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INS521

Goldman Sachs Group, Inc.:


Sustaining the Franchise

04/2014-6057
This case was written by Ingo Walter, Visiting Professor at INSEAD and Professor of Finance, Stern School of
Business, New York University, assisted by Sohail Rana, New York University Abu Dhabi. It is intended to be used as
a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative
situation.
Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at
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In mid-April 2010, the US Securities and Exchange Commission accused Goldman Sachs of
civil fraud during the financial crisis, alleging that the firm had failed to disclose to clients
serious conflicts of interest and was in violation of its fiduciary obligations in the sale of a
collateralized debt obligation (CDO) called Abacus. After the news broke, Goldmans shares
slid by 12.8% within a few hours, closing at $160.70, a fall of over $12 billion in the firms
market value. Within two weeks the stock was down 21% and had lost nearly $21 billion in
market value (Figure 1).
A few months later, Goldman Sachs agreed to pay $550 million in fines and penalties to the
Securities and Exchange Commission, one of the largest ever paid by a Wall Street firm, to
settle charges of securities fraud linked to mortgage investments. Under the terms of the
settlement, Goldman paid $300 million in fines to the Treasury Department and $250 million
in restitution to investors in the Abacus deal, but without admitting any wrongdoing. Goldman
did admit that its marketing materials for the investment had contained incomplete
information. The firm also agreed to change several business practices, including the way it
developed marketing materials for complex mortgage-related securities and educated
employees in that part of its business. The amount of the settlement was small compared to
the firms reported $39 billion in revenues and $8.35 billion net income for 2010.
A civil fraud settlement was one thing; a criminal indictment was another. In view of
persistent public and political resentment of the role banks and bankers had played in the
global financial crisis yet nobody went to jail and contrition was virtually non-existent it
was only a matter of time before pressure to bring criminal charges materialized. If the law
had actually been flouted and people or financial firms had knowingly broken it, the public
expected criminal charges to be filed. Goldman was a prime target for a Department of Justice
criminal probe, but evidence beyond reasonable doubt and mens rea (intent to commit) had
to be proven for a grand jury to indict and for a criminal jury to convict.
Despite the political pressure, the Department of Justice decided not to charge Goldman or
any of its employees with a criminal offense. The decision followed a high-profile
investigation of the banks subprime mortgage deals including the Abacus transaction
based on information provided in an April 2011 US Senate report. In August 2012, the
Department of Justice concluded that based on the law and evidence as they existed at the
time there was no viable basis to bring a criminal prosecution against the firm. Goldman
responded we are pleased that this matter is behind us.
Nevertheless, Senator Carl Levin, who commissioned the 2011 report, commented that
Goldmans actions did immense harm to its clients, and helped create a financial crisis that
nearly plunged us into a second Great Depression. Whether the decision by the Department
of Justice is the product of weak laws or weak enforcement, Goldman Sachs actions were
deceptive and immoral.1 He promised unrelenting regulatory pressure on Goldman and its
competitors.
With a stellar track record, highly talented employees, close relationships with policymakers
and regulators, and a peerless franchise with clients, Goldman had long been a leader in
global investment banking. The firm claimed a unique risk management culture that seemed
to execute superbly during the global financial crisis, outperforming most competitors under
1

http://www.politico.com/news/stories/0812/79566.html

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severe stress conditions and coming out of the episode firing on all cylinders. In the process,
Goldman was forced to convert to a bank holding company thereby accepting tighter
regulatory burdens in order to obtain access to Federal Reserve financing as financial
markets melted down following the failure of rival Lehman Brothers.

The Heritage
Goldman Sachs was founded in New York in 1869 by Marcus Goldman, a German
immigrant. The firm adopted the name Goldman Sachs Co. after Goldmans son-in-law,
Samuel Sachs, joined the firm in 1882. From the start the business was organized as a
partnership, with all key decisions and commitments undertaken by the firms partners.
Ownership and management were one and the same. The partnership mindset came to define
the firms culture and persisted over the ensuing decades more durably than any of its
investment banking competitors, all of which likewise started as partnerships.
The early Goldman Sachs partnership was both resourceful and innovative. It was one of the
first firms to introduce the use of commercial paper to raise funds for corporations in the
1890s, giving clients an alternative to bank credit lines. The firm was invited to join the New
York Stock Exchange (NYSE) in 1896. It was a player in establishing the initial public
offering (IPO) market in the early 20th century, and in 1906 managed one of the largest IPOs
for Sears, Roebuck and Company.
There were misses as well as hits along the way. In the early 1920s, Goldman established a
closed-end fund, Goldman Sachs Trading Corp, which collapsed in the stock market crash of
1929 and the Depression that followed in the 1930s, creating reputation problems that took
time to overcome. The Depression was a difficult period for Goldman Sachs, as for its Wall
Street competitors. The volume of business was at a low ebb for close to a decade.
It was during the worst of this period that the Goldman partners appointed one of the firms
most charismatic leaders, Sidney Weinberg, as senior partner in 1930. Weinberg shifted focus
away from trading and toward investment banking raising capital and providing advisory
services for corporate clients. Weinberg was a very social individual and maintained contact
with key people in the business and government communities. He effectively welded
Goldmans partnership culture to a corporate finance service culture. Client interests were the
primary focus, and this long defined the Goldman Sachs approach to the business. Under his
leadership, Goldman was lead advisor on the Ford Motor Companys IPO in 1956, a major
coup on Wall Street at the time, made possible by Weinbergs contacts with the family of
Henry Ford. He was also responsible for creating an investment research division and a
municipal bond department, as well as establishing risk arbitrage as a distinct line of business.
Weinbergs eventual successor, Gus Levy, joined the firm in the 1950s as a securities trader.
Levy was a pioneer in block trading, in which the firm risked a large amount of capital to
provide trading clients with liquidity and effective low-cost execution by buying large blocks
of securities at a fixed price and then selling them in the market, hopefully at a profit.
Competitors were slower or more risk averse in adopting the practice, so Goldman was able to
gain market share, notably with large institutional investors. As he rose through the firm,
Levy was influential in gradually changing the profile of Goldman Sachs and the balance
between its two powerful divisions, investment banking and securities trading.

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Levy took over from Weinberg as Goldmans senior partner in 1969, and continued to build
the firms trading franchise. He famously introduced the term long-term greedy to the
Goldman vocabulary denoting a focus on making money in the long term while helping
clients meet their objectives. Short-term trading losses happened from time to time but were
to be tolerated as the cost of doing business.
Goldman partners reinvested almost all of their earnings in the firm, except for a draw
needed to live a reasonable lifestyle, and the focus was firmly on the future, not the present. In
a sense, the firm was married to its clients and the partners were married to the firm in what
became an uncommonly successful business model.
Like its competitors, Goldman suffered a financial setback in 1970, when Penn Central
Transportation Company went bankrupt with over $80 million in commercial paper
outstanding, much of which had been underwritten by Goldman Sachs. In the face of large
investor losses, Goldman was forced to mount a sustained defence of its due diligence
practices and underwriting standards, and rebuild its reputation with investors.
Like its American rivals, Goldman Sachs had plenty of business opportunities in the US
domestic market during the high-growth 1950s and 1960s, having been protected in the
securities business by the Glass-Steagall provisions of the Banking Act of 1933, which kept
out the large commercial banks with much bigger balance sheets and much larger capitalbases. In the 1970s, new opportunities were emerging in Europe, Japan and elsewhere that
offered US investment banks a chance to migrate their financial know-how into markets
mainly dominated by big local universal banks. Most of these banks were well entrenched,
with close connections to industry and resistant to importing disruptive new ideas that could
threaten their long-standing business models. Creating a viable competitive footprint abroad
was a long slog for the American investment banks, but one with a potentially massive payoff
as companies and markets globalized. Goldman opened its first international office in London
in 1970, creating a Private Wealth division along with a Fixed Income division in 1972.
In the market for corporate restructuring in the US and abroad, Goldman tended to focus on
the defence adviser to the target both because fees were highly likely to get paid and
because conflicts associated with hostile takeovers could be avoided. This was important for
the firm with the most impressive client list in the industry. Goldman famously created a
white knight strategy in 1974 during its defence of Electric Storage Battery against a hostile
takeover bid from International Nickel (advised by rival Morgan Stanley), an innovation that
burnished the firms advisory reputation.
Two capable partners led the firm at the time John L. Weinberg (son of Sidney Weinberg)
and John C. Whitehead. Both were named co-senior partners in 1976. With Weinbergs
trading background and Whiteheads leadership in corporate finance, this arrangement
avoided internecine battles for power across divisions and set a pattern of co-leadership that
was to last for some time. Weinberg and Whitehead defined much of the culture of Goldman
Sachs, including the firms 14 business principles (see Annex A).
With corporate finance earnings under pressure during the recession of the early 1980s,
Goldman once again ramped up its reliance on trading. In 1981, the firm acquired J. Aron &
Company, a commodities trading business that merged with Goldmans Fixed Income

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division to create Fixed Income, Currencies, and Commodities (FICC). The Aron acquisition
also spawned important Goldman Sachs leaders in later years.
Business in the 1980s was good. Goldman underwrote the largest REIT offering in history for
the Rockefeller Center. Deals like Microsofts IPO, major advisory assignments for GE and
admission to the Tokyo Stock Exchange propelled Goldman Sachs to the top echelons of the
investment banking league tables by the late 1980s. The firm launched a lucrative
privatization practice as Margaret Thatcher privatized whole sectors in the UK, German
reunification brought sell-offs of state-owned enterprises to East Germany, and various
governments in continental Europe and emerging markets followed suit. There was plenty to
privatize and Goldman Sachs got more than its share of the advisory work. To help rebalance
the firm on the buy-side of the market Goldman Sachs Asset Management was formed in
1986 to manage in-house mutual funds and hedge funds offered to clients.
Continuing under a dual leadership structure, Robert Rubin and Stephen Friedman became cosenior partners in 1990, and built on the firms string of successes and innovations. Goldman
introduced paperless trading to the NYSE, and lead-managed the first global debt offering by
a US corporation. It launched the Goldman Sachs commodity index (GSCI) and opened a
Beijing office in 1994. Mexicos $20 billion bailout during the Tequila crisis with the
involvement of Robert Rubin stopped-out significant potential losses for Goldman, although
the Feds abrupt turn in 1994 toward a much tighter monetary policy wreaked havoc on the
firms fixed income portfolio and left partners to take large losses in their capital accounts.
Accustomed to consistently growing personal wealth intended to be harvested at retirement,
many Goldman partners were shocked by the losses they had to bear, even if only
temporarily.
Jon Corzine assumed sole leadership of Goldman Sachs in 1994 with Rubins move to the US
Treasury and Friedmans retirement. The collapse of Long Term Capital Management
(LTCM) and the financial crisis of 1998 posed significant but not cataclysmic challenges for
the securities industry, and Goldman weathered them better than most.

The IPO
For years the Goldman Sachs partners had periodically debated the pros and cons of going
public. All of its major competitors had already taken the decision to go public, notably
Morgan Stanley, Merrill Lynch and Lehman Brothers, leaving Goldman Sachs as the last
partnership holdout. Several points were seemingly in favour:
x

Partners could finally cash-out in what looked to be a favourable market for financial
stocks, instead of remaining locked in until retirement and subject to a five-year
withdrawal schedule. Diversification made sense for partners wealth, and an IPO
would make this possible.

The repeal of Glass-Steagall in 1999 allowed the model of universal banking to be


introduced into the United States and ended the protected status of the full-service
investment banks. The big commercial banks were already entering investment
banking aggressively using their enormous balance sheets, which was likely to
produce erosion of margins and force greater use of leverage.

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Failure of LTCM and the earlier bond losses left many partners concerned about the
value of the firms capital account in the event of a future financial crisis. In an
extreme case, given their limited wealth diversification and partnership liability, they
could be wiped-out financially. As shareholders in a listed company, their losses
would be limited to the value of the stock.

The partnership form constrained Goldmans strategic alternatives, since any


acquisitions would have to be paid for in cash as opposed to shares as a form of
acquisition currency.

Since Goldman as a partnership could not be acquired by another firm, it was not
contestable, which could put a lid on the value of the company in the market for
corporate control.

Arrayed against these arguments were a number of points, strongly defended by some of the
partners, that going public even at an attractive valuation would be the wrong thing to do:
x

Loss of control by the partners. Even with limited distribution of IPO shares to
friendly hands, former partners and other senior executives were unlikely to retain
their dominant role in shaping the firm going forward.

As a public company, Goldman could be slower to respond to challenges and


opportunities, possibly a critical issue in a fast-moving business like investment
banking.

With the public disclosure requirements of a listed company, the competitive freedom
allowed by financial and operational confidentiality could be lost, while the cost of
regulatory requirements would certainly rise.

As a public company whose key people were no longer married to the firm, a key
element of Goldmans culture would eventually dissipate, including fierce loyalty to
its clients. An extraordinary firm would soon become an ordinary firm, losing much of
its distinctiveness.

After a sometimes bitter debate, on May 4th 1999 Goldman Sachs gave up the partnership
form of organization and went public. The IPO raised $3.6 billion, the second largest IPO in
US history at that time. The stock issue was offered at $53 per share and was fully subscribed.
This put Goldmans market capitalization at $33 billion. The first shares to be traded on the
secondary market sold at $76 and the stock reached a first-day high of $77 before closing at
$70.37.
For 133 years, Goldman Sachs had been owned and managed by its partners. Following the
IPO there were 221 managing partners, the top echelon of executives with profit
participation rights. They retained 48.3% of the outstanding shares, while 8.5% went to retired
partners and 21.2% to non-partner employees. Two investors in Goldmans subordinated debt,
Sumitomo Bank of Japan and the Kamehameha Activities Association of Hawaii, received
9.4% of the shares. So only 12.6% was sold to the general public in the IPO, and most were
sold to clients, primarily loyal and wealthy customers. No shares were allocated to the
syndicate managing the IPO and hence the general public.

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Leadership of the newly public company was vested in Henry Paulson, a strong advocate of
the IPO who was instrumental in ousting his predecessor, Jon Corzine, after bruising policy
disagreements. Paulson reverted to the classic Goldman long-term greedy view of the
conduct of business and focused on Weinberg-Whiteheads 14 basic business principles.
Not long after the IPO in 1999, Goldman Sachs became enmeshed in an industry-wide
scandal involving biased research and underwriting practices during the dot-com bubble. With
one of the largest IPO market shares, Goldman had underwritten 56 new tech issues in 19981999. Of these, 40% fell below their offering price shortly after issuance and some soon lost
as much as 75%. All had been touted as strong buys by the firms analysts, who had faced
the impossible task of providing unbiased opinions to investors while at the same time under
pressure to help move the paper for IPO clients who paid the bills. Again, Goldman was not
unique in facing this conflict. Aggressive legal action was brought against the investment
banks by New York State Attorney General Elliott Spitzer, leading to a civil settlement of
$1.435 billion against the securities industry, of which Goldman Sachs paid $110 million.

Building-out the Firm


These potholes aside, a key motivation for the IPO had been to allow Goldman Sachs to
expand its business platform across high-potential clients, financial products and techniques,
and geographies, calibrated to take optimum advantage of the firms evolving competitive
capabilities.
Trading for clients (market making) and for its own book (proprietary trading) had reaped
large profits prior to 1999, amplified by the earlier acquisition of J. Aron in 1981. The IPO
was a way to raise capital to further expand trading, and once again refocused the firms
balance towards trading and positioning, and away from corporate finance, advisory work and
institutional asset management. Increasingly, Goldman served as both principal and agent in
its evolving competitive profile, with its agency role in the flow businesses for major clients
providing a useful information edge for its proprietary trading business.
Goldman made three additional acquisitions designed to support trading. One was the July
1999 $531 million purchase of the Hull Group Inc., a leading electronic trading company.
This signalled Goldmans view that profitable trading growth would increasingly require
electronic, high-frequency, algorithm-driven platforms. In 2001, Goldman acquired the
specialist assets of TFM Investment Group, LLC, a leading options specialist firm. And in
2000, Goldman purchased the NYSE market-maker Spear Leeds & Kellogg LP for $6.5
billion in stock and cash.
To compete in the evolving trading environment with the investment banking divisions of the
massive US and foreign financial conglomerates like Citigroup, UBS and Deutsche Bank, a
much larger balance sheet and increased leverage would be needed. One option was to merge
with JPMorgan & Co. itself the product of Chase Manhattans acquisition of the legacy J.P.
Morgan in 2000 which was working to build its own investment banking and trading
capability, sometimes with mixed success. Some considered this a match made in heaven, and
Goldman looked set to join with Morgan in 2003.

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The deal never happened, reportedly due in part to reservations of CEO Henry Paulson. In an
effort to rent a large balance sheet, Goldman instead created a strategic alliance with
Sumitomo of Japan. This facilitated a market positioning for Goldman that combined agency
functions for clients with an active capital-intensive proprietary trading and investment book
of its own.
In 2006, Paulson was named US Secretary of the Treasury by President George W. Bush and
was succeeded by Lloyd Blankfein, who had joined the firm with the highly successful
acquisition of J. Aron some 25 years earlier. Blankfein was supportive of a workable balance
between agency business, trading and principal investing that had originated with Friedman
and Rubin and gathered force with Paulson. The persistent swing toward trading as a source
of earnings (over investment banking and asset management) continued to the point that
uncharitable observers characterized Goldman Sachs as a hedge fund with some investment
banking activities attached. Nevertheless, investors were amply rewarded by Goldmans
impressive stock price performance in the mid-2000s (see Exhibit 1).

Surviving the Financial Crisis


Unlike most of its competitors, Goldman Sachs was able to profit from the collapse in
subprime mortgage securities and their derivatives in the spring and summer of 2007 by
shorting the impacted asset classes. Adroit risk management on the part of the firm and its
CFO, David Viniar, together with two Goldman traders, Michael Swenson and Josh
Birnbaum, was credited with this success. Goldman turned in a gain of $4 billion by betting
on the markets collapse, while others among its competitors and its own clients held
disastrous long positions which had to be written down a difficult exercise in the absence of
a viable secondary market for the toxic assets. Goldmans performance during the onset of the
global financial crisis was widely lauded in the media, although it did not come without
collateral damage.
As losses of financial intermediaries and institutional investors mounted in the second half of
2007 and into 2008, it became increasingly difficult for firms to profit from the market
turbulence, conditions that worsened dramatically after the collapse of Lehman Brothers in
September 2008 in a Chapter 11 bankruptcy filing. Mortally wounded, Merrill Lynch was
taken over by Bank of America in a controversial transaction.
With two independent investment banks gone, that left Goldman Sachs and Morgan Stanley
still standing. On September 21, 2008, both firms confirmed that they would convert to
traditional bank holding companies in order to obtain access to the Federal Reserve for
liquidity, and both ultimately obtained funding under the governments Troubled Asset Relief
Program (TARP) for injecting taxpayer capital into banks. This brought an end to 75 years of
independent investment banks on Wall Street.
Goldman Sachs received a $10 billion TARP investment of preferred stock from the U.S.
Treasury in October 2008. All of its US competitors were likewise forced to accept TARP
funds, although Goldman and its wholesale banking competitors needed hefty doses of
additional private capital to stabilize the firms and the system as a whole. Various options
were available, but all were expensive. Goldman Sachs turned to Warren Buffet and Berkshire
Hathaway. On September 23, 2008, Berkshire agreed to purchase $5 billion of Goldman

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preferred stock, paying 10% interest, accompanied by warrants to buy another $5 billion of
Goldman's common stock exercisable over a five-year term. In June 2009, Goldman Sachs
repaid the governments TARP investment with 23% interest (in the form of $318 million in
preferred dividend payments and $1.418 billion in warrant redemptions).
The US TARP exercise was highly unpopular politically and remained so for years. It was
perceived as taxpayers in the deepest and longest recession in memory bailing out the fat
cats of Wall Street, socializing risk and privatizing returns. Goldman Sachs did not help
build the banks political credibility by rewarding 953 employees with over $1 million each
immediately after receiving its share of TARP funds, followed by announcements of
impressive earnings rebounds a year later. Taking a hard media line, Goldman insisted that it
had not in fact needed any government bailout at all, but given the possibility of a global
financial melt-down, this argument struck most people as disingenuous.
Besides Treasury capital injections, in 2008 the Federal Reserve had introduced a number of
short-term credit and liquidity facilities to help stabilize financial markets and institutions.
Some of the transactions under these facilities provided liquidity to banks whose failure could
have severely stressed an already fragile financial system.
Goldman Sachs was one of the heaviest users of the Feds loan facilities, with large
borrowings between March 18, 2008 and April 22, 2009. The Primary Dealer Credit Facility
(PDCF), the first Federal Reserve facility ever to provide overnight loans to investment banks,
lent Goldman Sachs a total of $589 billion against collateral such as corporate debt
instruments and mortgage-backed securities. The Term Securities Lending Facility (TSLF)
additionally allowed primary dealers to borrow liquid Treasury securities for one month in
exchange for less liquid collateral. TSLF lent Goldman Sachs a total of $193 billion during
this period. In all, Goldman Sachs's borrowings from the Federal Reserve totalled $782 billion
in 2008 and 2009. All loans were fully repaid and the collateral returned.

Sustaining a Hard-Earned Reputation


Prior to its IPO, Goldman Sachs was revered as a firm with an overriding fiduciary focus on
clients. Ownership and management were the same, and the firm could afford possible shortterm costs to reap the benefits of long-term relationships. The IPO seemed to shift the
goalposts, elevating the importance of fiduciary obligations to public shareholders on the part
of management and the board at a time when Goldman increasingly served as both principal
and agent as a key element of its competitive strategy.
Combined with the aggressive push of commercial banks into investment banking, technology
advances in financial products and processes, and financial globalization, the likelihood of
conflicts of interest increased accordingly. The issue was not whether conflicts of interest
existed in the Goldman business model; they did. The issue was how conflicts of interest
could be managed in ways that safeguarded Goldmans core franchise. Risk governance rose
or should have risen to the top of the agenda in a politically-charged post-crisis
environment that was unlikely to spend a great deal of time listening to excuses for future
slip-ups.

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Unfairly or not, Goldman Sachs was the target of a series of allegations across a number of its
business lines which seemed to call into question the firms overall business model and its
market conduct.

Regulatory Capture
Numerous Goldman Sachs partners and employees served in the US government and vice
versa in a relatively uncontroversial combination of public service and business motivations.
But the firms uncommon success in navigating the financial turbulence of 2008 and 2009
generated much criticism of an alleged revolving door through which Goldman employees
and consultants moved in and out of high government positions. Critics saw a troubling
potential for conflicts of interest involving three axes Goldmans interest, clients interests
and the public interest (see Exhibits 2 and 3).
Treasury Secretary Paulson had been CEO of Goldman, as had former Treasury Secretary
Robert Rubin. The firms lobbyist Mark Patterson had served as chief of staff to Treasury
Secretary Timothy Geithner. Stephen Friedman, a former senior Goldman partner, was named
Chairman of the Federal Reserve Bank of New York in January 2008, although he continued
to own Goldman stock and was a member of the board. Former Goldman partner William
Dudley became President of the Federal Reserve Bank of New York. Goldman's conversion
from a securities firm to a bank holding company meant that its primary regulator was now
the Fed and not the SEC. Former Goldman partner Gary Gensler became head of the
Commodities Futures Trading Commission (CFTC), a key financial regulator.
In Europe, as in the United States, commentators noted the close relationship between
Goldman Sachs and government officials in many countries, as well as at EU and Eurozone
levels. Examples included Lucas Papademos, Greece's prime minister, who was in charge of
the Greek central bank when a swap deal with Goldman Sachs allowed Greece to hide public
debt. Likewise Petros Christodoulou, head of Greece's debt management agency, began his
career at Goldman Sachs. Mario Monti, Italy's prime minister and finance minister, was an
international adviser to Goldman Sachs, and Mario Draghi, head of the European Central
Bank, was formerly Managing Director of Goldman Sachs International. Antnio Borges,
former head of the IMF's European Department, served as vice chairman of Goldman Sachs
International. Peter Sutherland, former Attorney General of Ireland and head of the World
Trade Organization, was a non-executive director of Goldman Sachs International. Karel van
Miert, former EU Competition Commissioner, was an ex-international adviser to Goldman
Sachs. With a reported gross exposure of some $33.6 billion to Portugal, Italy, Ireland, Greece
and Spain in mid-2012, its peerless European contacts couldnt hurt.
Goldmans tradition seemed to encourage successful employees to give back in the form of
public service, and Goldman offered uncommonly remunerative career opportunities to
former public employees. There was nothing to suggest the exploitation of conflicts of
interest, but when assembled as a montage by industry critics accusing it of hijacking of
public policy, there was plenty to discuss in the media. Perceptions matter. Nor did it help that
CEO Lloyd Blankfein once reportedly described conditioning the public policy environment
as our seventh line of business.

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Doing Well in the AIG Bailout


American International Group (AIG) was famously rescued by the US Treasury and Federal
Reserve in September 2008. AIG was heavily exposed to credit default swaps (CDSs) linked
to mortgage-related securities through an affiliate of the AIG holding company, AIG
Financial Products (AIGFP) in London. The AIG holding company itself was lightly
regulated by the US Office of Thrift Supervision. Although AIGs insurance business
remained sound regulated by the New York State Insurance Department the impending
collapse of the holding company was deemed to threaten the financial system.
Counterparties of CDSs written by AIG successively demanded additional capital to secure
their interests. In the absence of sufficient capital, the Federal Reserve initially lent AIG $85
billion to stay afloat. To the extent the banks avoided haircuts on their AIG CDS exposures,
the Fed was indirectly supporting the banks by bailing out AIG. US and foreign banks
received billions during the unwinding of AIG credit default swap contracts, including $12.9
billion from funds provided by the US Federal Reserve.2 (See Exhibit 4)
This triggered controversy in the media and among politicians as to whether counterparty
banks had benefited excessively from the massive bailout and whether they had been
overpaid. In the event of a looming bankruptcy, it was argued, creditors could expect to suffer
a haircut and make a contribution to the firms restructuring. Goldman Sachs and a number of
foreign banks took a very hard line in refusing to accept any haircuts. Lloyd Blankfein was
reportedly the only Wall Street representative present at a meeting at the Federal Reserve
Bank of New York where the options for resolving the AIG crisis were considered.
For its part, Goldman maintained that its net exposure to AIG was not material, and that the
firm was protected by hedges (in the form of CDSs with other counterparties) and $7.5 billion
of AIG collateral posted with the firm. Others considered this position disingenuous. In any
financial meltdown, nobody would be spared and hedges would inevitably fail.3
Abacus Mortgage-Backed CDOs
In July 2009, Goldman Sachs received a so-called Wells Notice, alleging that it had
defrauded investors of more than $1 billion by wilfully mis-marketing toxic sub-prime
mortgage-related securities. The SEC case, launched in April 2010, was described by
Goldman as baseless and factually incorrect.
The charge was based on a financial vehicle, Abacus 2007-AC CDO, that Goldman had
created and sold. The SEC claimed that Goldman had deliberately placed poor-quality
(guaranteed to fail) mortgage loans into the Abacus vehicle at the request of US hedge fund
Paulson & Co., which was seeking to build on its massive short position in that asset class.
The structure and performance of the deal are depicted in Exhibits 5 and 6. Goldman sold the
ill-fated Abacus CDO structure as highly-rated CDOs to investors, especially in Europe, while

2
3

http://www.businessweek.com/the_thread/economicsunbound/archives/2009/03/german_and_
fren.html#more
http://dealbook.nytimes.com/2009/03/20/goldman-maintains-it-had-no-aig-exposure/;
http://www.nytimes.com/2010/02/07/business/07goldman.html?pagewanted=all;
http://www.goldmansachs.com/media-relations/comments-and-responses/archive/aig-nyt-response.html)

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shorting its own position in the same assets. Goldman and one of its traders, Fabrice Tourre,
were the main targets of an SEC civil enforcement action alleging securities fraud.
In April 2010, Tourre was stripped of his license to operate in the City of London and sent on
permanent leave by Goldman, based on emails suggesting he was aware of the complex and
toxic nature of the trades and the intent to deceive investor clients. Later that month, Tourre
appeared before the US Senate Permanent Subcommittee on Investigations, and denied
misleading clients. The Senate hearing received further testimony on other derivative
financial products that turned sour. One, a $1 billion CDO package called Timberwolf, was
branded in an internal email as a shitty deal by Thomas Montag, then Goldman's head of
Sales and Trading for the Americas.
It then emerged that US federal prosecutors had likewise begun a criminal investigation into
Goldman over allegations that investors who bought complex mortgage-backed securities had
been knowingly deceived by the firm.
On 16 July 2010, Goldman settled the civil fraud case with the SEC for $553 million in fines
and penalties over its allegations that it had misled investors in the Abacus 2007-AC1 deal by
not disclosing the involvement of a hedge taking a short position, or the fact that the hedge
fund stood to benefit if the CDO failed. Fabrice Tourre was subsequently charged by the SEC.
In September 2010, the UK's Financial Services Authority (FSA) fined Goldman 17.5
million for not alerting the British authorities about the original SEC probe.
In April 2011, the Senate Permanent Subcommittee on Investigations released its report on
Goldman Sachs. Goldman was accused of deliberately selling mortgage-linked derivatives at
inflated prices after it had concluded that the housing market was about to crash. Chairman
Carl Levin argued that regulators could take further action against Goldman. In February
2012, Goldman Sachs received notice from the SEC that the agency might bring further
charges related to mortgage-backed securities, but in August the prosecution was dropped.
Meanwhile, Goldman was named in a $1.07 billion civil lawsuit related to the Timberwolf
transaction.4
Trouble in China
In 2009, the State-owned Assets Supervision and Administration Commission (SASAC) in
China accused Goldman Sachs of bringing complex products to market that had damaged
investors. The complaint related to a series of oil price hedges structured by a number of
investment banks, predominantly Goldman, for Chinese airlines and energy companies. Li
Wei, SASAC vice president, claimed that the companies had lost RMB 11.4 billion of RMB
125 billion in derivative contracts. Goldman likewise was refused payment by Shenzhen
Nanshan Power, a listed utility which owed the firm $80 million on hedges that went bad, on
the grounds of excessive complexity. Goldman ascribed these disputes to regulatory
constraints in China, where the firm was only one of two investment banks with a full license
to conduct domestic business (the other being UBS).

http://www.reuters.com/finance/stocks/GS/key-developments/article/2424057;
http://nymag.com/daily/intel/2010/04/sec_charges_goldman_sachs_with.html;
http://www.reuters.com/article/2010/04/16/us-goldman-idUSTRE63F3JX20100416)

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The Facebook IPO


Facebook was a fast-growing privately owned tech company when Goldman Sachs invested
$450 million at a share price which valued Facebook at $50 billion, in early January 2011.
Facebook was looking to raise an additional $1.5 billion from investors but without going
public. Goldman Sachs created a plan to offer Facebook shares to its own wealthy American
clients by creating an SPV (special purpose vehicle) which would allow Goldman to raise
cash from large numbers of investors while declaring the SPV as a single owner on the books
of the limited partnership (LP) listed as undertaking the investment with Goldman as the
general partner. This structure would allow important Goldman clients to obtain early entry as
Facebook shareholders at what was likely to be a substantially lower price than an eventual
IPO issue price to the general public.
Within two weeks, Goldman reconfigured the deal under pressure from the SEC, which
considered the structure biased in favour of Goldman and its clients. Instead the shares were
offered to wealthy Goldman clients overseas. Interested US investors felt they had been
cheated out of a potentially lucrative investment opportunity.
The Facebook IPO was launched in May 2012. Goldman and other banks in the syndicate put
substantial effort into marketing and roadshows, and demand seemed strong. However,
Goldman failed to tell clients about a recent drop in Facebook revenues. Moreover, an asset
management unit of Goldman Sachs had rejected the Facebook investment, a fact that
likewise was not revealed to customers for Facebook shares. There was no obligation to do so
but it looked bad after the fact.
The Facebook IPO price was targeted at the high end of the price range ($38) and the IPO had
a dismal start, the share price initially staying barely above the offering price and later
dropping below half that level. Underwriters including Morgan Stanley and Goldman Sachs
as well as the NASDAQ took serious reputational losses in a disastrous deal for investors.
Europes Sovereign Debt Crisis
Goldman Sachs was widely criticized for its role in the European sovereign debt crisis,
particularly in its first phase. The firm allegedly helped the Greek government mask the true
facts concerning its national debt between the years 1998 and 2009.5 Reports circulated that in
September 2009 Goldman Sachs had tried to benefit from the deteriorating fiscal situation in
Greece by creating a special credit default swap (CDS) index to cover the high risk of
Greece's financial situation. (Exhibit 7 shows comparative bank exposures in troubled
European countries). Since Goldman had been involved with the Greek Government for over
a decade, it implied a conflict of interest which drew attention from the regulators, notably the
Federal Reserve.6 The fact that the EU statistical arm, Eurostat, found no fault with the
accounting or disclosure failed to improve perceptions after the fact.

5
6

http://www.spiegel.de/international/europe/greek-debt-crisis-how-goldman-sachs-helped-greece-to-maskits-true-debt-a-676634.html.
http://www.usatoday.com/money/economy/2010-02-25-bernanke-fed-greece_N.htm.

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Persistent Compliance Issues


In April 2003, the SEC charged Goldman Sachs and its competitors over conflicts of interest
among its research analysts. This led to a fine of $110 million for Goldman and $4.1 billion
for the industry as a whole. In July 2004, Goldman paid fines of $10 million to the SEC for
improperly promoting a stock sale involving PetroChina. In January 2005, Goldman paid the
SEC $40 million over charges that it violated securities laws in promoting initial public
offerings. In March 2007, Goldman Execution and Clearing, a Goldman subsidiary, paid the
SEC $2 million over allegations in a case of faulty oversight that allowed customers to make
illegal trades. This unit was involved in another charge by the SEC in March 2009, when it
settled for $1.2 million over improper proprietary trading by employees, and again in May
2010 when the SEC fined Goldman $225,000 for violating a rule aimed at regulating short
selling.
It was arguable whether the string of regulatory and compliance problems faced by Goldman
Sachs was more or less severe than those of its competitors. Observers seemed to conclude
that there was money to be made in the grey areas of the market that tested the rules and the
likelihood of getting caught, and that industry practice developed accordingly. Having no
backlog of regulatory allegations or tolerable cease and desist settlements came to be
regarded by some as flabbiness on the competitive playing field, and the penalties as little
more than the cost of doing business.
Insider Trading
In November 2003, a former Goldman economist, John Youngdahl, pleaded guilty to insider
trading, which led to a fine of $4.2 million on the firm. Three years later two former Goldman
employees, Eugene Plotkin and David Pajcin, were charged with running an international
insider trading ring while they were at the firm. Both were convicted and sentenced to prison
terms. Yet another insider trading incident occurred in July 2009, when the SEC charged a
former Goldman Sachs trader, Anthony Perez, and his brother with insider trading based on
information Perez had obtained on the job at Goldman Sachs both were fined. And in
September 2011 the SEC charged a Goldman employee, Spencer Midlin, and his father with
insider trading based on information Midlin had gained from his position at Goldman Sachs
both were fined. Goldman Sachs was not accused of wrongdoing in any of these cases. But
while not deemed to be at fault, the string of cases brought back painful memories of
Goldman partner Robert Freemans conviction and imprisonment on insider trading charges
decades earlier.
Indeed, Goldman was itself the victim of insider trading by one of its own board members in
the biggest case in decades. In April 2010, director Rajat Gupta, a former long-time managing
partner of McKinsey & Co. who was also a board member of Procter & Gamble and AMR
Corp. (parent of American Airlines), was named in an insider-trading case. According to the
charges, Gupta had provided information to Raj Rajaratnam, CEO of the Galleon Group of
hedge funds, about the September 2008 $5 billion Berkshire Hathaway investment in
Goldman Sachs. That information earned $17 million for Rajaratnam's funds. Confidential
boardroom information from Proctor & Gamble was likewise passed on to Rajaratnam and
created illegal profits of more than $570,000.

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Following a high-profile criminal trial by a jury of eight women and four men in Manhattan,
Rajaratnam was found guilty in May 2011 on all 14 counts against him in a seven-year
conspiracy involving $63.8 million in illegal profits. He was sentenced to 11 years in a federal
prison and fined $10 million. Gupta was likewise criminally charged with insider trading and
found guilty in June 2012 on three counts of securities fraud and one count of conspiracy. He
faced up to 20 years in prison for his conviction on securities fraud, while the conspiracy
change carried a maximum term of five years. Gupta appealed.
Lloyd Blankfein testified at the trial, noting that issues discussed at Goldman board meetings
were strictly confidential: The fact that anything discussed in a board meeting is a
confidential fact.(Exhibit 8 shows Goldmans board at the time).
Greg Smith
On March 14, 2012, a Goldman employee, Greg Smith, announced his resignation in an open
letter to the New York Times. He questioned the culture of Goldman Sachs and claimed CEO
Lloyd Blankfein and President Gary Cohn had lost hold of the firms culture on their watch.
According to Smith, the interests of the client continue to be side-lined in the way the firm
operates and thinks about making money. 7 His letter apparently had a swift impact on the
Goldmans share price, which slid by 3.4% the next day in a strong market (a loss of $1.7
billion in market capitalization). Goldman Sachs responded: We disagree with the views
expressed, which we dont think reflect the way we run our business. In our view, we
will only be successful if our clients are successful. This fundamental truth lies at the heart of
how we conduct ourselves. 8
For shareholders, the Goldman stock price had delivered a bumpy ride since the 1999 IPO
(Exhibit 1) ending mid-2012 about where it began.9 On 21 June 2012, Moodys Investor
Service cut the ratings of 15 banks including Goldman Sachs by two notches. Earlier, Fitch
had earlier downgraded Goldman Sachs by one notch in December 2011.

Perceptions
Goldmans response to the various compliance issues and criticism faced following its 1999
IPO were generally tight-lipped: Never complain. Never explain. Work the system. Rarely
was there a sign of contrition or bending with the wind. The firm seemed to rely heavily on its
network to ease outsize pressure or in extremis take a combative stand. Some scandals, such
as Libor manipulation, were industry-wide, and Goldman Sachs could not be singled out. At
times the approach worked well, at others not. When the SEC charged Goldman with civil
fraud in the Abacus case, it vigorously fought the allegations and then submitted to a $550
million fine for securities fraud, deferred prosecution, and the admission that it had made a
mistake.10

7
8
9
10

http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?pagewanted=all).
http://blogs.wsj.com/deals/2012/03/14/goldman-rejects-claims-made-by-disgruntled-executive/
Exhibits 9-12 provide Goldman Sachs operating and valuation data.
It was a sign of the times and the Goldman resonance that an interview with Lloyd Blankfein caught
worldwide attention:

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Difficult as it might have been, Goldman Sachs significantly evolved its public persona in an
environment of deep and lasting hostility toward banks and bankers. It launched a $500
million programme to help small businesses, and a new Citizenship tab on the firms
website covering initiatives from 10,000 Women to Goldman Gives.
Along the way it set up an active public relations department that responded to many issues
appearing in the print and electronic media. Reports that cut close to the bone, such as the
article by Greg Smith on corporate culture, were swiftly deflected by the firm. Criticism of
specific deals, including one alleging poor due diligence and uncharacteristically sloppy
responsibility to a corporate client, were vigorously challenged in the media.11

11

Reporter: Is it possible to make too much money? Is it possible to have too much ambition? Is it possible
to be too successful? Blankfein shoots back. I dont want people in this firm to think that they have
accomplished as much for themselves as they can and go on vacation. As the guardian of the interests of the
shareholders and, by the way, for the purposes of society, Id like them to continue to do what they are
doing. I dont want to put a cap on their ambition. Its hard for me to argue for a cap on their
compensation.
Reporter: So, its business as usual, then, regardless of whether it makes most people howl at the moon
with rage? Goldman Sachs, this pillar of the free market, breeder of super-citizens, object of envy and awe
will go on raking it in, getting richer than God? An impish grin spreads across Blankfeins face. Call him a
fat cat who mocks the public. Call him wicked. Call him what you will. He is, he says, just a banker doing
Gods work.
Source: Wall Street Journal at http://blogs.wsj.com/marketbeat/2009/11/09/goldman-sachs-blankfein-onbanking-doing-gods-work/
http://www.goldmansachs.com/media-relations/comments-and-responses/current/nyt-dragon-systemsresponse.html

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Case Questions
1. What are the 3 or 4 key issues raised in this case?
2. How might the Goldman story be perceived by key interest groups:
 Nonfinancial corporations
 Sovereign states
 State/local governments and public entities.
 Financial services firms (FICC)
 Private equity
 Hedge funds
 Mutual funds
 Pension funds
 Private clients
 Financial regulators
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?
4. Would you buy Goldman Sachs shares today?

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Exhibit 1
Goldman Sachs Share Price, 1999 IPO 21 August 2012 vs. SPX

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Exhibit 2
Some Goldman Sachs Employees Migrating to Government
Henry Paulson: Served as Treasury Secretary under President George W. Bush.
Was CEO of Goldman from 1999 to 2006.
Robert Rubin: Served as Treasury Secretary under President Clinton.
Previously, he was co-Chairman of Goldman from 1990 to 1992.
Robert K. Steel: Served as Under-Secretary of the Treasury for Domestic Finance, the principal adviser to the Secretary
on matters of domestic finance and led the department's activities with respect to the domestic financial system, fiscal policy
and operations, governmental assets and liabilities, and related economic and financial matters. Retired from Goldman as a
Vice Chairman in 2004, where he worked as Head of Equities for Europe and Head of the Equities Division in New York.
Mark Patterson: Chief of Staff to Secretary Tim Geithner. Was Director of Government Affairs at Goldman.
Dan Jester: Key adviser to Geithner, who played a key role in shaping the takeover of Fannie Mae and Freddie Mac.
Was Strategic Officer at Goldman.
Steve Shafran: Adviser helping to shape Treasury's effort to guarantee money market funds. Was an expert in Corporate
Restructuring at Goldman.
Kendrick Wilson: Brought in to advise former Treasury Secretary Henry Paulson, another Goldman alum -- after a personal
call from his old Harvard Business School classmate George W. Bush. Was a senior investment banker at Goldman.
Neel T. Kashkari: Appointed by Paulson to oversee the $700 billion TARP fund and was considered Paulson's right hand
man during the crisis. Was technology investment banker for Goldman in San Francisco from 2004 to 2006.
Reuben Jeffrey: Selected by fellow Goldman alum Kashkari as the interim Chief Investment Officer for the bailout.
Was executive for 18 years at Goldman, beginning in 1983.
Edward C. Forst: Left his post as Executive Vice President at Harvard to serve as an advisor on setting up TARP, but
has since returned to the school. Was global head of the Investment Management Division at Goldman for 14 years.
William Dudley: President of the Federal Reserve Bank of New York. Was former Chief Economist and Advisory Director at
Goldman where he worked from 1986 to 2007.
Stephen Friedman: Was Chairman of the Federal Reserve Bank of New York until May 2009, when he was pressured to resign
after buying Goldman shares in December and January. Previously he was Director of President George W. Bush's National
Economic Council. Joined Goldman in 1966 and was co-Chairman from 1990 to 1994.
Gary Gensler: Appointed by Obama to head the CFTC. Was a partner in Goldman from 1979-1996
Sonal Shah: Appointed to Office of Social Innovation and Civic Participation and an advisory board member for the
Obama-Biden Transition Project in 2008. Was Vice President at Goldman from 2004 to 2007.
Joshua Bolten: Former Chief of Staff of the Bush administration as well as Director of the Office of Management
and Budget until 2006. Was Executive Director of Government Affairs for Goldman Sachs from 1994 to 1999.
Jon Corzine: A strong supporter and political ally of Obama, Corzine was Governor of New Jersey until 2009. Began working
for Goldman in 1975 and worked his way up to Chairman and co-CEO before being pushed out in 1998.
Robert Zoellick: President of the World Bank and previously deputy Secretary of State.
Was previously a Managing Director at Goldman, which he joined in 2006.
James Johnson: Was involved in the vice-presidential selection process for the Obama campaign and served as President and
CEO of Fannie Mae. Board member of Goldman.
Kenneth D. Brody: Former President and Chairman of the Export-Import Bank of the US.
Worked for Goldman for 20 years.
Sidney Weinberg: Served as Vice-Chairman of FDR's War Production Board during World War II.
Head of Goldman from 1930 to 1969, nicknamed "Mr. Wall Street."

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Exhibit 3
Government Officials Migrating to Goldman Sachs
Some Government Officials Joining Goldman Sachs
E. Gerald Corrigan was President of the New York Fed from 1985 to 1993. He joined Goldman Sachs in 1994 and currently
is a partner and managing director.
Lori E Laudien: Former counsel for the Senate Finance Committee in 1996-1997. Has been a lobbyist for Goldman since 2005.
Marti Thomas: Executive Floor Assistant to Dick Gephardt from 1989-1998, he went on to serve in the Treasury Department
as Deputy Assistant Secretary for Tax and Budget from 1998-1999, and as Assistant Secretary in Legal Affairs and Public Policy
in 2000. Joined Goldman as the Federal Legislative Affairs Leader from 2007-2009.
Kenneth Connolly: Was staff director of the Senate Environment & Public Works Committee. Became a Vice President at
Goldman in 2008.
Arthur Levitt: The longest-serving SEC chairman (1993 to 2001). Hired by Goldman in June 2009 as an adviser on public
policy and other matters.

Some Ex-government Lobbyists for Goldman Sachs


Richard Gephardt: Was House Majority Leader from 1989 to 1995 and House Minority Leader from 1995 to 2003. His lobbying
firm was hired by Goldman to represent its interests on issues related to TARP.
Michael Paese: Former top staffer to Rep. Barney Frank, the chairman of the House Financial Services Committee.
Is Goldman's new top lobbyist - previously worked at JPMorgan and Mercantile Bankshares and was senior minority counsel
at the Financial Services Committee.
Faryar Shirzad: Former top economic aide to President George W. Bush and Republican counsel to the Senate Finance Committee.
He now lobbies the government on behalf of Goldman Sachs as the firm's Global Head of the Office of Government Affairs.
Richard Y. Roberts: Former SEC commissioner. Now working as a principal at RR&G LLC, which was hired by Goldman to
lobby on TARP.
Steven Elmendorf: Former chief of staff to then-House minority Leader Rich Gephardt.
Now runs his own lobbying firm, where Goldman is one of his clients.
Robert Cogorno: Former Gephardt aide and one-time floor director for Steny Hoyer (D-Md.), the No. 2 House Democrat.
Works for Elmendorf Strategies, where he lobbies for Goldman and Citigroup.
Chris Javens: Ex-tax policy adviser to Iowa Senator Chuck Grassley. Now lobbies for Goldman.

Exhibit 4
Largest Recipients of AIG CDS Bailout at Par, Sept-Dec 2008
12.9

11.9
11.8
8.5
6.8
5.2
5.0
4.9
3.5

2.6

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European Banks Using AIG CDS to


Reduce Basle 2 Capital Ratios:
Barclays
HSBC
BNP Paribas
Lloyds
Calyon
Rabobank
Danske Bank
RBS
Deutsche Bank
Santander
Dresdner Bank
SocGen
UBS

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Exhibit 5
Synthetic Collateralized CDO
Goldman Sachs Abacus 2006-hgs 1

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Exhibit 6
Investor Losses on Goldman Sachs Abacus 2006-hgs 1

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Exhibit 7
Gross and New Exposures to Greece, Italy,
Ireland, Portugal and Spain (June 2012)

Exhibit 8
Goldman Sachs Board of Directors, April 2010

Lloyd Blankfein
Chairman & CEO

Gary Cohn
President & COO

Rajat Gupta
Ex-MP, McKinsey*

James Johnson
Ex-CEO, FNMA

John Bryan
Ex-CEO Sara Lee

Lois Juliber
Ex-VC, Colgate

Claes Dahlbck
Investor AB

Lakshmi Gupta
CEO, ArcelorMittal

Steve Friedman
William George
Stone Point Capital Ex-CEO Medtronic

James Schiro
Ruth Simmons**
Ex-CEO, Zurich President, Brown Univ.

* Subsequently resigned (insider trading scandal). ** Resigned (university pressure).

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Exhibit 9
Goldman Sachs Net Revenue
50000

45000
40000
35000
30000

Net Revenue

25000
20000
15000
10000

5000
0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Exhibit 10
Goldman Sachs Net Revenue Breakdown 2000-2009
40000

35000

30000

25000
IB
20000

Trading
Asset Management

15000

10000

5000

0
2000

2001

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2002

2003

2004

2005

2006

2007

2008

2009

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Exhibit 11
Goldman Sachs Net Revenue Breakdown 2009-2011
35000

30000

25000

20000

Institutional Client Services

Investing and Lending


Investment Management

15000

IB
10000

5000

0
2009

2010

2011

Exhibit 11
Goldman Sachs ROE vs. ROA
35.00%

30.00%

25.00%

20.00%
ROE
ROA

15.00%

10.00%

5.00%

0.00%
2000

2001

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2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

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Exhibit 13
Goldman Sachs Market to Book Value
3.5

2.5

2
Market value/Book value
1.5

0.5

0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Exhibit 14
Exhibit 14

Perfor
mance
Metrics
for
Global
Wholesale
Banks

Perfor
mance
Metrics
for
Global
Commercial
Banks

1Q 2012, $ billions
YTD
Total
MV/BV MV/EPS ROE Tier 1 Assets Beta

Ranked by
Market CapitalizMV
JPM
C
BAC
BNP
UBS
GS
DB
BCS
CS
MS
Average
US Average

176
105
103
57
48
61
47
48
35
38
72
97

0.97
0.63
0.48
0.59
0.91
0.92
0.75
0.52
0.94
0.64
0.74
0.73

9.90
9.40
12.80
5.36
9.50
9.90
6.90
8.60
11.10
9.70
9.32
7.80

12.00
7.30
0.62
11.50
6.20
12.20
5.50
-4.00
0.50
-0.25
5.16
6.37

12.60
13.26
13.37
12.20
18.70
14.70
12.30
12.90
15.60
16.80
14.24
14.15

2,230
1,948
2,181
2,555
1,343
951
2,516
2,409
1,098
794
1,803
1,621

1.27
2.57
2.27
1.41
1.76
1.42
2.19
2.59
1.39
1.56
1.84
1.82

Cost of
Capital(a) RoE-COC
9.96
18.00
16.15
10.83
12.99
10.89
15.66
18.13
10.70
11.76
13.51
13.35

2.04
-10.70
-15.53
0.67
-6.79
1.31
-10.16
-22.13
-10.20
-12.01
-8.35
-6.98

(a) Cost of capital = risk free rate + (equity risk premium x company beta)
(b) as of Dec. 31, 2011. RF = 10yr UST (2.10%) and risk premium = 6.19 (Damodaran)
(c) as of 9/30/2011
WFC
HSBC
Royal Bank Cana
Toronto Domini
Santander
Std Chartered
BBVA
Average

183
164
84
77
68
58
39
96

1.34
1.02
2.09
1.80
0.68
1.38
0.71
1.29

10.20
6.50
11.70
11.20
7.70
10.80
9.80
9.70

12.14
6.40
19.70
14.00
8.13
12.20
9.90
11.78

Cost of capital = 10 year T + (ERP*beta)


2.10 + (6.19 x beta)

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11.50
11.90
12.20
12.70
11.05
13.70
10.70
11.96

1,314
2,637
807
650
1,693
599
792
1,213

1.32
1.20
1.26
1.30
1.69
1.52
1.80
1.44

10.27
9.53
9.90
10.15
12.56
11.51
13.24
11.02

1.87
-3.13
9.80
3.43
-5.17
0.69
-4.79
0.39

Source: Roy C. Smith

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Annex A
Goldman Sachs 14 Business Principles12
Our clients interests always come first.
Our experience shows that if we serve our clients well, our own success will follow.
Our assets are our people, capital and reputation.
If any of these is ever diminished, the last is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical principles that govern
us. Our continued success depends upon unswerving adherence to this standard.
Our goal is to provide superior returns to our shareholders.
Profitability is critical to achieving superior returns, building our capital, and attracting and
keeping our best people. Significant employee stock ownership aligns the interests of our
employees and our shareholders.
We take great pride in the professional quality of our work.
We have an uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we would, if it
came to a choice, rather be best than biggest.
We stress creativity and imagination in everything we do.
While recognizing that the old way may still be the best way, we constantly strive to find a
better solution to a clients problems. We pride ourselves on having pioneered many of the
practices and techniques that have become standard in the industry.
We make an unusual effort to identify and recruit the very best person for every job.
Although our activities are measured in billions of dollars, we select our people one by one. In
a service business, we know that without the best people, we cannot be the best firm.
We offer our people the opportunity to move ahead more rapidly than is possible at
most other places.
Advancement depends on merit and we have yet to find the limits to the responsibility our
best people are able to assume. For us to be successful, our men and women must reflect the
diversity of the communities and cultures in which we operate. That means we must attract,
retain and motivate people from many backgrounds and perspectives. Being diverse is not
optional; it is what we must be.

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We stress teamwork in everything we do.


While individual creativity is always encouraged, we have found that team effort often
produces the best results. We have no room for those who put their personal interests ahead of
the interests of the firm and its clients.
The dedication of our people to the firm and the intense effort they give their jobs are
greater than one finds in most other organizations.
We think that this is an important part of our success.
We consider our size an asset that we try hard to preserve.
We want to be big enough to undertake the largest project that any of our clients could
contemplate, yet small enough to maintain the loyalty, the intimacy and the esprit de corps
that we all treasure and that contribute greatly to our success.
We constantly strive to anticipate the rapidly changing needs of our clients and to
develop new services to meet those needs.
We know that the world of finance will not stand still and that complacency can lead to
extinction.
We regularly receive confidential information as part of our normal client relationships.
To breach a confidence or to use confidential information improperly or carelessly would be
unthinkable.
Our business is highly competitive, and we aggressively seek to expand our client
relationships.
However, we must always be fair competitors and must never denigrate other firms.
Integrity and honesty are at the heart of our business.
We expect our people to maintain high ethical standards in everything they do, both in their
work for the firm and in their personal lives.

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This document is authorized for use only in Int2_BF-1 by CKLEY_HBS, Zurich University of Applied Science from February 2016 to August 2016.