The Goldman Sachs Crisis

Group 2 Members:
Marianne
Marleny
Peter
Contents

Background ……………………………………………………………. 3

Crisis …………..…………………………………………………….… 4

Analysis .………………………..………...…….…………………....... 7

Conclusion ……………………………………………………..……… 8

Lessons Learned ………………...……………………………..……… 9

References …………………………………………………………….. 10

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BACKGROUND:

Goldman Sachs Group, Inc. is an American investment banking and securities

firm that engages in global investment banking, securities, investment management and

other financial services. Goldman Sachs was founded in 1869 and is headquartered in

New York City. The firm provides mergers and acquisitions advice, underwriting

services, asset management and prime brokerage to its clients. Former employees

include Robert Rubin and Henry Paulson who served as United States Secretary of the

Treasury, as well as Mark Carney, the governor of the Bank of Canada.

In 2007, the housing bubble burst with many subprime homeowners defaulting on

their mortgages. One of the main reasons for this default was due to the increase in

interest rates and a decrease in their property values. The subprime loan borrowers

typically had poor credit. Financial Institutes would come up with some financial

innovation where they used mortgage backed securities. Basically these securities were

backed by global investors.

Goldman Sachs was one of the major financial institution that advised investors to

put money in these securities. While Goldman Sachs was advising investors to invest in

these securities, they were shorting the housing market by betting against it. Goldman

Sachs tried to get mortgage-backed securities (MBS) written off their books. The

Permanent Senate Subcommittee on Investigations released documents on the five

Collateralized Debt Obligations (CDOs) that Goldman Sachs sold. The reason for the

investigation was to see what role investment banks played in the housing crisis.

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 There were articles from the New York columnists that stated they feel that

Goldman Sachs was not the only ones to blame. Some feel that AIG had much to do with

the crisis as Goldman Sachs. AIG insured billions of dollars in the Mortgage-Based

Securities. Still some may say Goldman Sachs acted immorally. They advised their

investors to invest their money into the housing market while Goldman Sachs was trying

to short the market.

THE CRISIS:

Goldman Sachs Group Inc. (GS) misled clients and Congress about the firm’s

bets on securities tied to the housing market, the chairman of the U.S. Senate panel that

investigated the causes of the financial crisis said.

Much of the blame for the 2008 market collapse belonged to banks that earned

billions of dollars in profits creating and selling financial products that imploded along

with the housing market. The Levin-Coburn panel levied its harshest criticism at

investment banks, in particular, accusing Goldman Sachs and Deutsche Bank AG (DB) of

selling collateralized debt obligations backed by risky loans that the banks’ own traders

believed were likely to lose value.

Among the culprits cited by the panel are Washington Mutual, a major mortgage

lender that failed in 2008, as well as, the Office of Thrift Supervision, a federal bank

regulator, and credit rating firms. The report makes 19 recommendations about how to

prevent a future crisis, many of which were adopted in last year's overhaul of financial

rules.

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How management dealt with the crisis:

Goldman Sachs denied that it had misled anyone about its activities. They said

their testimony was truthful and accurate. A Deutsche Bank spokeswoman said that there

were different views within the bank about the U.S. housing market and the bank’s views

were fully communicated to the market through research reports, industry events, and

press coverage. Despite the views held by some, Deutsche Bank like the others was

affected by the housing market and endured significant losses.

The condition of the organization today after the crisis:

After a two-year bipartisan probe, a Senate panel has concluded that Goldman

Sachs Group Inc. profited from the financial crisis by betting billions against the

subprime mortgage market then deceiving investors and Congress about the firm's

conduct. Some of the findings in the report by the Senate's Permanent Subcommittee on

Investigations will be referred to the Justice Department and the Securities and Exchange

Commission for possible criminal or civil action.

Even the Wall Street banks are being grilled by US securities regulators over

alleged fraud in mortgage-bond deals that played a large role in triggering the financial

crisis of 2007-2008. A report mentioned that the Securities Exchange Commission

(SEC) was discussing settlement deals with the banks. Banks named in the negotiations

include JP Morgan Chase & Co, Citigroup Inc, Morgan Stanley, Merrill Lynch now part

of Bank of America Corp and UBS AG. The move would be the most far-reaching

attempt so far by regulatory officials to hold Wall Street accountable for its role in the

subprime mortgage bust.

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 The financial crash of 2008 nearly brought the US financial system to its knees

and had globally disastrous effects from which the world is still recovering. The main

culprit in the crash was the rise of new investment instruments in subprime mortgages

granted by banks to people without good credit records or the ability to pay off expensive

houses. When the housing market crashed, many homeowners saw the value of their

houses dropped, while others were unable to pay off their loans.

The US government then launched a trillion-dollar bailout of the banks, but has

not brought criminal cases against bank and finance executives for their role in the crisis.

Pressure is growing most especially from investors who feel they were misled by the

banks. Large investors and institutions charge that the banks sold them bundled mortgage

investments which the banks knew would be worthless. Senate committee then released

a report that accused Wall Street firms of purposely misleading their investors. The report

singled out Goldman Sachs and Deutsche Bank's activities in the sketchy mortgage

market.

Goldman Sachs last year paid 550 million penalties to settle SEC charges that it

had misled investors in a mortgage-bond investment. At the heart of the fraud suspicions

is the claim that banks neglected to inform investors that the mortgage packages they

were buying had been created with help of hedge funds that were betting the housing

market would collapse.

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ANALYSIS:
No organization wants to be as hard-driving as Goldman Sachs, but it is important

for customers and competitors to understand and respect what Goldman Sachs had

accomplished and how quickly it adapts to change and profit opportunity. They had

changed the investment banking business in the 1960s, the stockbrokerage business in the

1970s, commodities in the 1980s, and investment management in the 1990s. Initiating

and driving change is in Goldman Sachs culture. The company has changed to a bank

holding company but the substance of what makes them Goldman Sachs is that the

culture has changed very little in 50 years, while almost every aspect of its form has

changed greatly.

The credit rating agencies appear to have played a very significant role in the

crisis by providing investment grade ratings for packaged securities which were not of

high quality. Investors should do their due diligence before investing in securities,

however, many investors do not have the resources to conduct strong due diligence and

often rely on rating agencies when purchasing these securities. They should use their own

research and regard market prices as a better and more significant rating for a security.

These agencies were not really independent since the financial services industry is the

source of their fees. This creates a serious conflict of interest and a new structure of

independence needs to be proposed.

Goldman Sachs has been a staple in the financial industry for years. With a

market capitalization of 87 billion, it is among the largest financial institutions in the

country. It makes up approximately 6.6% of the financial sector and is held by over 2,500

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institutions. The company boasts 31,700 employees, with revenue of nearly $2 million

per employee.

As the banking system continues to stabilize in 2009, markets are rising and

consumer confidence is returning. Although a weaker than expected consumer spending

report at the end of October 2008 sent stocks fleeing, there is a general consensus that the

economy is stabilizing. GDP is showing positive growth and the banking industry has

taken advantage of improving market conditions. Risks remain but while consumer debt

shows signs of improving, provisions for commercial real estate losses may not cover the

actual costs of these loans. With few consumer loans on hand, Goldman Sachs must step

carefully in their portfolio of loans to companies holding risky assets. If the company can

successfully walk the tight rope, it may have a competitive advantage against some of its

competitors such as JP Morgan, Bank of America and Morgan Stanley.

CONCLUSION:
From a very promising beginning to a near-death during the depression, Goldman

Sachs has been able to prevail. Goldman Sachs was able to take its instability and high

earnings per share and remain an icon in the financial world while some companies were

collapsing all around. The setback the company experienced during the financial crisis of

2008 may have forced Goldman Sachs to make some changes, but from almost every

perspective, the company has come out in a better position than most others. The payback

from AIG as well as Warren Buffett’s investment has only helped to secure a better

perception for the company. Goldman Sachs is now ready to continue on to great things

in the future due to the determination of the current senior management team.

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LESSONS LEARNED:

Complexity has increased in most industries. It is a factor in the innovative

financial instruments on Wall Street, enterprise software that runs much global business

or new drug development. Organizations and their leaders pay no attention this

complexity at their own risk. Information and its use to support management decision

making at the strategic level is more important today that it has ever been. Denial is a

fatal error made by overconfident leaders.

The first project management lesson learned from this crisis is that we manage

projects in an age of complexity. One example is a software application like Enterprise

Resource Planning (ERP) that can be very complex when independent modules are

integrated in one system. The crisis on Wall Street has taught that the way in which our

financial system has evolved over the years has added layers of complexity to the already

complex system.

The second lesson is that project managers need timely information and not just

data to manage effectively. They will need this useful information in summary form to

help them in these complex situations. In this crisis, the absence of information and the

uncertainty about the vulnerability of the system and inflated values of the CDOs on

balance sheets, suggests that the lack of information contributed to the crisis.

Lastly, denial can bring catastrophic results. In this crisis, denial was everywhere

from the homebuyers who felt that could afford a $500,000 house on a $50,000 income,

to the mortgage originator, to the debt consolidators who put together the CDOs, to the

banks who purchased the CDOs and kept them on their balance sheets at high prices and

to the insurers who miscalculated the risks they were taking.

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 REFERENCES:

http://articles.latimes.com/2011/apr/14/business/la-fi-crisis-probe-20110414

http://news.yahoo.com/s/afp/20110403/bs_afp/usfinancebankingcompanygoldman

http://www.huffingtonpost.com/2011/01/26/goldman-sachs-aig-backdoor-
bailout_n_814589.html

http://www.bloomberg.com/news/2011-03-31/goldman-borrowed-from-fed-s-discount-
window-at-least-five-times-data-show.html

http://www.wikiswot.com/SWOT/13_Financial_Sector/Goldman_Sachs.html

http://www.economist.com/blogs/democracyinamerica/2010/04/financial-crisis_inquiry

http://articles.nydailynews.com/2010-07-02/news/27068936_1_joseph-cassano-financial-
crisis-inquiry-commission-aig-officials

http://graphics8.nytimes.com/packages/pdf/business/2010April26_MemorandumonWallS
treetCrisis.PDF

http://www.businessweek.com/news/2011-04-14/goldman-sachs-misled-congress-duped-
clients-levin-says.html

http://en.wikipedia.org/wiki/Goldman_Sachs

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