Goldman Sachs and Its Reputation

By David Baron
2011 | Case No. P77
Goldman Sachs was a bank, but it did not take deposits, issue credit cards, make mortgage loans, or interact with consumers. For most of its history Goldman was organized as a partnership and operated as an investment bank engaging in underwriting new securities to raise funds for corporations and public agencies, advising clients as in mergers and acquisitions, and managing assets for clients. It began to engage in securities trading and risk arbitrage in the 1950s, when it developed its philosophy of being “long-term greedy,” which the bank understood as focusing on long-term profitability rather than short-term performance. Goldman went public in 1999, forecasting that its investment banking business would continue to provide most of its revenue and profits. Soon, however, its proprietary trading and trading on behalf of clients began to dominate both its revenue and profit streams. The leadership of the firm also shifted from investment bankers to traders, such as Henry Paulson and CEO Lloyd C. Blankfein. Goldman was a major player in the events leading to the financial crisis and was a major participant in the CDO market. As with most financial institutions Goldman was heavily criticized for its role in the crisis. The disclosure that Goldman had allowed an investor to select securities for inclusion in a CDO that the investor intended to short caused an uproar, particularly because the purchasers were not informed of the investor’s role. The media covered the issue extensively, Congress held hearings, the SEC filed a lawsuit against Goldman, private investors filed lawsuits, and some issuers of securities shunned the company. Goldman’s reputation was damaged. The company faced the decision of how to rebuild its reputation as it addressed new regulations on banks as a result of Dodd-Frank and Federal Reserve actions.
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