Professional Documents
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MANAGEMENT
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GOLDMAN SACHS CASE STUDY
Brady Gear, Adam Heying, Maxwell Kagan, Kelly Schilling, & Joseph Quinn Wingerd
Table of Contents
Introduction .................................................................................................................................................. 4
History ........................................................................................................................................................... 4
The Nineteenth Century ............................................................................................................................ 4
The Twentieth Century .............................................................................................................................. 5
More Recent Times ................................................................................................................................... 6
Who s Who List of Fo e Gold a “a hs E e uti es ................................................................................ 7
Business Segments ........................................................................................................................................ 9
Investment Banking ................................................................................................................................ 10
Financial Advisory ................................................................................................................................... 12
Underwriting ........................................................................................................................................... 12
Trading and Principal Investments.......................................................................................................... 13
Fixed Income, Currency and Commodities (FICC) .................................................................................... 14
Equities .................................................................................................................................................... 15
Principal Investments .............................................................................................................................. 16
Asset Management and Securities Services ............................................................................................ 17
Asset Management ................................................................................................................................. 17
Securities Services ................................................................................................................................... 17
TARP and Goldman Sachs ...................................................................................................................... 18
Warren Buffet’s Investment in Goldman Sachs ................................................................................. 22
Goldman Commercial Bank Conversion ..................................................................................................... 24
Regulation of Goldman and the Financial Markets .................................................................................... 29
Enforcement ............................................................................................................................................ 29
Banking Reform........................................................................................................................................... 31
Transparency........................................................................................................................................... 31
Credit Rating Agencies ............................................................................................................................ 33
Mark-to-Market Accounting ................................................................................................................... 34
Bank Compensation ................................................................................................................................ 35
Bank Capital and Pro-Cyclicality ............................................................................................................. 36
Recapitalization of the Banking System .................................................................................................. 38
Local Rules, Global Markets .................................................................................................................... 39
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Capital is Global, Regulation is Local ...................................................................................................... 39
Exceptional Regulatory Systems Promote and Encourage Financial Activity ......................................... 40
Regulatory Approach .............................................................................................................................. 41
Financial Analysis ................................................................................................................................... 42
Competitive Analysis .............................................................................................................................. 49
Conclusion ................................................................................................................................................... 56
Bibliography ................................................................................................................................................ 57
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Introduction
The Goldman Sachs Group, Inc. has come from humble beginnings to become one of the largest
investment firms on Wall Street. Founded in 1869 by German immigrant, Marcus Goldman, the
o pa did ot assu e the a e Gold a “a hs u til his so -in-law Samuel Sachs became
his partner, a d offi iall a ed the sel es Gold a “a hs Co pa . The company was
first listed on the New York Stock Exchange in 1896, but did not go through its initial public
offering (IPO) until 1906, which the firm co-managed. Throughout the Twentieth Century,
Goldman Sachs helped co-managed the IPOs for some of the largest, most well-known
companies in the United States, including Ford Motor Company in 1956, Sears Roebuck in 1906,
Microsoft in 1986, and Yahoo! in 1996. From a history that goes across several centuries to the
most recent financial turmoil, Goldman Sachs has had its ups and downs as a financial giant, but
has still been able to come out of the rough times in a better position than its competition.
History
The Nineteenth Century
Marcus Goldman began his career in the United States as a salesman, and then opened his own
clothing store in Philadelphia. From there he moved to New York City and began trading
promissory notes in 1869. Samuel Sachs began helping his father-in-law in 1882 and became a
partner in 1885. Eventually, Henry Goldman and Ludwig joined the company, which would
the ek o as Gold a , Sachs a d Co. “oo afte this, the o pa started amassing
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customers that included Sears Roebuck and Cluett Peabody. Goldman, Sachs and Co. went on
to list on the New York Stock Exchange in 1896 (Goldman Sachs History).
Goldman, Sachs & Co. opened the Twentieth Century with a bang. Not only did the firm co-
manage its own IPO in 1906, but it also comanaged the IPO for Sears Roebuck in the same year.
Soon after, Goldman Sachs was recruiting an A-List of clients that included May Department
Stores, F.W. Woolworth, B.F. Goodrich, H.J. Heinz, Pillsbury, General Foods and Merck
(Goldman Sachs History). Goldman, Sachs & Co. was using its clout and prowess to start
offering new products. They were growing so big that they were able to open their first
subsidiary of the Goldman Sachs Trading Corporation. Unfortunately, that particular subsidiary
was one of the many victims of the 1929 Stock Market Crash and resulting Depression.
In 1933, Congress passed the Securities Act of 1933, which created the Securities and Exchange
Commission. This made Goldman, Sachs and Co. work diligently to develop a much easier to
read prospectus. It was events like this that led Goldman Sachs to become very customer
focused and a leader in the investment industry. It was also in the 1930s that the security-
arbitrage business was started. This part of the company actively participated in a myriad of
investment activities, which included private securities sales, corporate mergers and
and Co. worked hard to raise investment capital through the sales of war bonds. It was not
u til the s that Goldman, Sachs hit their stride when it came to profitability in the
investment world.
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In 1956, Ford Motor Company was ready to go public. Goldman, Sachs stepped in to managed
the Initial Public Offering, by marketing 10.2 million shares, worth $26.5 million (Goldman Sachs
Goldman, Sachs stepped in to manage the trade. People would finance these LBOs with junk
bond debt. The problem was that the junk bond debt had to paid off somehow, and it was
usually with the operating profits from the purchased firm or by selling pieces of the firm for
profit. Goldman, Sachs worked to steer clear of the riskiness involved in LBOs and tried to focus
on transactions instead. The market crash of 1987 helped flush out those who were taking on
these risky investments and leave those more moderate investors ahead.
Goldman, Sachs decided it was time to go public in 1998. In May 1999, Goldman, Sachs and Co.
went public on the New York Stock Exchange with a $3.6 billion windfall for 69 million shares. It
as afte this offe i g that the fi e a e offi iall k o as The Gold a “a hs G oup I .
Goldman Sachs was no longer the financial powerhouse that it once was, as Citibank was three
times its size, and JP Morgan Chase & Co. was twice as large. Rumors were swirling that
Goldman Sachs would need to merge with one of these firms if it wanted to stay afloat. It was
Henry Paulson who was a le to ai tai Gold a “a h s positio i the fi a ial o ld.
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Who’s Who List of Former Goldman Sachs Executives
Not many people have the right to say that they were once a member of this financial giant, but
the short list reads as a Who s Who of fi a ial heavyweights. Some of the more notable
alumni include:
Jon Corzine is probably one of the most well-known of the former Goldman Sachs
employees. He began his career working for multiple Midwestern banks, and earning
his Masters of Business Administration (MBA) at the University of Chicago Booth School
of Business. Jon went to work for Goldman Sachs in 1975 and managed to work his way
up to Chairman and Co-CEO in 1994. It was after his departure in 1998, that the firm
went public in 1999 and made him $400 million richer. From there he ran for a Senate
seat in 2000 that he won by a small margin. In January 2006, Jon moved into the New
He Ha k Paulso is the ost infamous of all the alum. He came from humble
beginnings to become one of the most powerful financial presences in the Twenty-first
Century. He obtained his Bachelors of Arts in English at Dartmouth and then went on to
pursue his MBA at the Harvard School of Business (Henry "Hank" Paulson, 2009). He first
joined Goldman Sachs in 1974 in the Chicago office. In 1994, he assumed the role of
Chief Operating Officer and then became co-CEO with Jon Corzine. Hank was appointed
as the 74th Secretary of the U.S. Treasury in 2006. He had the misfortune of presiding
over the Financial Crisis of 2008 and having that time period make a stain on his legacy
in that role. He took the fall for many of the failed decisions made by the Chairman of
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the Federal Reserve, Ben Bernanke and Timothy Geithner, President of the Federal
John Thain has been the alumnus most recently in the news. He was success as the
Chief Operating Officer and President at Goldman Sachs, but left to help the New York
Stock Exchange find a new direction in 2004. He successfully turned the NYSE around
and was sought by both Citigroup and Merrill Lynch to help dig them out of the slumps
they were in. He ended up with Merrill Lynch where he had to weather the storm that
was the Financial Crisis of 2008. Merrill Lynch was performing so poorly that they were
not to survive the collapse, but Thain managed to orchestrate a deal with Bank of
America, and soon he was an employee. Unfortunately, it was found out that he had
passed out large bonuses before the official takeover, and had to resign in January 2009
Robert Rubin left Goldman Sachs for one of the most illustrious careers, only to leave his
most recent financial position in shame. Rubin was educated at Harvard University, the
London School of Economics, and Yale Law School. He worked for Goldman Sachs for 26
years, two of which were spent as Co-Chairman. In 1995, he was appointed as the
United States Secretary of the Treasury by President William Clinton. After serving over
one of the most successful periods of expansion, he left government work for a position
with Citigroup (Wikipedia). Citigroup was nearly defeated by the Financial Crisis of 2008
and Rubin was held accountable for its inability to keep up with the changes in the
housing market. In a letter published in the Huffington Post Rubin said, "My great
regret is that I and so many of us who have been involved in this industry for so long did
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not recognize the serious possibility of the extreme circumstances that the financial
o Robert Steel: Goldman Sachs (1976 to 2004), Barclays Bank (2005 to 2006),
(2008 to present).
o Joshua Bolten: Goldman Sachs (1994 to 1999), George W. Bush policy director
(1999 to 2000), Deputy Chief of Staff for Policy at the White House (2001 to
2003), Director of the Office of Management and Budget (2003 to 2006), and
White House Chief of Staff (2006 to 2009). (Wikipedia - Joshua Bolten, 2009)
o John Whitehead: Goldman Sachs (1947 to 1984), U.S. Deputy Secretary of State
(1985 to 1989), Chairman of the Board of the Federal Reserve Bank of New York
Business Segments
Goldman Sachs separates its principal operating activities into three separate business
segments: Investment Banking, Trading and Principle Investments, and Asset Management and
Securities Services. The following graph shows the net revenues of the operating activities from
2006 to 2008.
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Net Revenues by Segment
(in millions) (2)
40,000
30,000
20,000
10,000
-
2008 2007 2006
Investment Banking
Goldman Sachs, although not exclusively an investment bank, is a leader in the investment
banking industry, ranking number one in global Mergers and Acquisitions (M&A) and in
worldwide public common stock issuances (Wetfeet, Inc., 2009). Gold a s i est ent banking
segment assists corporations and financial institutions plan and execute financial strategies in
the capital markets. Through its investment banking segment, Goldman offers clients a wide
range of advisory, structuring, and underwriting services, including debt and equity financing,
mergers and acquisitions, and project financing. Over the past three fiscal years, the investment
a ki g seg e t of Gold a s ope atio s has ee the s allest of its usi ess seg e ts
net revenues, but is still fu da e tal to Gold a s o siste t p ofita ilit . I est e t a ki g
operations provided net revenues of $5,185 million, $7,555 million, and $5,629 million for the
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years ended December 2008, 2007, and 2006, respectively (The Goldman Sachs Group Inc.,
2008). The investment banking segment of Goldman Sachs is divided into two components:
Financial Advisory and Underwriting. Goldman also divides the investment banking into
Corporate finance
Financial institutions
Health care
High technology
Leveraged finance
Real estate
Special execution
The following graph indicates the net revenues earned in millions in financial advisory and
underwriting.
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Investment Banking Net Revenues
(in millions) (2)
5,000
4,000
3,000
2,000
1,000
-
2008 2007 2006
Financial Advisory
advisory services related to mergers and acquisitions, restructurings and spin-offs, divestitures,
and corporate defense activities. Net revenues from financial advisory services were $2,656
million, $4,222 million, and $2,580 million for the years ended 2008, 2007, and 2006
Underwriting
Underwriting of both debt and equity securities is the second component of the Investment
assisting corporations and financial institutions with public offerings as well as private
placements of debt and equity instruments. Net revenues from underwriting services for the
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years ended 2008, 2007, and 2006 were $2,529 million, $3,333 million, and $3,049 million
Gold a “a hs la gest usi ess seg e t is its T adi g a d P i ipal I est e ts ith et
revenues of $9,063 million, $31,226 million, and $25,562 million for the years ended 2008,
2007, and 2006, respectively, as shown in the graph below (The Goldman Sachs Group Inc.,
2008). The trading and principal investments segment focuses on executing transactions for
in U.S. equities and option exchanges and clears customer transactions on major stock, options,
investment activities, it makes principal investments both directly and indirectly through funds
that it aises a d a ages. Gold a s t adi g a d p i ipal i est ents segment is divided into
three components: Fixed Income, Currency and Commodities, Equities, and Principal
Investments.
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Trading and Principal Investments Net Revenues
(in millions) (2)
20,000
15,000
10,000
5,000
-
2008 2007 2006
(5,000)
Under the fixed income, currency and commodities component of operations, Goldman focuses
on the marketing and trading of fixed income and derivative securities. These securities include:
interest rate and credit products, mortgage-backed securities and loan products, other asset-
backed products, currencies, and commodities. Risk management is a strong focus in this
business component, especially in the areas of interest rates, liquidity, commodities, credit, and
currencies. Net revenues from the fixed income, currency and commodities component for
2008, 2007, and 2006 were $3,713 million, $16,165 million, and $14,262 million (The Goldman
Sachs Group Inc., 2008). The fixed income, currency and commodities component is also further
Capital markets
Corporate securities
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Dealer sales
Futures services
Government securities
High-yield securities
Municipal securities
Energy
Foreign exchange
Metals
Equities
The equities component of Gold a s t adi g a d p i ipal i est e ts usi ess seg e t
brought in net revenues of $9,206 million, $11,304 million, and $8,483 million for fiscal years
2008, 2007, and 2006, respectively (The Goldman Sachs Group Inc., 2008). This component
focuses on the trading of equities and equity-related products, structuring and executing equity
derivative transactions, proprietary trading. The equities component also executes and clears
customer transactions on major exchanges around the world. Profits in this component are
generated primarily from commissions made from trading activities for others and from gains
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on proprietary investments. The following functional groups comprise the equities component
Equities arbitrage
Equities management
Institutional sales
Trading
Principal Investments
merchant banking investments. These investments are generally made in the areas of real
estate and corporate principal investments. Income is generated on these investments from
gains made when the returns on merchant banking funds exceed certain thresholds and on the
principal investments were ($3,856 million), $3,757 million, and $2,817 million, respectively
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Asset Management and Securities Services
Gold a s thi d usi ess seg e t is its asset a age e t a d se u ities se i es di isio ,
which brought in net revenues of $7,974 million, 7,206 million, and $6,474 million for the years
ended 2008, 2007, and 2006, respectively, as shown in the graph below (The Goldman Sachs
Group Inc., 2008). Asset management services are separated from securities services as
individual components. Collectively, this business segment offers investment advice, planning,
a d st ategies fo all ajo asset t pes to Gold a s i di idual a d i stitutio al i esto s. This
segment also provides finance, brokerage, and securities service to funds, endowments,
Asset Management
This component is responsible for both financial planning and investment advisory services for
individual and institutional investors. Net revenues produced from the asset management
component for the years ended 2008, 2007, and 2006 were $4,552 million, $4,490 million, and
$4,294 million (The Goldman Sachs Group Inc., 2008). Revenues are generated from
management and incentive fees generated as a result of these services. Assets under
management include alternative investments, equity, fixed income, and money market
products. Total assets under management were $779 billion, $868 billion, and $676 billion for
2008, 2007, and 2006 (The Goldman Sachs Group Inc., 2008).
Securities Services
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The securities services component at Goldman provides prime brokerage services, financing
services and securities lending services to institutional clients, including hedge funds, mutual
funds, pension funds and foundations, and to high-net-worth individuals across the globe.
Revenues are primarily generated from these services in the form of fees or interest rate
spreads.
5,000
4,000
3,000
2,000
1,000
-
2008 2007 2006
TARP allows the United States Department of the Treasury to purchase or insure up to $700
billion of "troubled" assets. "Troubled assets" are defined as "(A) residential or commercial
mortgages and any securities, obligations, or other instruments that are based on or related to
such mortgages, that in each case was originated or issued on or before March 14, 2008, the
purchase of which the Secretary determines promotes financial market stability; and (B) any
other financial instrument that the Secretary, after consultation with the Chairman of the Board
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of Governors of the Federal Reserve System, determines the purchase of which is necessary to
promote financial market stability, but only upon transmittal of such determination, in writing,
to the app op iate o ittees of Co g ess. (The Troubled Asset Relief Program: Report of
In short, this allows the Treasury to purchase illiquid, difficult-to-value assets from banks and
other financial institutions. The targeted assets can be collateralized debt obligations, which
were sold in a booming market until 2007 when they were hit by widespread foreclosures on
the underlying loans. TARP is intended to improve the liquidity of these assets by purchasing
them using secondary market mechanisms, thus allowing participating institutions to stabilize
TARP does not allow banks to recoup losses already incurred on troubled assets, but officials
hope that once trading of these assets resumes, their prices will stabilize and ultimately
increase in value, resulting in gains to both participating banks and the Treasury itself. The
concept of future gains from troubled assets comes from the hypothesis in the financial
industry that these assets are oversold, as only a small percentage of all mortgages are in
default, while the relative fall in prices represents losses from a much higher default rate.
The Act requires financial institutions selling assets to TARP to issue equity warrants (a type of
security that entitles its holder to purchase shares in the company issuing the security for a
specific price), or equity or senior debt securities (for non-publicly listed companies) to the
Treasury. In the case of warrants, the Treasury will only receive warrants for non-voting shares,
or will agree not to vote the stock. This measure is designed to protect taxpayers by giving the
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Treasury the possibility of profiting through its new ownership stakes in these institutions.
Ideally, if the financial institutions benefit from government assistance and recover their former
strength, the government will also be able to profit from their recovery.
Another important goal of TARP is to encourage banks to resume lending again at levels seen
before the crisis, both to each other and to consumers and businesses. If TARP can stabilize
bank capital ratios, it should theoretically allow them to increase lending instead of hoarding
cash to cushion against future unforeseen losses from troubled assets. Increased lending
equates to "loosening" of credit, which the government hopes will restore order to the financial
markets and improve investor confidence in financial institutions and the markets. As banks
gain increased lending confidence, the interbank lending interest rates (the rates at which the
banks lend to each other on a short term basis) should decrease, further facilitating lending.
(Nothwehr, 2008)
The TA‘P ill ope ate as a e ol i g pu hase fa ilit . The T easu ill ha e a set spe di g
limit, $250 billion at the start of the program, with which it will purchase the assets and then
either sell them or hold the assets and collect the 'coupons'. The money received from sales
and coupons will go back into the pool, facilitating the purchase of more assets. The initial $250
billion can be increased to $350 billion upon the President s e tifi atio to Congress that such
an increase is necessary (Summary of the Emergency Economic Stabilization Act of 2008, 2008).
The remaining $350 billion may be released to the Treasury upon a written report to Congress
from the Treasury with details of its plan for the money. Congress then has 15 days to vote to
disapprove the increase before the money will be automatically released. The first $350 billion
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was released on October 3, 2008, and Congress voted to approve the release of the second
$350 billion on January 15, 2009. One way that TARP money is being spent is to support the
"Making Homes Affordable" plan, which was implemented on March 4, 2009, using TARP
money by the Department of Treasury. Because "at risk" mortgages are defined as "troubled
assets" under TARP, the Treasury has the power to implement the plan. Generally, it provides
refinancing for mortgages held by Fannie Mae or Freddie Mac. Privately held mortgages will be
eligible for other incentives, including a favorable loan modification for five years (MHA
Guidelines).
The authority of the United States Department of the Treasury to establish and manage TARP
under a newly created Office of Financial Stability became law October 3, 2008, the result of an
initial proposal that ultimately was passed by Congress as H.R. 1424, enacting the Emergency
Economic Stabilization Act of 2008 and several other acts (Gross, 2008).
As this relates to Goldman Sachs, they gave taxpayers their due in September. Goldman Sachs
said it paid the government $1.1 billion to redeem the stock-purchase warrants it issued
Treasury last fall. The payment marks the first time taxpayers have recovered the full value of
warrants issued to a major institution under TARP. The Goldman Sachs TARP warrant deal is the
best deal that taxpayers have got to date. Since at least April 2009, representatives from
Goldman Sachs have said that taxpayers deserve a fair return for their investments. Taxpayers
received a 23% annualized return for their $10 billion investment last fall in Goldman.
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Warren Buffet’s Investment in Goldman Sachs
Warren Buffett's ride to the rescue of Goldman Sachs with a $5 billion cash infusion at the
height of the Wall Street panic is an opportunity to examine what the terms of his deal might
preferred stock deal that made the capital very expensive for Goldman. He took taking $5
billion worth of perpetual preferred stock that promised him a 10% dividend and warrants to
In many ways, Goldman operates for Buffett the way a profitable hedge fund does for its
ea i gs oss a spe ified hu dle. “i ila l , Buffett s % di idend means he gets the first cut of
Gold a s e e ues, efo e the Gold a pa t e ship itself. If they don't earn enough to pay
closely aligned with those of the Goldman partnership. He has a concentrated interest in
Goldman and little interest in having the firm pursue short term gains. Similarly, the Goldman
partners have their fortunes tied to the profits of a single firm, both through their interests in
the firm continuing to pay them and their large holdings of its stock. Both have an interest in
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Co pa e that to a o di a i esto i Gold a s o o sto k. Those folks a e happ if just
employees and overhead when it comes to seeing a cut of the revenues. Their capital is in a far
leverage. Ordinarily, a combination of debt load and stock options helps encourage the
management of corporations to overcome the excessive risk aversion that comes from their
undiversified interest in their company. Their interests become aligned with their shareholders
since they need to achieve enough returns to be profitable after the fixed costs of debt
payments. In short, the guys in charge need to make sure the firm makes enough money that
they can get paid after the lenders get paid (Haruni, 2008).
As firms lower their debt, the barrier between revenue and the bosses paycheck lowers. This
lo e s the appetite fo isk. But Buffett s gua a teed % puts that a ie a k i pla e, e-
As firms and regulators attempt to reduce leverage and risk in the fi a ial se to , e ould t
be surprised if the capital structure of many Wall Street firms began to shift in this direction.
The problem of excessive risk is solved by a fixed return, and the problem of excessive risk
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Goldman Commercial Bank Conversion
On September 21, 2008, Goldman Sachs received Federal Reserve approval to transition from
an investment bank to a bank holding company. As part of the credit and banking turmoil, the
Goldman Sachs in particular has thrived on disruptive change. Not always nice, they are here to
stay and will strive to bring change that works to their advantage.
Corporate executives and directors, particularly those who rely on banking organizations for
access to capital, will be wise to anticipate the impact on the credit markets and on financial
relationships that will develop with the new contenders acting as bank holding companies. The
banking industry is being joined by companies that have been living and winning by very
diffe e t ules. The e ee i a oughe usi ess ith o e isk-taking and faster change and
2009).
Clearly the change was not voluntary. Goldman Sachs, Morgan Stanley, and Merrill Lynch (now
part of Bank of America) got caught in a capital-market tsunami. As public companies with
enormous leverage and funding requirements plus mark-to-market accounting, they were
plummeting market prices of many of their assets decimated their capital. While Goldman
Sachs was the least distressed of the three, it was given only one choice. The other choice for
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Gold a as to opt fo a state ha te athe tha e o i g a atio al a k, so it s egulated
by New York State rather than the federal government. The state could be more
accommodating.
During the intense market turmoil at the height of the October storm, Goldman Sachs severely
threatened by an inability to roll over short-term credits like commercial paper and losing
substantial prime-brokerage assets held for hedge funds was nearly forced to merge itself into
a giant commercial bank, reportedly Citigroup. But no transaction materialized, and Goldman
soon as it became a full-service New York State-chartered bank as Goldman Sachs Bank USA, it
ranked as one of the 10 largest banks in America, with assets of $150 billion (Reynolds, 2008).
A few important financial changes will come with the transition to bank-holding-company
status: lower leverage ratios, higher capital atios, o e li uidit , a d ushio apa it to
premises, as they are at all large bank holding companies. Further expected consequences
include slower growth in profits most likely partly offset by more consistent earnings growth
and therefore somewhat higher price-earnings ratios on its stock. So in some ways, Goldman
“a hs ill e ha ged its e a k status. But odds a e that this o t e the ajo ha ge.
Goldman Sachs Bank will alter corporate banking more than corporate banking status will alter
Goldman Sachs. First, consider how much the businesses of Goldman Sachs have changed in
past years while the essence of what makes Goldman Sachs Goldman Sachs has changed so
little. In a single generation, it has absorbed, and adapted to exploit profitably, such major
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ha ges as oke age o issio s plu gi g o e tha %––from 40 cents a share to less
than 4 cents––and the transformation of bond dealing, foreign exchange, and commodities
principal businesses. During that same time, the firm has gone from being almost entirely
domestic and losing money in Europe to earning a majority of its profits overseas, and from a
U.S. partnership with 2,000 employees to a global, publicly owned corporation with some
30,000 employees and a balance sheet over $1 trillion. It has built a major private equity
serving hedge funds. In these and dozens of other businesses, Goldman Sachs has embraced
Corporate executives and directors will like most of the surprises still to co e f o the fi s
transformation into a regulated bank holding company. While projecting the future of free
competitive markets is notoriously risky––and the market for corporate financial services is
notoriously free and competitive––corporations can confidently anticipate that Goldman Sachs
will combine its old strengths with its new strengths in ways that are innovative and assertively
entrepreneurial. As a major bank, Goldman Sachs will be able to combine credit—swiftly and on
private equity, commodities, foreign exchange, and other areas. Some of the combinations will
be fairly conventional, but if history teaches one thing about Goldman Sachs, the lesson is that
its people will conceive of and create strongly profitable new ways of meeting the objectives of
the thousands of corporations and dozens of governments with which it already has major
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Information technology has become a core strategic force in banking strategies. The ability to
syndicate large loans swiftly is now the norm and has already changed the basic business model
of banking. Managing lending risks by hedging with sophisticated analytical models and
derivatives continues to change the traditional concepts of loan portfolio management. Balance
markets is becoming more important. These are areas where Goldman Sachs excels.
muscle in on the more profitable business enjoyed by securities dealers and investment banks.
egulated a k holdi g o pa ies. The got the e fo defe si e easo s, ut the o t sta
on the defensive for long; they will go over to the offense soon.
The critical advantage of universal banks is that they accept deposits and therefore have access
to much more capital than investment banks do. Clients of Goldman Sachs have increasingly
asked it for substantial financing, with the firm acting as financing principal, to help them
ago of acquiring JPMorgan––and its declining to do so. When the firm decided not to make that
acquisition, it was because Henry Paulson, then CEO, was convinced Goldman Sachs would
soon meet or beat what was arguably the best corporate bank in each area of capability. There
was also a cultural gulf. Taking just one factor in isolation, the culture of Goldman Sachs
included being at work before 7 a.m. and often working well into the night and on most
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weekends, largely because the work was so interesting and compelling and the rewards so
great. Goldman Sachs people could not relate to bankers who worked only from nine to five or
driven leadership. All these are energized by the entrepreneurial imperative to create, discover,
many strong corporate relationships, its power in many markets, advanced technology, and an
interconnected team that is flexible, adaptable, and, to any and all competitors, dangerous.
Only a few universal banks have as much competitive strength as Goldman Sachs, and no bank
of any kind has such formidable strength in service after service in market after market or the
speed and intensity of internal communication or the number of action-taking leaders well over
1,000 distributed with action authority into parts all over the world.
Corporations will need to decide how they will work with the new Goldman Sachs. Will they
clients? How crucial might it be to get the first call with new ideas? At what executive level will
traditionally builds its principal relationships with CEOs and CFOs. Will companies concentrate
their corporate finance business with one or two banks like Goldman Sachs or distribute their
business more widely to achieve supplier diversification? Managers and directors will want to
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answer such long-te st ategi supplie questions early, because having the right partners in
corporate finance is clearly becoming more important, and powerful strategic partnerships take
customers and competitors to understand and respect what such a firm has accomplished and
how quickly it adapts to change and profit opportunity. Consider how it changed the
i est e t a ki g usi ess i the s, the sto k oke age usi ess i the s, o odities
area after area of corporate finance. Initiating and driving disruptive change is in its culture.
Sure, the firm has changed to a bank holding company, but the substance of what makes
Goldman Sachs Goldman Sachs the culture has changed very little in 50 years, while almost
Enforcement
The main lesson learned from the financial crisis is the need for more effective systemic
regulation. Again, more effective regulation is needed, not necessarily more regulation.
Government and financial leaders realize that the task of a systemic regulator would be
impossible without the much needed transparency and regulatory tools to instill market
discipline. Lately there has been a focus on who should be in charge and exercise this enormous
29 | P a g e
responsibility. There was a fundamental problem with the old system in that it was far too easy
for financial institutions to flat out deny and ignore problems that allow systemic risks to
infiltrate the market. Whoever is in charge of exercising regulation needs to be able to first
determine risk areas early to prevent them from becoming so large that they soon infect and
threaten the entire financial system. If systemic problems do begin to arise, these regulators
need to take immediate action to limit their overall impact and protect the overall safety of the
system.
In order to protect the system, the regulator must be able to first recognize all of the risks
which may be exposed to an institution and require that those risks be recognized. However,
Sachs, have argued that their assets must be valued at their fair market value price and not at
the historic value (The Trouble with Wall Street Regulation, 2009). It could be argued that if
institutions had been able to recognize their daily risk exposures and value them appropriately,
they may have been able to abbreviate or reduce the worst risk. Because these positions
In an Op-Ed piece in the Financial Times, Goldman CEO Lloyd Blankfein stated that regulators
really need to encourage a culture whereby financial firms are required to share their concerns
fire people fo losses o istakes that e e ho estl ade, said Bla kfei . But if a o e
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conceals or fails to escalate a problem, they must be held accountable immediately. The same
underwriting standards and risk assessment. If practices ever slip and risk starts to become
uncontrollable, regulators should be the first to know. These committees would need the
authority to quickly address any massive capital deficits by reducing risk or raising capital. Of
course, raising the capital requirements of holding companies would reduce systemic risk but
but these ratios really tell you nothing about banks liquidity. If a large amount of a financial
i stitutio s assets a e illi uid, lo le e age atios ould t atte u h. Once liquidity begins
to dry up in the market, these institutions begin to face significant life-threatening problems.
This is why the regulators need to really put an emphasis on the care and need for institutions
to focus on keeping a large amount of liquidity reserve at all times which would prevent
extreme events. A set of broad regulatory proposals which were recently discussed by the G20
Banking Reform
Transparency
In order to flow freely, the money system has to be trusted by everyone around the world. We
have lost that trust and a lack of transparency led us to our current situation. Infosys CEO, Kris
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Ma of the e o o i halle ges e fa e a e the fu tio of a global crisis in
where their efforts and investments will be safe. This lack of confidence is
preventing basic, sound business from thriving and is ultimately prolonging the
(Gopalakrishnan, 2009).
Greater transparency is obviously highly desirable not only for financial institutions, but for
governments and credit agencies as well. The issue is far more complex than just simply
requesting for more transparency. Most of the requests from governments and the public have
2009). It is not easy to do this, partly because valuations are constantly changing under mark-
to-market accounting. What makes this financial crisis so different from others in the past, are
the difficulties of estimating fair-value of derivatives which have been deemed worthless and in
Goldman Sachs has produced countless reports to Congress regarding different avenues to
achieve a transparent market. They publicly state they support regulatory oversight but
continue to play on both sides of the fence. Regulatory decay has spurred countless
unregulated and unregistered market exchanges - some of which are run primarily by Goldman
Sachs. Their GSTrUE (Goldman Sachs Tradable Unregistered Equity OTC Market) program is the
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new game in town. This type of market is particularly attractive for firms who place a significant
value on keeping their operations confidential and staying out of the public limelight
(Ehrenberg, 2007). Below are some recent excerpts from a Wall Street Journal story that
plans to raise almost $700 million by selling a stake in itself. But unlike rival firms
selling shares -- such as Fortress Investment Group LLC, which has done so, and
Blackstone Group, which plans to -- Oaktree won't trade publicly. Instead, it will
trade on a new private market being developed by Wall Street firm Goldman
Sachs Group Inc. Not only does the maneuver enable Oaktree to avoid most
shareholders will have practically no say in how Oaktree is run (Sender, 2009).
The only reason this opportunity exists is because of the broken regulatory system in the U.S.
This type of market does not seem to fit into the regulatory and transparency guidelines that
Goldman has been preaching since it received TARP money last year.
As was mentioned earlier, 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. There is a popular view that investors should do their due diligence before
33 | P a g e
investing in securities, however, many investors who do not have the resources to conduct
strong due diligence and often rely on rating agencies when purchasing these securities. Now it
is clear that they may as well use their own research and regard market prices as a better and
the financial services industry is the source of their fees. This creates a serious conflict of
Mark-to-Market Accounting
As we dug further into this crisis, there has been increased opposition to mark-to-market
accounting. In the Global Economics Weekly of July 2009, Chief Accounting Officer Sarah Smith
presented her views on why Goldman Sachs regards mark-to market accounting as more fair
and more sensible than the alternatives (Smith, 2009). The parties who oppose mark-to-market
accounting argue that as the prices of assets decline, mark-to-market accounting calls attention
to significant problems in the balance sheets of financial institutions. By having to report these
unrealized losses, banks are forced to reduce leverage which accelerates the process.
In a report in the Huffington Post in April, Goldman Sachs publicly stated their major problems
We see two major problems with this view. First, it is not very credible for
downturns. Second, if the underlying assets are worth more than institutions are
34 | P a g e
institutions will see mark-to-market gains when and if the assets appreciate
(Nazareth, 2009).
Clearly, Goldman Sachs wants mark-to-market accounting to stay put. Furthering their view,
they believed that policy markets could instead choose to broaden their le de of last eso t
activities and require financial institutions to raise more capital. They could also relax capital
ratios in certain circumstances. CEO Lloyd Blankfein made reference to his views on the subject
in the Financial Times (Blankfein, Do Not Destroy the Essential Catalyst of Risk, 2009). He
disagreed with those who suggest that fair value accounting is one of the main factors
exacerbating the credit crisis. If more institutions had properly valued their positions and
commitments at the outset, they would have been in a much better position to reduce their
exposures, he stated. For the industry, we cannot let our ability to innovate exceed our
Bank Compensation
Most recently, the crisis has scrutinized the compensation structure of the banking industry. In
an interview published in the Wall Street Journal, Goldman Sachs expressed three points in
o pa ies…A syste of rewardi g i ediate appare t profit with cash bonuses is not
appropriate.
role.
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It is important that policymakers and regulators do not place artificial ceilings on
compensation. Forces of supply and demand for skilled labor need to be allowed to
function. Controls will be circumnavigated (as they were in the 1970s and 1980s through
generous free car schemes, etc). If it is the case that financial services employees do not
o stitute skilled la or, the the demand for their services will wane.
The recent executive pay limits imposed by President Obama and his administration are
poi ted at o pa ies that take ailout o e a d ill affe t o pa ies getti g e eptio al
Basel II is a set of banking regulations which regulates both finance and banking internationally.
requirements of financial institutions with the goal of ensuring liquidity of the institution (Basel
II). O e o e a out Basel II s isk-sensitive bank capital requirements is that they could
amplify business cycle fluctuations. In boom times, everything looks good – asset prices rise and
credit expands in the system. In recession, everything seems very bad – banks stop lending,
asset prices diminish, and this makes the macro environment and their own problems worse.
There have been a variety of recommendations to deal with this problem by the Issuing
Commission. One simple guideline to combat pro-cyclicality has been developed by Rafael
Repullo, Jesus Saurina, and Carlos Truchart – three well respected economists. They argue that
the best way to correct pro-cyclicality is to use a business cycle multiplier of the Basel II capital
requirements that is increasing in the rate of growth of the GDP. Under this scheme, more risky
36 | P a g e
banks would face higher capital requirements without regulation intensifying credit bubbles
Using the experience of Spain, the simple multiplier of the Basel II requirements depends on
the deviation of the rate of growth of GDP compared with its long-term average. Based on their
results, they recommend that the multiplier be increased in expansion phases or decreased in
recessions by 7.2% for each standard deviation in GDP growth, i.e., 7.2% more capital needs to
be raised when GDP is 1% above trend, and vice versa. The below chart which was obtained
from Goldman Sachs shows how the cycle would be smoothed when using this approach. It
may be difficult for an international regulator to enforce this rule, but it would be sensible for
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Recapitalization of the Banking System
Many questions still need to be asked. How can we somehow find enough capital to support
and refuel our banking systems? In the first of three series on effective regulation, Goldman
Sachs brings up three reasons which they believe it will be unlikely that we solve these
realistic or enforceable? Can we really expect all countries in the G20 to share the same
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For cross-border purposes, some commonly used capital requirements are necessary
Despite this, it is necessary and urgent that all local governments continue with their currently
economies would lay out a plan for regulation reform which would stop banks from transferring
risk to less regulated markets and security domains. He mentioned that it was extremely
important that the United States work with Europe in developing a global infrastructure which
to ensure that these same mistakes are not bound to repeat in the future. It must be
recognized that global economic growth can only resume with well-functioning financial and
capital markets. Effectively regulated markets can enable new capital to be put to use in
effective areas.
Capital is not local – it is cross-border. But regulation is local, and that identifies a clear
mismatch which has increased many of the problems facing the global financial system. One
way to fix this mismatch of capital location and regulation is to have one global financial
39 | P a g e
regulator, or at least consistent rules and regulations in financial markets. It could be helpful to
have coordination amongst national regulators, but many do not think a single regulatory
system is viable. It would be far too difficult for a single global regulator to monitor each
country and its laws separately while enforcing standard rules. With that in mind, it would
this were the case, governments could set their own standards and monitor risk-taking very
closely. This would not hinder cross-border financial activity and trading. Instead governments
should attract financial activity to their jurisdiction in order to control it more effectively. The
most effective long-term solution is for countries to contain risk in institutions which oversight
All parties in a financial transaction have an interest in maintaining a trading environment that
is clear and operates under effective and sensible rules. Regulatory systems which have been
geographic areas should focus on regulations that make those markets function well and avoid
regulations which cause financial activity to flee. The key to all effective global regulations
include some form of transparency: legal clarity in bankruptcy and the treatment of creditors,
reliable accounting standards, and regulators which have a large desire to help and the
experience to provide a successful market. Factors which tend to cause a drop in market
activity include legal uncertainty, politically-motivated regulators, and harsh tax treatment. The
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question then becomes, what factors support a growth of market activity? A recent report from
Sandra Lawson of Goldman Sachs International gave a list of a few principles which encourage
Regulatory Approach
When looking at global regulation, recent years have seen two separate approaches to
and how it must be done, with compliance focused solely on the letter of the law.
to follow, and that this clarity removes much of the subjectivity from enforcement
The principles-based approach lays out broad principles and standards but does not
offer detailed guidelines. Compliance and oversight lean toward meeting the spirit of
the law rather than the (less detailed) letter. Supporters of this argue that it gives firms
41 | P a g e
more flexibility and is better suited to fast-changing markets (Principles Based
Given these two approaches, it is important to note there is no strict line dividing the two. In
the end, there is no perfect regulatory approach that fits all markets or societies. Instead other
factors matter more in determining the effectiveness of regulation and the attractiveness of the
Financial Analysis
Goldman Sachs has been a staple in the financial industry for years. With a market
capitalization of $87.73 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 institutions. The
company boasts 31,700 employees, with revenue of nearly $2 million per employee.
Goldman Sachs displayed a very favorable Return on Equity (ROE) in the years leading up to the
commercial banking industry and several competitors from the year 2000 through 2008.
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Comparative ROE
40.00%
35.00%
30.00%
25.00% Industry
ROE
20.00% GS
15.00% JPM
10.00% MS
5.00% BAC
0.00%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Year
Source: SEC 10-k filings and FDIC Statistics on Depository Institutions reports
realize such high levels. Restructuring in the latte pa t of aused Gold a s le e age to
fall from a high of 26.16 at the end of 2007 to 13.5 on their most recent quarterly report filed
showing some improvement over the year end of 2008, but far from nearly 35% at the end of
2007.
Gold a “a hs Return on Assets (ROA) has been historically lower than the commercial
commercial banking industry and several competitors form the year 2000 through 2008.
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Comparative ROA
2.50%
2.00%
1.50% Industry
ROA
GS
1.00%
JPM
0.50% MS
BAC
0.00%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Year
Source: SEC 10-k filings and FDIC Statistics on Depository Institutions Reports
its narrow net interest margin. Compared with other financial institutions with a broader array
made up for this narrow margin by engaging in non-interest income producing activities such as
trading and financial advisement that give the company a typically negative burden, raising
total ROA (2008 was the first time that Goldman Sachs experienced a positive burden based on
Goldman Sachs is currently comprised of three business segments, which may also be broken
Investment Banking
o Financial Advisory
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o Underwriting
o FICC
o Equities
o Principal Investments
o Asset Management
o Securities Services
Trading and Principal Investments has significantly more earnings than either of the other two.
Goldman Sachs has wisely increased this line of their business as it is also the most profitable
with a net operating margin of 40.23% compared to 16.38% and 17.14% for Investment Banking
and Asset Management, respectively. Below is a chart displaying the breakdown of Goldman
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Source: November 4, 2009 10-Q SEC filings
In the third quarter of 2009 the Trading and Principal Investments segment earned $4.5 billion
in operating income.
due to a steep decline in interest rates. The company has lost significant interest revenue
particularly in their securities borrowed category, falling from $2.917 billion in the third quarter
of 2008 to just $122 million in the similar quarter, 2009. Likewise, their interest expense has
dropped in a related category: securities loaned with interest expenses falling from $1.639
narrowed to just .19% in the third quarter of 2009, but gains in non-interest income have offset
this, creating once again a negative non-interest related income and expenses burden.
financially sound. Because the company is de-le e agi g (la gel aused Gold a “a hs
shift to a bank holding company) they have been forced in recent months to shift the focus of
thin interest margins necessitated utilizing leverage to increase ROE, their focus must now shift
to the more profitable area of their business. While Goldman Sachs has decreased their risk by
reducing their leverage, they are now engaging in more risky investment opportunities with a
highe ate of etu to ake up the diffe e e. Belo is a g aph sho i g Gold a “a hs
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operating income over time from FICC-the riskiest part of the Trading and Principal Investments
segment.
$25,000.00
Millions of Dollars
$20,000.00
$15,000.00
$5,000.00
$-
$168,801.26 in compensation per employee in the third quarter of 2009 alone. This allows the
company to recruit some of the best talent available, but cuts into their returns by increasing
interest expenses. The company has come under scrutiny recently for its high compensation.
47 | P a g e
Goldman Sachs employs an above average amount of off-balance sheet trading as well. The
company holds off-balance sheet items totaling 927.56% of total assets, or $1.11 trillion worth.
These are primarily composed of credit derivatives totaling $1.04 trillion, split roughly evenly
between derivatives purchased and those that the bank has written. The company has been
reducing its off-balance sheet holdings in recent months, reducing total items by 30% since the
year-end 2008. Below is a graph showing the off- ala e sheet ite s held Gold a “a hs
900.00%
800.00%
700.00%
600.00%
300.00%
200.00%
100.00%
0.00%
GS MS JPM BAC
While it appears that Goldman Sachs is using off-balance sheet derivatives responsibly, their
p ese e i eases the o pa s o e all isk. The a e age dail alue at isk has i eased i
48 | P a g e
fo to $ illio due to the o pa s o e agg essi e t adi g st ategies.
Goldman Sachs is heavily exposed to shocks to the financial system due to its heavy volume of
trading activities. If securities prices are over-inflated and the company is not adequately
Competitive Analysis
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, however, as the depths of commercial credit losses
have yet to be discovered, and while consumer debt shows signs of improving, provisions for
commercial real estate losses may not cover the actual costs of these loans. It is in this climate
that Goldman Sachs is operating. With few consumer loans on hand, Goldman Sachs must
tread carefully in their portfolio of loans written to companies holding risky assets. If the
company can successfully walk the tight rope it may have a competitive advantage against
some of its staunchest competitors, such as JP Morgan, Bank of America and Morgan Stanley.
JP Morgan is has a market capitalization of $168.18 billion, which is nearly twice the weight size
of Goldman Sachs. They have been able to buy assets including Bear-Stearns and Washington
Mutual at extreme discounts through the financial crisis of the past year. Though they engage
in retail banking to a greater degree than Goldman Sachs, their investment banking potential is
49 | P a g e
othi g to s off at. The o pa s ‘OA is oughl e e ith Gold a “a hs hile JP Mo ga
Bank of America has also weighs against Goldman Sachs in the financial services sector. With a
market capitalization of $128.02 billion it also holds more of the sector than Goldman. Bank of
America, however, lies in much worse shape than JP Morgan and poses less of a threat to
Goldman Sachs. By overpaying for Merrill Lynch during the financial crisis and keeping billions
in bad commercial real estate loans on its books, Bank of America does not fare as well against
some of the more well-placed financial companies. Bank of America has also seen its debt to
equity ratio rise in the past year and its financial leverage fall, reflecting an increase in debt and
a decrease in assets.
business. With a market capitalization of $43.68 billion it is roughly half the size of Goldman
Sachs. Much like Goldman Sachs, Morgan Stanley reclassified itself as a bank holding company
coming out of the economic crisis. Also similar is the fact that Morgan Stanley is required to
reduce leverage and look for high return business opportunities to bolster its returns. Below
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Valuation Ratios
P/E P/Book P/Cash Div. Yield
Flow
Goldman Sachs appears to be the most overpriced stock, trading at 40.8 times cash flows and
price to cash flow ratio is much more in line ith the o . Ea h o pa s price to tangible
ROE
Industry GS JPM MS BAC
2008 1.35% 3.60% 4.91% 2.60% 3.04%
2007 9.12% 34.20% 13.08% 14.10% 12.95%
2006 13.02% 25.17% 11.32% 27.00% 16.86%
2005 12.87% 17.30% 6.37% 18.17% 14.47%
2004 13.71% 11.83% 3.29% 15.49% 10.07%
2003 15.33% 6.34% 7.54% 11.58% 10.89%
Gold a “a hs etu o e uit has ee o e of the highest over the last few years while JP
Morgan has typically trailed, though this trend appears to be changing. The sharp decline in
ROE seen in 2008 comes from one of two sources: in the case of Goldman Sachs and Morgan
51 | P a g e
Stanley, quick de-leveraging pulled back their returns while JP Morgan saw their burden sharply
increase from -.22% to 1.01% from 2007 to 2008 causing ROA to fall. Bank of America had a
similar problem, though their situation was exacerbated by a decrease in the net interest
ROA
Industry GS JPM MS BAC
2008 0.13% 0.26% 0.19% 0.27% 0.33%
2007 0.93% 1.98% 1.53% 0.40% 1.55%
2006 1.33% 1.64% 1.34% 0.98% 2.36%
2005 1.30% 0.98% 0.82% 0.87% 1.73%
2004 1.30% 0.80% 0.42% 0.80% 1.42%
2003 1.40% 0.50% 0.67% 0.72% 1.10%
Similar to ROE, each company saw a sharp decline in ROA from 2007 to 2008. While conditions
are improving in 2009, companies are being forced to find more profitable lines of business to
Goldman Sachs and Morgan Stanley, as brokerage firms, have the tightest Net Interest Margins
(NIM) due to the amount of non-interest income and expenses they have. They are able to
52 | P a g e
make up profits in securities trading and wealth management. JP Morgan, as an institution
leaning more on the commercial bank side, shows higher NIM than either Goldman or Morgan
Stanley while Bank of America, which leans mostly upon its commercial banking business, has
the highest net interest margins. This all makes sense and when comparing the two brokerage
firms, Goldman Sachs shows the most promise in its net interest margin.
$30.00
Historical Earning Per Share
$25.00
$20.00
Earining Per Share
GS
$15.00 JPM
MS
$10.00 BAC
$5.00
$-
2002 2003 2004 2005 2006 2007 2008 2009
53 | P a g e
Stock Prices from 1/6/03 through 11/2/09
$250.00
$200.00
$150.00
Stock Price
$100.00
$50.00
$-
1/6/2003 1/6/2004 1/6/2005 1/6/2006 1/6/2007 1/6/2008 1/6/2009
GS JPM MS BAC
The stock price and earnings data charts give a visual representation of volatility risks involved
riskier than the other two stocks. In addition, Goldman Sachs market exposure subjects it to
risks of market fluctuations to a greater degree than any of the other three stocks. Though
Morgan Stanley is a brokerage firm as well, it has followed the path of wealth management
athe tha t adi g a ti ities to olste its etu s. JP Mo ga s usi ess is di e sified to a
54 | P a g e
degree that it is much less exposed to market fluctuations than Goldman Sachs. Bank of
A e i a s i est e ts i Cou t ide a d Me ill L h ause its isk p ofile to i ease ith
regards to both market exposure and fixed income securities. This is likely why its volatility is
so high because a change in any number of economic factors could cause a loss for Bank of
America.
Goldman Sachs holds off-balance sheet derivatives far in excess of any of the three competitors
examined. This additional exposure to market risks should cause investors to pause. Although
many of the off-balance sheet liabilities are offset by assets, they are dependent on timing and
the direction of the markets. These items total $1.11 trillion in notional value and represent a
real risk hidden withi Gold a “a hs ooks. As a pe e tage of total assets, this a ou t is
much higher than any other competitor, the next closest being JP Morgan with 472.12% of total
Because of off-balance sheet items, higher securities trading volumes (particularly in the FICC
segment), and higher stock price volatility Goldman Sachs does have a higher risk profile than
Countrywide combined with its high beta likely make it the riskiest out of the bunch. That
being said, Goldman Sachs does have higher earnings potential per share than either of the
other competitors though the valuation analysis shows that this has likely already been priced
55 | P a g e
Conclusion
From a very auspicious beginning to a near-death during the Depression; from the IPO of an
automobile giant to a bleak future in the new century; Goldman Sachs has been able to prevail.
Goldman Sachs was able to take its volatility and high earnings per share and remain a steadfast
icon in the financial world while many firms were collapsing all around. The setbacks
experienced during the Financial Crisis of 2008 may have forced Goldman Sachs to make some
changes, but from almost every perspective, the firm has come out in a better position than
a better perception for the firm. Goldman Sachs is now poised to continue on to great things in
the future due to the determination of the current senior management team.
56 | P a g e
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