First Draft

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.  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).  Recently, however, Goldman Sachs has been the focus of much negative attention for deals which they offered to investors called “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 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.  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 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 1).  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 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.