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Goldman Sachs

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Goldman Sachs,, founded in 1869, describes itself as a "a leading global financial services firm providing investment banking, securities and investment management services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals."[1]

Contents

Financial crisis and the bailout

Role in the crisis

Net capital requirements

In 1975, the SEC’s trading and markets division ruled that investment banks must maintain a debt-to-net capital ratio of less than 12 to 1. In 2004, following extensive lobbying by Goldman Sachs, and its then-chair, Henry Paulson, and other investment banks, the SEC under chairman Christopher Cox authorized five investment banks to develop their own net capital requirements. This enabled investment banks to push borrowing ratios to as high as 40 to 1.[2] These five investment banks were Goldman Sachs, Morgan Stanley, Lehman Brothers, Bear Stearns, and Merrill Lynch. This very high debt-to-reserves helped lead to the financial crisis of 2008 by weakening the ability of these institutions to recover from losses incurred when the risky CDO and CDS bets failed.[3][4]

Lee A. Pickard, who had been Director of the SEC’s Division of Market Regulation when the 1975 12-1 rule was ordered, said of the change, "The SEC modification in 2004 is the primary reason for all of the losses that have occurred."[5]

Exposing foreign institutions to subprime risk

Goldman Sachs used offshore tax havens, often in the form of secret deals run through the Cayman Islands, to sell its mortgage-backed securities to institutions worldwide, including European and Asian banks. In at least one such offering, as documented in a September 26, 2006 investment circular, Goldman Sachs pitched supposedly high-grade bonds backed by residential, commercial, and student loans, but the ratings of many of the mortgage securities hid their true risks and, in some cases, Goldman's descriptions exaggerated their quality. The September 2006 offering, one of billions of dollars worth of such deals in 2006 and 2007, was made at a time when Goldman Sachs began to disengage from the subprime market. "One bond analyst who reviewed the 2006 Cayman deal dismissed it in a report to clients as 'a not so cleverly disguised way for Goldman Sachs & Co. to unload its unwanted exposures to the subprime real estate market onto foreign investors.'"[6]

Marketing what Goldman Sachs was simultaneously betting against

"In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting. . . . Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk."[7]

Bubble machine

A recent article in Rolling Stone, "The Great American Bubble Machine"[8], caused a great deal of controversy when writer, Matt Taibbi, placed Goldman Sachs at the center of every market manipulation since the 19th century including: The Great Depression, Tech Stocks, The Housing Craze, $4 a gallon oil prices, Rigging the Bailout, and future global warming derivatives trade.

“They achieve this using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased.”

– Matt Taibbi

Trading scandal

As a matter of practice, the Goldman Sachs Group Inc. has provided select clients with advice that contradicts what its traders tell the rest of its customers. Once a week beginning in 2007, Goldman analysts gathered in what is called a "trading huddle" to talk about short-term changes in individual stocks or the market at large. Marc Irizarry's published rating on mutual-fund manager Janus Capital Group Inc. was a lackluster "neutral" in early April 2008, but about 50 top customers got a phone call that the stock was likely to go up, according to company documents.[9]

Bailouts

Bailout amounts

Goldman Sachs received $10 billion from the government on October 14, 2008[10][11][12] as one of the six large banks initially given funding from TARP intended to unfreeze credit markets.

Goldman repaid the $10 billion TARP money it received in June 2009.[13]

In September, 2008, as the financial crisis peaked, Goldman Sachs ceased to be an investment bank and became a bank holding company[14].

Goldman Benefits from Lehman Failure and AIG Bailout

Questions were raised about the federal government's decision to allow the collapse of Lehman Brothers, a Goldman Sachs competitor, and the decision to prop up American International Group, Inc.

According to the New York Times, during the peak week of the financial crisis Hank Paulson, Treasury Secretary and former Goldman Sachs CEO was in "very frequent contact" with Lloyd C. Blankfein, Goldman’s current CEO.[15] The extent of the contacts prompted Paulson to seek ethics waivers from the White House and the Department of the Treasury. During the week of the AIG bailout alone, Mr. Paulson and Mr. Blankfein spoke two dozen times, the calendars show, far more frequently than Mr. Paulson did with other Wall Street executives. On Sept. 17, the day Mr. Paulson secured his waivers, he and Mr. Blankfein spoke five times. Two of the calls occurred before Mr. Paulson's waivers were granted."[16]

After the $182.5 billion taxpayer bailout of AIG[17], Goldman received $12.9 billion from AIG in the form of collateral that Goldman already had in its possession and a cash settlement of ongoing margin disputes. $90 billion of the bailout money provided to AIG by the government went directly to banks, including this $12.9 billion to Goldman Sachs[18]. Foreign banks were also major recipients of the AIG bailout funds prompting an investigation by New York Attorney General Andrew Cuomo.

In his 2009 book, Too Big To Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves, Andrew Sorkin reports that same week Paulson was trying to convince Goldman to buy Wachovia.

Jim Wilkinson, Paulson’s chief of staff, realized that such a deal would be a public-relations nightmare at the worst possible time—just as they were trying to pass TARP. “Hank, if you do this, you’ll get killed,” Wilkinson frantically told his boss. “It would be fucking crazy.” Paulson, he said, would lose credibility; he would be accused of lining the pockets of his friends at Goldman; the “Government Sachs” conspiracy theories would flourish.[19]

Throughout this time, Treasury Secretary Henry Paulson, formerly a Goldman Sachs chief executive was aided in his administration of the Treasury Department by numerous advisers who also had personal ties to Goldman Sachs.[20]

Geithner and AIG

At the end of 2008, with AIG running out of cash, negotiations were underway to determine what percentage AIG would pay on its obligations to credit default swap (CDS) counterparties, including Goldman Sachs Group Inc., Merrill Lynch & Co., Paris-based Societe Generale SA and Frankfurt-based Deutsche Bank AG. Negotiations had reached discounts of as much as 40 cents on the dollar. However the government took over AIG on Sept. 16, 2008, and beginning November 3 negotiations were taken over by New York Fed President Timothy Geithner, the Treasury Department and the Federal Reserve. After less than a week of negotiations, the New York Fed instructed AIG to pay 100 cents on the dollar, costing taxpayers at least $13 billion[21].

According to an Oct. 27, 2009 Bloomberg report[21],

The deal contributed to the more than $14 billion that over 18 months was handed to Goldman Sachs, whose former chairman, Stephen Friedman, was chairman of the board of directors of the New York Fed when the decision was made. Friedman, 71, resigned in May, days after it was disclosed by the Wall Street Journal that he had bought more than 50,000 shares of Goldman Sachs stock following the takeover of AIG. He declined to comment for this article.

Actions as bank holding company

There are questions about appearances that Goldman Sachs continues to operate as an investment bank after transitioning to a commercial bank holding company. Simon Johnson, former chief economist of the International Monetary Fund, is a professor at the MIT Sloan School of Management and AIG, and question why they continue to act as investment bank a senior fellow at the Peterson Institute for International Economics, writes[22],

Goldman is also currently engaged in private equity investments in nonfinancial firms around the world, as seen for example in its recent deal with Geely Automotive Holdings in China (People’s Daily; CNBC). US banks or bank holding companies would not generally be allowed to undertake such transactions - in fact, it is annoyed bankers who have asked me to take this up. [. . .] is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks? Or will all bank holding companies be allowed to expand on the same basis.

Notable reactions to the financial crisis

Invoking religious themes

As Goldman's reputation in the general public suffered in late 2008 and 2009, several Goldman spokesmen began to invoke religious themes in their media appearances and public events. "The injunction of Jesus to love others as ourselves is an endorsement of self-interest," Goldman Sachs International adviser Brian Griffiths said on October 20, 2009, to a crowd in St. Paul’s Cathedral in London. "We have to tolerate the inequality as a way to achieving greater prosperity and opportunity for all."[23] Lloyd Blankfein similarly was quoted in the Sunday Times describing his company's work as having "a social purpose" and himself as "doing God’s work."[24]

Seeking gun permits

Bloomberg News columnist and Warren Buffett biographer Alice Schroeder reported in December 2009 that some senior Goldman executives sought gun permits and were "loaded up on firearms and ... now equipped to defend themselves if there is a populist uprising against the bank."[25]

Apologies

Goldman chairman and CEO Lloyd Blankfein told a conference in November 2009, "We participated in things that were clearly wrong and have reason to regret. We apologize." Published accounts do not quote Blankfein having elaborated upon which "things ... were clearly wrong."[26]

Discouraging holiday parties

Goldman Sachs canceled its annual Christmas party in 2009, and it prohibited employees from paying for parties in their own homes. It also instructed employees not to gather in any parties of 12 or more people.[27]

Phoning in to White House meeting

President Obama summoned leading financial sector executives to the White House for a meeting on December 14, 2009, at which he implored the companies to cease opposing financial reform and cooperate with homeowners struggling with their mortgages. Goldman CEO Lloyd Blankfein was one of three who failed to arrive in person and instead participated via conference call.[28]

Earnings and bonuses

According to a report by the Attorney General of New York State Goldman Sachs paid $4.8 billion in bonuses to executives and employees[29] while earning only $2.3 billion after being a recipient of TARP bailout funds of $10 billion. Other reports claim the bonus pool was as high as 11.4 billion[30].

Breakdown of Goldman Sachs 2008 bonuses from the Attorney General's report[31];

  • Tarp funds received: $10 Billion
  • 2008 Earnings: $2.3 billion, or $4.47 a share.
  • 2008 total bonuses: $4.82 billion (includes $2.24 billion in cash)
  • The top four received a combined $45.9 million
  • The next four received a combined $40.81 million.
  • The next six received a combined $56.40 million.
  • Number of individuals that received more than $10 million: 6.
  • Number that received more than $8 million: 21.
  • Number that received more than $5 million: 78.
  • Number that received more than $4 million: 95.
  • Number that received more than $3 million: 212.
  • Number that received more than $2 million: 391.
  • Number that received at least $1 million: 953.
  • Total work force: 30,067.

In the first and second quarters of 2009, the Goldman Sachs earned $5.3 billion in net income, the most profitable six-month stretch in the company’s history. By August of 2009, Goldman's stock had more than tripled since its low in November of 2008, to more than $160 per share. Goldman Sachs set aside $11.36 billion in the first eight months of 2009 in total compensation and benefits for its 29,400 employees. In 2008, while Goldman earned $2.3 billion for the year, it paid out $4.82 billion in bonuses, giving 953 employees at least $1 million each and 78 executives $5 million or more (although Goldman's top five officers, including Blankfein, made a public show of declining to take bonuses).[32]

Bad bonus publicity

Goldman Sachs is considering its options dealing with the issue of bad bonus publicity. The company is reportedly planning to hire a brand manager to combat its negative public image. Three options have been suggested to soften the negative public reaction to the bonuses: 1) Pay the vast majority of the bonus in stock. On Wall Street, executives receive a combination of stock and cash, with the cash portion comprising 65% of the total bonus. 2) Goldman Sachs could pay much smaller bonuses and hand out larger salaries. 3) Goldman Sachs could forgo bonuses for the most part and just buy its stock in the open market. Because most of its executives have large pieces of their net worth tied up in shares of Goldman, the wealth effect would be bigger and less sensational than paying all those huge bonus packages at the end of the year.[33]

Code Pink demonstrating at Goldman Sachs, October, 2009: Code pink demonstrating‎

Coal issues

Coal investments

Goldman Sachs is a major financier of new coal plant construction. New coal-fired power plants being funded by the company include:

Coal energy assets

Goldman Sachs' subsidiary, Goldman Sachs Power Holdings, owns Cogentrix, a North Carolina-based company which owns four coal-fired power plants, with a total capacity of 574 MW.

Political influence

Lobbying

Decade-long lobbying expenditure total (1998-2008): $21,637,530 [34]

Goldman Sachs Group Inc. spent $630,000 in the second quarter of 2009 lobbing on automotive industry issues and legislation related to the financial bailout program. Goldman also lobbied on energy reform and issues relating to financial regulatory reform in the April-June period. Besides Congress, the company lobbied the Securities and Exchange Commission and the Federal Reserve, according to the report filed July 20th, 2009 with the House clerk's office[35].

Notable Goldman Sachs’ Lobbyists: [36]

  • Ken Connolly, a former staff director to the U.S. Senate Environment and Public Works Committee.
  • Todd Malan, formerly employed by the U.S. Trade Representative's office.
  • Michael Paese, a former top aide to U.S. Rep. Barney Frank, D-Mass.

2008 Lobbying Expenditure (Top 15) Total: $5,210,000[34]

2008 Top Lobbying Expenditure Recipients:[34]
1. Goldman Sachs $3,280,000
2. Duberstein Group $400,000
3. ML Strategies $280,000
4. Baptista Group $270,000
5. Capitol Tax Partners $240,000

The company spent $2,380,000 for lobbying in 2006. $1,031,250 went to nine outside lobbying firms with the remainder being spent using in-house lobbyists. The lobbying firms included DLA Piper Rudnick Gray Cary, The Duberstein Group, and Vinson & Elkins. [37]

Lobbying positions

Goldman Sachs lobbyists circulated in the Senate[38] a position paper on financial industry regulatory reform that argued, among other things, that some privileged institutions should be permitted to trade with less transparency than other market participants:

In traditional exchange trading, bids and offers are public, and this transparency helps buyers and sellers to achieve the best price. For some market participants, however, the openness and transparency of the equity market actually mean they are unlikely to achieve the best price. The risk, particularly for large transactions such as those undertaken by pension funds or large mutual funds (where most small investors have most of their equity exposure), is that other market participants will use this transparency to undercut the intended transactions.... Alternative trading platforms –- so-called "dark pools" of liquidity -- have evolved to address this problem. They work by separating liquidity from information about the transaction -- the participants, lot sizes and transaction prices. Through the process of "non-displayed liquidity," information does become available to both regulators and the public market -- but not until the transaction is complete.[39] (Italics in original document)

Campaign contributions

Decade-long campaign contribution total (1998-2008): $25,445,983 [34]

Henry M. Paulson, Jr., then Chair & CEO of Goldman Sachs, was a Bush Pioneer having raised at least $100,000 for Bush in the 2004 presidential election. In 2006, Paulson was appointed by Bush to be Secretary of the Department of the Treasury. [40]

Goldman Sachs gave $478,250 to federal candidates in the 05/06 election period through its political action committee - 35% to Democrats and 65% to Republicans. [41]

2008 Campaign Contribution (Top 20) Total: $5,635,501 [34]

2008 Top Recipients:[34]
1. Barack Obama (D) $884,907
2. Hillary Clinton (D) $405,475
3. John McCain (R) $229,695
4. Mitt Romney (R) $229,675
5. Jim Himes (D) $140,448

Revolving door influence

Political appointees and figures

  • Robert Rubin, Former United States Treasury Secretary
  • John Corzine, Governor of New Jersey
  • Henry Paulson, Chief Executive, U.S. Treasury Secretary under George W. Bush
  • Robert Zoellick - United States Trade Representative (2001-2005), Deputy Secretary of State (2005-2006), World Bank President. 2007-
  • Reuben Jeffery III, Under Secretary of State for Economic, Business, and Agricultural Affairs (2007-)
  • Joshua Bolten, Bush's chief of staff during the bailout
  • Mark Patterson, Obama’s Treasury chief of staff, former Goldman lobbyist
  • Ed Liddy, whom Paulson put in charge of bailed out insurance giant AIG, the former Goldman director
  • Neel Kashkari, Head of TARP
  • Gene Sperling, Deputy Dept of Treasury
  • Gary Genzler, CFTC Chair
  • Robert D. Hormats, Dept of State Under Secretary for Economic, Energy and Agricultural Affairs (2009 -)
  • Phil Murphy, Democratic Party’s national finance chairman, represents the United States in Berlin [14]

Other notable Goldman alums: [13]

  • George Herbert Walker IV - member of the Bush family and current managing director at Neuberger Berman
  • Robert Steel - Chairman and President, Wachovia.
  • Jim Cramer, MSNBC Commentator
  • Michael Cohrs, Head of Global Banking at Deutsche Bank
  • Mark Carney, Current Governor of the Bank of Canada [92][93]
  • Malcolm Turnbull, Australian politician, currently the federal leader of the Liberal Party of Australia.
  • John Thain,former Chairman and CEO, Merrill Lynch, and former chairman of the NYSE.
  • Romano Prodi, Prime Minister of Italy twice (1996-1998 and 2006-2008) and President of the European Commission (1999-2004)[94]
  • Mario Draghi, governor of the Bank of Italy (2006- )[94]
  • Massimo Tononi, Italian deputy treasury chief (2006-2008)[94]

Personnel

Key executives

[42]

Members of the board

[43]

Contact details

85 Broad Street
New York, NY 10004
Phone: 212-902-1000
Fax: 212-902-3000
Web: http://www.goldmansachs.com

Articles and resources

Related SourceWatch articles

References

  1. ↑ Goldman Sachs Goldman Sachs Web site
  2. ↑ Stephen Labaton, Agency’s ’04 Rule Let Banks Pile Up New Debt, NY Times, October 8, 2008. Retrieved October 9, 2009
  3. ↑ Julie Satow, Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers, NY Sun, September 18, 2008. Retrieved October 9, 2009
  4. ↑ Ben Protess, ‘Flawed’ SEC Program Failed to Rein in Investment Banks, ProPublica, October 1, 2008. Retrieved October 9, 2009
  5. ↑ Julie Satow, Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers, NY Sun, September 18, 2008. Retrieved October 9, 2009
  6. ↑ Greg Gordon, "Goldman left foreign investors holding the subprime bag," McClatchy Newspapers, November 3, 2009.
  7. ↑ Greg Gordon, "How Goldman secretly bet on the U.S. housing crash," McClatchy Newspapers, November 1, 2009.
  8. ↑ Matt Taibbi, The Great American Bubble Machine, Rolling Stone, July 9-23 2009
  9. ↑ Goldman's Trading Tips Reward Its Biggest Clients, Wall Street Journal, accessed October 7, 2009.
  10. ↑ Goldman reports $1.8 billion profit, CNN, April 14, 2009, retrieved Oct 4, 2009.
  11. ↑ Jane Sasseen and Theo Francis, Paulson's $250 Billion Bank Buy, Business Week, October 14, 2008, retrieved Oct 4, 2009.
  12. ↑ Ian Katz and Rebecca Christie, Blankfein's $70 Million Would Survive Paulson's Rules, Bloomberg, October 15, 2008, retrieved Oct 4, 2009.
  13. ↑ Goldman Sachs repays about $10 bln in TARP funds, Marketwatch, June 17, 2009
  14. ↑ Goldman Sachs to be regulated by Fed, Reuters, Sept 21, 2008, Retrieved Oct 2, 2009.
  15. ↑ Gretchen Morgenson and Don Van Natta Jr.,Paulson’s Calls to Goldman Tested Ethics, New York Times, August 8, 2009, Retrieved Oct 2, 2009
  16. ↑ Gretchen Morgenson and Don Van Natta Jr.,Paulson’s Calls to Goldman Tested Ethics, New York Times, August 8, 2009, Retrieved Oct 2, 2009
  17. ↑ AIG shares bounce as CEO hopes to repay bailout funds, USA Today, August 20, 2009. Accessed October 7, 2009.
  18. ↑ CBS News $90B Of AIG's Federal Rescue Went To Banks, CBS News, March 16, 2009, retrieved Oct 1, 2009.
  19. ↑ Vanity Fair, Press Release, Andrew Ross Sorkin;Too Big To Fail, Sept. 30, 2009 [1]
  20. ↑ Geithner Says No Tilt to Goldman, Wall Street Journal, accessed October 7, 2009.
  21. ↑ 21.0 21.1 Richard Teitelbaum and Hugh Son, New York Fed’s Secret Choice to Pay for Swaps Hits Taxpayers, Bloomberg, October 27, retrieved November 3, 2009.
  22. ↑ Simon Johnson, A Short Question For Senior Officials Of The New York Fed, Baseline Scenario, October 3, 2009. Accessed October 7, 2009.
  23. ↑ Simon Clark and Caroline Binham, "Profit 'Not Satanic,' Barclays Says, After Goldman Invokes Jesus," Bloomberg, November 4, 2009.
  24. ↑ John Arlidge, "I'm doing 'God's work'. Meet Mr Goldman Sachs," Sunday Times, November 8, 2009.
  25. ↑ Alice Schroeder, "Arming Goldman With Pistols Against Public," Bloomberg News, Dec. 1, 2009.
  26. ↑ Christine Harper & Matt Townsend, "Blankfein Apologizes for Goldman Sachs Role in Crisis," Bloomberg News, Nov. 17, 2009.
  27. ↑ Jessica Toonkel Marquez, "Bah! Humbug! Goldman says no to Christmas party," Crain's New York Business, Nov. 12, 2009; John Carney, "Goldman Tells Employees Not To Have Christmas Parties In Their Homes," The Business Insider, Nov. 20, 2009; Courtney Comstock, "Goldman Employees Aren't Allowed To Hang Out In Groups Of 12 Or More," The Business Insider, Nov. 30, 2009.
  28. ↑ Andrew Ross Sorkin, "Putting Obama on Hold, in a Hint of Who’s Boss," DealBook (New York Times blog), Dec. 15, 2009.
  29. ↑ Andrew M. Cuomo, No Rhyme or Reason, report by the Attorney General of New York, retrieved Oct 4, 2009.
  30. ↑ Simon Bowers ,Wall Street banks in $70bn staff payout, Guardian UK, October 17, 2008, retrieved Oct 4, 2009
  31. ↑ Michael Corkery, Goldman Sachs: The Cuomo Report’s Bonus Breakdown, Deal Journal, Wall Street Journal, July 30, 2009. Retrieved Oct 2, 2009
  32. ↑ The Rage Over Goldman Sachs, TIME, accessed October 7, 2009.
  33. ↑ Goldman Execs Blame Anti-Semitism, The Daily Beast, accessed October 7, 2009.
  34. ↑ 34.0 34.1 34.2 34.3 34.4 34.5 "Sold Out: How Wall Street and Washington Betrayed America", accessed October 2009.
  35. ↑ Goldman Sachs spent $630,000 lobbying gov’t in 2Q, Associated Press, accessed October 7, 2009.
  36. ↑ Goldman Sachs spent $630,000 lobbying gov’t in 2Q, Associated Press, accessed October 7, 2009.
  37. ↑ Goldman Sachs lobbying expenses, Open Secrets.org
  38. ↑ Matt Taibbi, "Goldman Lobbies Senate, Says Full Transparency Sucks," Taibblog, October 27, 2009.
  39. ↑ Global Markets Institute, Goldman Sachs Global Investment Research, Effective Regulation: Part 4: Turning Good Ideas Into Good Outcomes, October 2009.
  40. ↑ Bush Pioneer Henry M. Paulson Jr., Texans for Public Justice, accessed August 2007.
  41. ↑ 2006 PAC Summary Data, Open Secrets, accessed July 2007.
  42. ↑ [2], accessed October 2009.
  43. ↑ Board of Directors, accessed October 6 2009.

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