[First Last Name]
English [Number]
[Date Month Year]
1. What are the 3 or 4 key issues raised in this case?
1.1 Sale of Client-Adverse Instruments: This violation of the firm’s fiduciary responsibility to its clients on the sale of a collateralized debt obligation (CDO), which triggered the 2010 American financial crisis after the US Securities and Exchange Commission accused it for civil fraud in April 2010, is an affront to revered historical principle of putting the clients’ interest first (INSEAD 1, 25). These mortgage-backed securities are sub-prime assets that Goldman Sach did not disclose to the buyers. Instead, it sold the CDO as highly-rated to investors, particularly in Europe, while shorting its own position for this instrument. In fact, they sold it deliberately at inflated price knowing that the housing market was bound to crash (11).
1.2 Biased Research and Underwriting Practices: This issue is essentially about conflict of interest. Goldman Sachs made deals with clients in the opposite side of the IPO deal: (1) they advise the corporate client who wants to go public with their organizations; (2) they sell the IPO company’s shares to their own list of high-value investing clients. In IPO companies with financial and operational problems, these companies’ gains will be the investors’ losses. Consequently, the investment analysts were caught in the middle of a rock and a hard place. They need to make their analysis reports glowing with promise for profitability despite the sometimes negative financial realities the IPO company is facing. Simultaneously, they need to make the report exciting to the investing clients to move the IPO shares (INSEAD 13).
1.3 Market Making vs. Proprietary Trading: Market making is about trading for clients who wanted their funds managed by the firm. Proprietary trading is about trading directly to the market for the firm’s own portfolio. Goldman Sachs did both and profit enormously from this dual fronts (INSEAD 6). However, when profitability prospects for clients conflict with its own-book portfolio objectives, which portfolio would the firm prioritizes at giving the potential profits on issues available in the market but cannot be large enough to provide both portfolios? This is another area of conflict of interest that the firm had been profiting from for years.
1.4 Socialized Risk and Privatized Returns: The Troubled Asset Relief Program (TARP) of the government had extended a capital injection of $10 billion to Goldman Sachs after the 2008 crisis (INSEAD 7). However, after awarding its people over $1 million each, the public clamored against the “fat cat” bail out. It looked inappropriate to use tax money to bail out the firm, which used the money to give bonuses to its employees. Essentially, however, the TARP investment was not a dole out charity as the public perceived. But an investment with a high expected rate of return. In Goldman Sach’s case, it was 23% interest.
2. How might the Goldman story be perceived by key interest groups?
2.1 Nonfinancial Corporations: These corporations are relatively less favored by the government financial facilities than financial corporations. The ease for financial corporations like Goldman Sachs to get bailout money in times of crises, and not so easy for nonfinancial corporations to do, often communicate a preferential treatment that does not taste good.
2.2 Sovereign States: The post-crisis behavior of Europe, particularly Greece, Italy, Ireland, Portugal, and Spain, hints on the grave disappointment it had on the Goldman Sachs investment instruments during the sovereign debt crisis. Next to Morgan Stanley, it received the lowest business from these countries as of June 2012 (INSEAD 21), most likely out of lost trust over deleterious impact of its synthetic debt or investment instruments.
2.3 State/Local Governments and Public Entities: These stakeholders are often reliant on their finance officials for recommendations to either take a Goldman Sachs synthetic proposal for overly, and as events had shown unfounded, positive profit estimates. They are highly vulnerable to mathematical manipulations in these kinds of contracts because of their finance officials are not often investment savvy. They were most likely among who lost a lot from the firm’s CDOs and swap deals. They are ambivalent at best and highly vulnerable to marketing maneuvers, especially when potential profitability is highlighted strongly enough.
2.4 Financial Services Firms (FICC): Among financial services firms, Goldman Sachs received the largest AIG CDS bailout package (INSEAD 18). In addition, its type of business has created a climate of deep and enduring hostility towards the banks and the bankers (15). The seemingly unfair high preference that Goldman Sachs enjoyed from the banking regulatory system will heighten the expected hostility between it and the banks. The FICC subsidiary can become a vehicle for complex and synthetic contracts (e.g. swaps or other derivatives) over fixed income instruments, currencies, and commodities (INSEAD 4). It is unknown, however, from the case how far FICC participated in selling synthetic contracts to their clients.
2.5 Private Equity: The 100% asset downgrading of Goldman Sach’s Abacus CDO in February 2008 decries the height of incompetence, if not outright conflict of interest against investors, of its fund managers (INSEAD 20). It is also the height of self-serving profitability when the investors who purchased $900 million of CDO contracts, with the assurance of paying profits ”as long as” the instrument remained healthy, and ended up losing their right to the investment as the mortgage bonds declined as the company rack in profits over the same instruments (19). Moreover, except during the financial crisis of 2008, its stock price had not changed much from its 1999 IPO price to 2012 (17, 14). It also received downgrades from Moody’s Investor Service and Fitch. These conditions will look at Goldman Sachs as an investment that should be avoided at all cost, not just for the losses the company incurred for its clients and violating its First Principle, but also for the publicly discernible pattern of deceptions, dishonesty, and unreliability. The downside are just too many compared to the upside potentials.
2.6 Hedge Funds: Hedge funds were natural recipients of Goldman Sach’s risks in the CDO business. However, they are often run by experienced managers who know the math in these synthetic instruments. Those who are savvy in their decisions may look at Goldman Sachs as sources of profitable opportunities but in their own terms (INSEAD 10). Their attitude mostly leans towards dealing with the firm as long as there are opportunities for profits.
2.7 Mutual Funds: In view of the credit downgrades and dismal performance (INSEAD 14) in the stock market, mutual funds, which are known to be defensive in their attitudes towards their investments, will not think twice considering a Goldman Sach investment as poor market performer that will not be serving the interests of their investors. Mutual funds may let the firm handle trading activities in their behalf. But, it will be unlikely that these actively managed institutions will check with the form for debt instruments or purchase its stocks.
2.8 Pension Funds: Pension funds will take a hard look before considering Goldman Sachs to manage their funds amidst the unresolved conflict of interests with which the firm do business and put the pension funds in the disadvantage when the interest of the firm becomes at stake in investment decisions. This negative reputational perception over the firm may have brought the decline of the firm’s net revenue attributable to institutional clients (INSEAD 23).
2.9 Private Clients: The perception of private clients, particularly the buyers of its investment instruments such as swaps, will look at Goldman Sachs with the repulsion of those who burned their investments in an IPO that went sour because the firm failed to disclose negative material information about the newly listed company. Its trading clients, who were not exposed to the swap and IPO deals, will continue to bring business to the firm, particularly those who make investment decisions that the firm execute. However, clients for asset management and investment banking may think seriously hard in dealing with the firm (INSEAD 22).
2.10 Financial Regulars: These stakeholders are regular clients or at least decision makers in their respective companies fund sourcing. They are the most vulnerable to synthetic contracts like the CDO and swaps, which Goldman Sachs had been pioneering in the investment banking world. They are supposed to get unhinged from their previous dealings with the firm or, if they are savvy enough, will find the complexity of these instruments frankly to their undoing. However, they can be vulnerable to marketing maneuvers. This stakeholder group is expected to be equivocal with regards to the firm until they get an actual taste of losing tax money.
3. What are the strategic options that face Goldman Sachs today? How should the firm proceed and what should be the role of the board?
The most important strategic dilemma that the firm needs to face today has been the same dilemma it had faced decades earlier: the conflicts of interest between selling IPO securities to clients and ensuring that IPO clients will be successfully launched publicly and available shares sold out as expected as well as between managing their clients’ money and managing their own portfolio in competition of available investment opportunities with their clients.
In the IPO front, Goldman Sachs can always effectively deal with this dilemma by screening corporate clients to manage for an IPO. Competent due diligence will ensure that any company it manages for an IPO will be genuine articles of long-term profitability and growth or at least in terms compatible with the investment purview (e.g. short- or medium-term) of their investing clients. Should there be weak areas in the IPO client’s business, it is always responsible to disclose the matter to the prospective buyers and let them decide whether to risk their capital into the security or not. The investors deserve the right to make that decision without misinformation involved. Of course, IPO clients with structural weaknesses may offer higher fees just to ensure that the public launching succeeds and profits. However, Goldman Sachs can always set the expectations clear and make their decisions accordingly. That is, if they want to.
The fund management front is a trickier one because the profits its clients make translates to lost profit potentials in their own portfolio. The own-portfolio profits are often larger than management fees from managed funds. To resolve this dilemma, Goldman Sachs has to resolve to act fairly with their managed clients, which they apparently have not done yet. They can be mathematical about allocating the purchase of a potentially profitable block of securities, for instance, between the managed funds and their own portfolio. That is, if they want to.
4. Would you buy Goldman Sachs shares today?
Base on how Goldman Sachs operates as reported in the case, the many unprincipled decisions that it made will dissuade me from considering an investment in its stocks until the management policies change for the better or when I can trust the management will make principled decisions in favor of the stockholders without compromising the interests of all its clients. With CEO Lloyd Blankfein and President Gary Cohn still in the helm, no significant improvement in this area will be expected. Still I may occasionally monitor its book value per share vis-à-vis its closing prices and its annual returns of equity if it can boast at least 25 percent per annum. Until then, I prefer to be in the sideline as far as Goldman Sachs stock is concerned.
Works Cited
INSEAD. “Goldman Sachs Group, Inc.: Sustaining the Franchise.” Apr. 2014. PDF file.
