Goldman sachs and its reputation final
- 1. Running head: GOLDMAN SACHS AND ITS REPUTATION 1 Goldman Sachs and Its Reputation Antoinette Broussard Christos Christou Oluseun Odumusi Anshuman Raghav Regina Tiong University of Houston-Downtown MBA 6360-Ethics and Professional Standard Dr. Ashe and Mr. Lewis March 1, 2016
- 2. GOLDMAN SACHS AND ITS REPUTATION 2 Contents Abstract ........................................................................................................................................... 3 Goldman Sachs Practices................................................................................................................ 3 Explanation to Public...................................................................................................................... 4 What did Goldman Sachs do Wrong?............................................................................................ 5 Facebook Controversy .................................................................................................................... 6 Importance of Reputation................................................................................................................ 7 Reputation Management. ................................................................................................................ 8 Conclusion ...................................................................................................................................... 8 References..................................................................................................................................... 10
- 3. GOLDMAN SACHS AND ITS REPUTATION 3 Abstract The purpose of this paper is to focus on Goldman Sachs and its reputation. This paper draws on several important events related to the past decade’s financial downfall. In addition, the paper attempts to highlight the role of Goldman Sachs played in the making of the Abacus deal as well as the collapse of AIG. To have the better understanding of the firm’s role, a detailed research is conducted to evaluate whether or not the leadership at Goldman Sachs was unethical. In conclusion, the impact of Goldman Sachs financial transactions will be assessed to determine the impact on the company’s intangible assets such as goodwill and reputation. Goldman Sachs and Its Reputation A tremendous amount of Goldman Sachs’s financial prestige is derived from healthy profit margins and social networks in important government posts and investment banks. During the 2008 crisis, many of Goldman Sachs business practices came to light and raised questions about the firm’s integrity toward its clients and the public. Several colliding factors such as: the collapse of American International Group, Inc. (AIG), creation and marketing of collateralized debt obligations (CDO), and the handling of Facebook IPO created increased scrutiny of the firm’s business practices. Goldman Sachs Practices After the financial crisis Goldman Sachs was embattled with a torrent of challenges. According to an executed contract between AIG and Goldman Sachs, there was a great risk of failure. The constant collateral demands by Goldman Sachs cause the illiquidity of AIG. In the early 2000s, Goldman Sachs issued a series of CDOs identified as “Abacus 1”. In the lawsuit by the Securities and Exchange Commission (S.E.C.), Goldman Sachs acknowledges that the marketing materials for the ABACUS-2007 AC1 contained incomplete information. Furthermore,
- 4. GOLDMAN SACHS AND ITS REPUTATION 4 “Goldman viewed its clients as sophisticated investors” (Free, 2012) hence saw its responsibility as providing them with the risks they want to bear. From the corporation’s perspective, there was nothing wrong with construction of the Abacus CDOs. After declining to reduce its mortgage- backed securities, Goldman Sachs created a $ 1 billion CDO named Timberwolf I, which was composed of other CDOs and other derivatives. In a statement published by Free, “When the business standards committee conducted an interview with 200 clients, reports was revealed that Goldman Sachs put its interests ahead of those of its clients” (Free, 2012). These findings proved true with the outcomes of the various lawsuits Goldman Sachs faced. Explanation to Public “Goldman Sachs began to have a hard time explaining the company’s transactions to the public, when revealing emails were released” (Farzad, 2016). In the S.E.C. lawsuit, Goldman agreed to disgorge $15 million in profits on Abacus AC1 and pay a fine of $535 million. All this was done without admitting to wrongdoing. Therefore, there is no way that Goldman Sachs can give an explanation to the S.E.C. that the company is not at fault. In addition to Facebook’s IPO, the controversy began when the S.E.C. was cynical about the arrangement about Goldman Sachs’s private offering to its clients. Goldman Sachs concluded that media attention may be marked with inconsistency with regards to adequate completion of a governmental private placement under United States law. Basically, this explanation was not sufficient being that it was given to the media to broadcast. The investigation also revealed that Goldman Sachs was a major participant in the events leading up to the financial crisis in 2008. From 2004 through to 2006, the company provided billions of dollars in loans to mortgage lenders. The chairman of the senate permanent subcommittee claimed that Goldman Sachs had misled its clients and consequently admitted acting
- 5. GOLDMAN SACHS AND ITS REPUTATION 5 unethically as well as paying fine and transforming its practices completely. With this acknowledgement, there is less explanation that Goldman Sachs can give to Congress. What did Goldman Sachs do Wrong? In respect to S.E.C.’s charge against Goldman Sachs’s regarding the 2007 synthetic CDO transaction, ABACUS 2007-AC1 as well as the collapse of AIG, it is particularly interesting to see the events unfold that questioned the firm’s reputation and its fiduciary duties in investment banking. This case highlights the legal and reputational nature of an investment bank’s responsibilities to its counterparties. The fact that Goldman failed to disclose Paulson’s involvement in the portfolio selection process showed that the firm duties are inappropriate in this context. Although the firm acknowledges that the CDO marketing materials were incomplete and that they should have revealed Paulson’s role in portfolio selection, they did not admit nor deny to the violations of antitrust provision of the Securities Act of 1933 (S.E.C.). Although Goldman Sachs admitted to this mistake, the conflict of interest arises when the company introduced Paulson to ACA which led ACA to believe that his interest was aligned with ACA. According to Bloomberg Business, Janet Tavakoli, who were once a Goldman Sachs mortgage analyst and now the President of Chicago advisory firm Tavakoli Structures Finance commented that “Goldman was gaming a weakening system” (Farzad, 2010). Goldman was taking advantage of a flaw in the CDO system (Farzad, 2010). The firm not only refused to absorb losses from the CDOs, but according to a November 2008 analysis by the asset management firm Black Rock, Goldman Sachs’s valuation for the securities were “consistently lower than third party prices” (Story). Even though it was not proven that the firm arrange for AIG bailout, the reflection of their actions caused them to be publicly criticized for the collapse of AIG. To defend themselves against the major allegations in relation to the collapse of AIG and taking short position the CDOs, they
- 6. GOLDMAN SACHS AND ITS REPUTATION 6 released their 2009 annual report (Farzad, 2010). However, their defense was not strong as it “lacks critical details” which the firm claimed that they were protecting the confidentiality of their clients (Farzad, 2010). Throughout the chaos, Goldman Sachs maintained strong financial standing. Ironically, by the end of 2009. The leadership teams approved one of history’s biggest bonus pools paid out to employees (McGee, 2010). One cannot help but to wonder how the firm still managed to reward its employee when they “disputed that it could not have survived if the government hadn’t paid it in full” (Farzad, 2010). None the less AIG’s involvement in the financial crisis has an impact to the world’s economy. While the Goldman managers made it clear that they played by the same rules as everyone else, it is challenging to find the statement true. According to Tawakoni, “Goldman is trying to pretend it didn’t know better, while also trying to say they are great risk managers. Goldman cannot have it both ways.” (Farzad, 2010). Facebook Controversy Before Facebook is ready for an initial public offering (IPO) of its shares, Goldman Sachs invested $450 million that valued Facebook at $50 billion. Andrew Sorkin, a financial columnist for the New York Times, not only exposed the information but he also reported the company is planning to offer its clients a chance to invest another $1.5 billion privately while maintaining the number of shareholder below 500 (Blodget, 2012). Sockin’s article exposed the “secret deal” and gained a massive publicity (Blodget, 2012). However, with the enormous publicity raised concerns in S.E.C. as they are strict about “advertising” private placement (Blodget, 2012). As the result of the concern, Goldman Sachs made a shocking announcement, pulling all deals off in the United States and stating that they would raise the funds from international clients instead. According to Henry Blodget, CEO and editor-in-chief of Business Insider, that announcement certainly angered those clients in U.S. that had hoped to invest in Facebook. In
- 7. GOLDMAN SACHS AND ITS REPUTATION 7 addition, it did more damage to the firm as the public distrust for Goldman Sachs was once stirred up again. Since the private deal was off the table, Goldman Sachs lost their chance as the primary banker in the IPO deal (Blodget, 2012). In this situation, Facebook found themselves lose their “face” due to these IPO deal and has suffered an embarrassment caused by Goldman Sachs. Importance of Reputation “Our reputation is one of our most important assets.” (Complaint in class action lawsuit, Ilene Richman v. Goldman Sachs Group, 10 Civ. 3461 (PAC), Complaint paragraph 154 (taken from 2007 Goldman Annual Report).) The above quote from Goldman Sachs Annual Report before the financial crash, suggests the highest respect from the public, industry and most treasured clients. This reputation was devastated by the S.E.C. lawsuit April 16, 2010, charged with fraud in conjunction with the Fabrice Tourre Abacus AC1 deal. Goldman’s fraud, according to the plaintiff, was that it made false and misleading disclosures to shareholders. As a result, Goldman realized quickly that its reputation was at stake with its clients, the public and the government. To mitigate the impact, Goldman pursued a settlement with the S.E.C. in May of 2010. Goldman Sachs’s reputation tarnished by large amount of public mistrust, the question of how Goldman remains the world’s leading, most profitable, and successful bank in spite of its reputation for predatory behavior is both interesting and difficult to believe. While consistently public opinion is low, Goldman reputation remains high in the industry, clients and employees. Due to higher average compensation for its employees, and performance for its clients, coming out of the S.E.C. settlement. In the first quarter of 2011, Goldman lost money on only one day of trading, and made over $100 million in 32 of those days.
- 8. GOLDMAN SACHS AND ITS REPUTATION 8 Reputation Management In May 2010, Goldman Sachs announced the creation of the Business Standards Committee (BSC) to conduct an extensive review of its business standards and practices. Goldman Sachs identified three unifying themes across the 39 BSC recommendations which capture the elements of greatest change and impact on the firm (Reuters, 2013). Such changes included a higher standard of client care, greater sensitivity and awareness of reputational risk and a deeper commitment to individual and collective accountability (Reuters, 2013). In January 2011, Goldman Sachs published the report of the BSC, which made 39 recommendations for change, spanning client service, conflicts and business selection, committee governance, training and professional development and employee evaluation and incentives. In February 2013, Goldman Sachs completed the full implementation of each of the recommendations (Reuters, 2013). Goldman Sachs also started the Chairman session in April 2012, which has held 92 sessions in over 20 cities across the world and trained over 2000 managing directors to be more ethical and client inclined (Goldman Sachs, 2013). Lastly, “to help achieve a higher standard of client care, we established the Firm wide Client and Business Standards Committee (CBSC) and have changed our committee governance structure and committee mission statements to ensure that clients are at the very center of our decision-making” (Cohn, 2013). Conclusion Goldman Sachs reputation took a hit after the lawsuits and SEC investigation. Their clients thought they were not looking out for their interest, and the S.E.C. was watching them like a hawk and domestic investors were angry at them. So, Goldman Sachs management decided it was necessary to take concrete steps to gain their clients confidence and salvage their reputation or they might lose customers and collapse like some other investment banks.
- 9. GOLDMAN SACHS AND ITS REPUTATION 9 Therefore, it is important for Goldman Sachs to raise their ethical standards in order to survive. Even though Goldman Sachs public reputation hasn’t improved much, but because Goldman Sachs acted decisively, they were able to save their reputation with their reputation with clients and regained client and industry confidence, and today they emerged as market leaders and a top investment bank in the country.
- 10. GOLDMAN SACHS AND ITS REPUTATION 10 References Blodget, H. (2012, May 08). How Goldman Sachs Blew The Facebook IPO. Retrieved February 18, 2016, from http://www.businessinsider.com/morgan-stanley-goldman-sachs- facebook-ipo-2012-5?op=1 Free, C. (2012.January) The Goldman Sachs Abacus 2007-ACI Controversy: An ethical case study: http://www.e-ir.info/2012/01/19/the-goldman-sachs-abacus-2007-aci-controversy- an-ethical-case-study/ Cohn, G. D. (2013). Chairma's Forum Stats; A HIGHER STANDARD OF CLIENT CARE. Retrieved from Goldman Sachs: http://www.goldmansachs.com/s/bsc- 2013/index.html#chairmans-forum Farzad, Roben. "Goldman Sachs: Don't Blame Us". Businessweek.com. N.p., 2010. Web. 18 Feb. 2016. Goldman Sachs. (2013, December). Chairman's Forum Stats; BY THE NUMBERS. Retrieved from Goldman Sachs: http://www.goldmansachs.com/s/bsc-2013/index.html#chairmans- forum-stats McGee, S. (2010). Chasing Goldman Sachs: How the masters of the universe melted Wall Street down-- and why they'll take us to the brink again. New York: Crown. Reuters. (2013, May 23). Goldman Sachs Releases the Business Standards Committee Impact Report. Retrieved February 15, 2016, from Reuters: http://www.reuters.com/article/ny- goldman-sachs-idUSnBw235970a+100+BSW20130523
- 11. GOLDMAN SACHS AND ITS REPUTATION 11 S.E.C. v. Goldman Sachs and Fabrice Tourre, Final Judgment as to Defendant Goldman Sachs & Co., Case No. 10-CV-3229. 27. S.E.C. v. Goldman Sachs & Co., and Fabrice Tourre, Complaint, Case No. 10-CV-3229. U.S. Security and Exchange Commission. Goldman Sachs To Pay Record $550 Million To Settle S.E.C. Charges Related To Subprime Mortgage CDO. 2016. Web. 18 Feb. 2016.