financial Crisis. pp. 280–1. "... IKB also created a structured investment vehicle called Rhinebridge. Rhinebridge, like other SIVs, issued debt that it then used to buy mortgage-backed securities and CDOs like Abacus. The debt issued by Rhinebridge, ... was bought by among others, King County, Washington, which managed money on behalf of one hundred other public agencies. This was money used to run schools and fix potholes and fund municipal budgets .... For all of Goldman's later claims that it dealt only with the most sophisticated of investors, the fact remained that those investors could be fiduciaries, investing on behalf of school districts, fire departments, pensioners, and municipalities all across the country." 
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Further reading[edit]

External links[edit]