Goldman Sachs:
Big Business, Big Corruption
In 1869 Goldman Sachs, one of the world’s largest present day investment banking and securities firm, was founded. Over the past nearly 150 years it has become a major force on Wall Street and in the opinion of many, Wall Street’s biggest company. Goldman Sachs has millions of investors throughout the world and has been a very reliable company throughout history. They have become a firm which many other firms hope to replicate the success of on Wall Street. The company provides several financial services, one of which being loaning securities to investors. Lending is not the firm’s only means of making money, they also act much like a hedge fund in that they trade and invest on their own to make profits (McGee 9).
In 2007 Goldman created a synthetic collateralized debt obligation (CDO) called ABACUS 2007-ACI (Trumbull- Stark Lesson). This CDO has led to much negative attention for Goldman Sachs due to the deception of their investors through “Abacus”. The Securities and Exchange Commission (SEC) took some of its most harsh action in history against Goldman Sachs due to this scandal. The penalty paid by Goldman Sachs was hardly diminishing to their company in the scheme of things. The reputation of Goldman Sachs has not received the blow which it deserved due to the sale of failure-bound securities to its investors.
The securities which Goldman Sachs was lending their investors were backed by subprime mortgages, this group of securities is what made up Abacus. John Paulson, an owner of a hedge fund, chose the securities which were put into Abacus on the basis that he believed they would fall in value. He then shorted the funds which he chose for Abacus in order to profit off of the decrease in value of the securities. Goldman Sachs failed to inform their investors of this, and instead encouraged the investors to buy into these securities. They claimed these securities to be highly rated, even though they knew that what they were investing in was junk. The collapse of the housing market led to assurance that these securities would fall in value. Goldman Sachs, however, failed to inform their investors of this scenario. Therefore, over nine months investors lost $1 billion in Abacus. This, of course, benefitted the company and John Paulson greatly.
The SEC stepped in and took action against Goldman Sachs in April 2010. “The agency alleged that Goldman failed to disclose key information about an investment product that had been designed with input from a client with a "short" position – a bet that the investment would go down in value” (Trumbull- Stark Lesson). This quote reveals exactly what the fraud that the SEC charged Goldman Sachs with was. By not telling their investors about this bet they were not properly informed on the securities they were investing in. Goldman argued that they were dealing with sophisticated investors and therefore they should have known what they were investing in. Goldman Sachs made approximately $1 billion from the crash of the Abacus securities, along with other investments tied to subprime mortgages (Lieberman and Krantz). The SEC reached a settlement with Goldman Sachs for $550 million and the whole case was dropped.
Those who invested in Abacus will receive a portion of $250 million from the Goldman Sachs payment and the other $300 million will go directly to the United States Treasury (Lieberman and Krantz). Not only did Goldman Sachs profit by $1 billion from this scam and only having to pay $550 million to settle, but it also does not seem to have put a damper on their reputation as a company. Millions of people are still investing in Goldman Sachs and the value of their stock is on the rise once again.
The SEC believes this case can be used a model for all other companies and goes to show that even the biggest companies will be punished if they break the law. However, the lack of real effect of the punishment on Goldman Sachs has not had this effect on other companies, but instead shown them that the repercussions of a scandal of this sort are not that strong. Other firms will be very careful in the future and will not want to be the next victim of the SEC according to Pravin Rao, an attorney at Perkins Coie (Lieberman and Krantz). However, Goldman Sachs continues to be a leading force on Wall Street and companies still wish to emulate their success in the financial world. Originally Goldman Sachs said that they had done nothing wrong and the investors whom they were dealing with were very experienced and knew what they were getting into. Eventually they did admit that they did not inform their investors of the shortage of the securities which they were investing in.
"’It's disappointing the SEC would basically give (Goldman) a slap on the wrist,’ says Andrew Stoltmann, an attorney at Stoltmann Law” (Lieberman and Krantz). Although in the SEC’s opinion, this punishment was a warning to all companies, the companies look at what little effect it truly had on Goldman Sachs and do not have to worry about action from the SEC destroying their firms. However, some such as John Coffee, a professor at the Columbia Law School, believe that this was a massive step for the SEC and also a major blow to Goldman Sachs to have to admit to their fraud charges (Lieberman and Krantz). Although investment remains high in the company, the reputation of Goldman Sachs may have taken a hit due to this scandal.
“The company's market value has dropped roughly 25%, to $70.5 billion, since April 16, when the SEC released its complaint” (Lieberman). Clearly some investors have shown their distaste for the actions of Goldman Sachs and the value of the company is suffering due to this action. Goldman is afraid of losing investors due to this scandal and the evidence that some have clearly taken their business elsewhere. Nevertheless, due to the decline in the Goldman Sachs’ stock prices in 2009, many investors are seeing this as an opportunity to “buy low, sell high” and therefore the company does not seem to be going through any major difficulties. This scandal is well-known throughout the country which could also hurt their reputation. However, many people see the opportunity to make money and they take it, not taking into account the history of the company or the way it has treated its investors.
This debate over whether or not to invest in Goldman Sachs leads to confusion in that figures and statistics are unable to reveal the reasons that investors did or did not stop investing in the company. This scandal also has influenced different people’s views of the company in different ways. For example, some may have chosen not to invest in the company because they knew the company would profit with more investment. Other investors may have believed the same principle, but for that reason invested in the company in order to benefit financially. The reputation of Goldman Sachs has been put to the test by this charge by the SEC and overall seems to have managed to pass this test.
The question over the repayment of the investors is one that remains to be answered in this case. Although $250 million of the $550 million Goldman Sachs was forced to pay went to the investors, this did not come close to reimbursing them for the money they lost in Abacus. Individual investors could choose to sue the company, however it is unclear how much good this would do them. The amount of money which each person lost could not easily be discovered because of the partial reimbursement which has already occurred. The possibility of investors being able to sue does frighten Goldman however because it would have to present evidence against each individual case and prove that they were not misleading in their presentation of these securities. This will cost the firm much more money on top of what profits it has already lost due to this scandal, which is not what Goldman wants to have happen.
Even after all this discussion there is still an unanswered question in this scandal. So what? Yes, Goldman had to pay millions of dollars, but in reality, so what? How does this affect their businesses or other businesses on Wall Street? First, this case will lead to other companies as well as Goldman Sachs looking into making sure their staffs are well educated on the laws, issues in the media, and their ability to make deals (Trumbull- Stark Lesson). Therefore some turnover in major companies may occur. More educated and qualified personnel may be hired in these huge companies in order to ensure nothing like this happens again. ”Goldman is conducting a comprehensive, firm-wide review of its business standards.” (Trumbull- Stark Lesson) This is part of the reason the SEC let Goldman off so easily in the belief that their policies were changing and they were genuinely attempting to be rid of the corruption within their company. It also shows that the SEC believes that nobody is above the law, not even the biggest companies in the world.
The decision by the SEC to settle this case did not come without argument amongst the commissioners of the SEC (Lieberman). Two of the members of the SEC voted against the settlement in favor of more harsh punishment for Goldman Sachs. The majority of the public seems to share the view of these two that the punishment should have been worse. This shows the weakness of the SEC once again in that even though they finally stood up and took action against a major firm, the punishment was not severe enough. Expectations leading into the case were that Goldman would have to pay at least $1 billion to settle because that was the amount they profited from the sale of these securities. Therefore, Goldman got off easy in the eyes of many when the $550 million was decided on. Who is to blame for allowing this entire scandal to take place?
Chief executive of Goldman Sachs, Lloyd Blankfein, has admitted that the company is to blame in part for the housing crisis and economic meltdown (Associated Press). Blankfein also stated that they did not knowingly contribute to the downfall of the market, but feels as he looks back that they should have seen it coming. The fraud charges by the SEC were on vice president of Goldman Sachs, Fabrice Tourre, due to his knowledge of the collapse of the housing market without informing investors (Baram). Although Tourre was not the only member of the company who was aware that the housing market would collapse, it was his responsibility to ensure investors were fully informed, which they were not.
Goldman Sachs is one of the most well-known investment firms in the world. The creation of ABACUS 2007-ACI led to much negative attention for their company. Goldman’s sale of securities which were bound to fail caused the SEC to step in and take action against them. Despite the deception of their investors, Goldman Sachs’ reputation has suffered very little. The weakness of the SEC has become apparent through this case and Goldman Sachs was able to “get off the hook” due to this. Although there are a few people which blamed is being placed on there were many more people who were aware of what exactly was going on than are being punished for it. The SEC was ensured that Goldman would be investigating its own company to figure out where the problem materialized from and will make any necessary changes. Will these changes actually take place? Will things remain just how they were before, with Goldman just having to pay a portion of their profits? Goldman Sachs has been “punished” by the SEC for this fraud, but in reality what good will the punishment do?
