Category winner: Goldman Sachs and Its Reputation

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This case won the Economics, Politics and Business Environment category at The Case Centre Awards and Competitions 2015. 
 
The case

What

For most of its history Goldman Sachs was organised as a partnership and operated as an investment bank, underwriting new securities to raise funds for corporations and public agencies, advising clients in mergers and acquisitions, and managing clients’ assets. It focused on long-term profitability rather than short-term performance. Although a bank, it did not take deposits, issue credit cards, make mortgage loans or interact with consumers.

Why

Goldman Sachs was a major participant in the events leading up to the financial crisis that started in 2008. Because it performed much better than other banks during the crisis, it was speculated that Goldman Sachs might have taken advantage of clients and others. A series of events and revelations also raised questions about its business conduct, challenging its reputation.

When

From 2004-2006, Goldman Sachs provided billions of dollars in loans to mortgage lenders – most going to subprime lenders such as Ameriquest, Long Beach, New Century and Countrywide through warehouse lines of credit. Among other activities during the same period, the bank acquired $53 billion in loans from subprime loan originators, which it securitized and sold to investors.

In 2009, the U.S. Securities and Exchange Commission filed a lawsuit against Goldman Sachs, and in 2010, Goldman Sachs was called to testify before the Financial Crisis Inquiry Commission. The UK Prime Minister, Gordon Brown, ordered the Financial Services Authority to investigate the effects of the bank’s actions on UK banks.

Where

Goldman Sachs has offices in all of the world’s major financial centres.

Key quote

‘We did a good job of managing risks but we did a less good job of managing our reputation.’ – Lloyd C. Blankfein, CEO Goldman Sachs, The Economic Times, The Times of India, 2010.

What next?

Lloyd C. Blankfein and other Goldman executives hired criminal defence lawyers, a common practice when companies face possible litigation. Goldman estimated ‘reasonably possible’ legal claim costs of $2.7 billion. John Whitehead, former chairman of Goldman, who died in February 2015, said: ‘There’s a lot of work ahead for the management to recover its reputation. They need to maintain some balance in top management of both investment bankers and trading.’

 
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Goldman Sachs and Its Reputation
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The author

David Baron

David P. Baron

David discusses the case and the many questions it raises, including how sophisticated businesses such as Goldman Sachs should manage its relationships with less sophisticated clients and trading partners.

Preeminent firm

The case deals with a preeminent firm with a rich tradition, an enviable record of performance, and a strong reputation. It explores the crises that occurred during turbulent times and a developing financial crisis. The crises received extensive media coverage for an extended time and Goldman Sachs was frequently the focus of this attention, posing a risk to its reputation.

Immediate challenge

The immediate challenge for Goldman Sachs was to deal with the crises and repair its reputation, but the deeper challenge was to improve its relationships with clients and trading partners. The most interesting issue is what Goldman Sachs should assume about the sophistication of its clients and trading partners. If the business is trading, the players are in all likelihood sophisticated as is Goldman Sachs, and no additional disclosure duty is imposed on Goldman. Moreover, if the client is sophisticated, there may be no duty to disclose the role of John Paulson in selecting the securities to include in a collateralized debt obligation.

Riskier

However, most purchasers of structured securities are not as sophisticated as Goldman Sachs. For example, is it right for Goldman to market securities, such as those designed by Fabrice Tourre, when it believes that they are riskier than they might appear to a less sophisticated client or trading partner? If, as with most institutional investors, they rely on the reputation of Goldman Sachs, should there be disclosure?

Ethics challenge

The most interesting ethics issue is what duty Goldman Sachs has to its variety of business partners and clients. This depends on Goldman’s role: is it, for example, acting as an issuer, a trader, or an agent working for a client?

Case writing tips

The main challenge when writing a case from published sources is to distinguish between the conflicting accounts and the advocacy of the players. To write a successful case, you must make sure it has a difficult issue or challenge that can generate a penetrating discussion rather than just being topical.

About the author

David P. Baron is the David S. and Ann M. Barlow Professor of Political Economy and Strategy, Emeritus at Stanford Graduate School of Business.
e dbaron@stanford.edu

 

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