POWER & PERILS

• Founded in 1869 by Marcus Goldman and Samuel Sachs

• Headquarter in Manhattan, New york

• Services provided- asset management, commercial banking, investment banking, mutual funds, prime brokerage.

• Offices worldwide – America, Europe, Asia Pacific, middle East.

• Primary dealer in US Treasury Security market.

• Currently headed by Lloyd Blankfein, CEO.

Company Background

• NINJA Loans

• CDO

• CDS

• Higher Interest Rate because of Higher risk

• U.S. subprime mortgage crisis - a rise in subprime mortgage delinquencies and foreclosures

Sub Prime Crisis – A Human Story

Bondholders-pension funds, who bought sub-prime mortgage bonds.Were worth between 20% and 40% of their original value for most asset classes, even those considered safe by the ratings agencies.

A dramatic effect on house prices, causing the first national decline in house prices since the 1930s.

The Tremors of the crisis

The Tremors of the crisis

Economists expected the US economy to slow in the last three months of 2007 to an annual rate of 1% to 1.5%, compared with growth of 3.9%.

Reduction of credit availability by banks due to the drying up of the wholesale bond markets and effect of the crisis on their own balance sheets

Who all were holding the bag? Held collectively by:

• Depositors• Investors• SPV• Banks• Government• Banks worldwide – Domino Effect

What did Goldman do?

• Securitizing High Risk Mortgages

• Magnifying Risk

• Shorting the Mortgage Market

• Conflict Of Interests

• Abacus Transaction

• Credit Default Swaps

“Short” the Mortgage Market

Goldman’s net short investments worth $13.9 billion

Record gains in 2007 of over $3.7 billion

Net revenues for Goldman’s Mortgage Department of $1.2 billion.

Lloyd Blankfein (CEO and Chairman)

“We didn't have a massive short against the housing market, and we certainly did not bet against our clients. Rather, we believe that we managed our risk as our shareholders and our regulators would expect," Blankfein said in his opening statement.

The Power Player

The Power Player

Senate

In a companies Email – November 2007

“Of course we didn't dodge the mortgage mess, We lost money, then made more than we lost because of shorts,” referring to trading bets that pay off when a bond drops in value.

Magnifying Risk & Abacus

• Selling high risk, poor quality mortgage products to investors around the world

• Transfer risk associated with its high risk assets – making on spread

• Assisting favoured clients to make profit at the direct expense of the clients that invested in the Goldman CDOs

Abacus Transaction

Paulson & Company ( Hedge Fund)

• Wanted GS to make a CDO – full of mortgage assets that were predicted to loose value

• GS stated assets were selected by ACA – fudged investors

• Paulson made $1 billion & gave $15 million to Goldman Sachs

The “Fabulous Fab”

• The lawsuit accuses Goldman Sachs and a Goldman VP Fabrice Tourre of "making materially misleading statements and omissions.“

• David Viniar (CFO) did not disclose investigation of the ABACUS by FED in 2009

• He denied the allegations "I wish to repeat -- I did not mislead Deuche Bank or ABM Amro”

The “Fabulous Fab”

Senate

• Emails between Tourre and his girlfriend suggesting that he was fully aware that the complex financial packages he helped create would collapse

• GS paid a $550m fine for sale of Abacus

The Lever -Age

• Short positions were so large and risky that the Mortgage Department repeatedly breached its risk limits.

• Goldman’s senior management repeatedly gave new and higher temporary risk limits to accommodate its trading.

• In 2007, GS value risk index revealed 54% risk from Mortgage Department.

The Power Player

Senate v/s Craig Broderick, Chief Risk Officer

The level of risk in Goldman Sachs's mortgage portfolio during the housing bust was "a matter of expert judgment" and the result of complex data-crunching

Goldman Sachs Reputation in Play

• The bank crossed paths with U.S. taxpayers

• Posted $3.44 billion in 2nd quarter profits 2009 in an environment where Morgan Stanley just reported a $1.26 billion loss.

• Stalwart voices of Wall Street -have criticized the firm’s undue influence on government and its ruthless pursuit of risky profits

The “FED UP” Power players

The “ Goldman Plant” in FED

Hank Paulson , Treasury Secretary 2006

• Let Lehman Brothers fail

• Bail out Bear Sterns

• Bailing out AIG

• Government buying illiquid assets

• TARP money to bail the wall street instead of Main Street

Hearing of Hank Paulson

VIDEO

Click on the Image to see this video

Golden Man of Goldman Sachs

Timothy Geithner , CEO New York Fed

• Allocation of $800 billion TARP funds

• Involved in JP Morgan Chase acquisition of Bear

Stearns ( 29 Million dollar Govt Aid)

• Involved with Henry Paulson in March ‘08 that saved AIG from failing.

• Freidman Case

• Not grant Lehman Brothers the right to become a bank-holding company

Other Catalyst

• Alan Greenspan’s malfeasance – Financial Deregulation

• Ben S. Bernanke – chair of FED

• Credit rating agencies

Cogs in the wheel of financial destruction

Fall of the Giants

• Bear Stearns- sold to JP Morgan Chase in for $236.2 million or $2 per share.

• Effective nationalization of mortgage giants Fannie Mae and Freddie Mac

• Merrill Lynch sold out to Bank of America• Fed arranges to lend $180 bn to AIG,

American International Group, U.S.A’s biggest national insurer

• Lehman Brothers, the 158 year old U.S.A’s 4th largest Investment Bank files for bankruptcy

US Government – Oligarchy?

BUBBLE WEB

LEHMAN BROS. NOT BAILED OUT-FAILED

AIG $180Bn

BIGGEST PAYOUT 12.9Bn DOLLAR

FANNIE AND FREDDIE FED TAKEOVER

HENRY PAULSON

NEEL KASHKARI

CHANGE TO BANK HOLDING CO.

TARP, FDIC MONEY, FED DISCOUNT WINDOW

CONFLICT OF INTEREST

TIMOTHY GEITHNER

1 year

waiver

MERRILL LYNCH- JOHN THAIN

TIMOTHY GIETHNER

STEPHEN FRIEDMA

N

AIG Bail Out – Why?

• Goldman Sachs had purchased $20 billion of CDS and other instruments from AIG.

• GS Had made offsetting transactions in AIG Stock.

• If AIG was not bailed out GS would Have lost the money.

• GS got 100 cents per dollar whereas taxpayers only got 2 cents per dollar

Stock Price – 5 Year

Economic vandals

• Underwrote 7-8% of the Sub prime Mortgage

• Shorting against – They new it was toxic

• Enormous profits – Access to cheap money, used incorrectly

• Internet Bubble – underwrote 1/5 IPO’s

• Global Warming – 10% Ownership in Chicago Climate Exchange

• Investment in Carbon Trading Companies

The Government Sachs?

“The incestuous marriage between the Fed, government and Goldman continues to give birth to demented offspring that move from Washington to Wall Street and back again like a piston in a perpetual motion screw-the-taxpayer machine”

Mr. Robber of Robber Barons

Lloyd Blankfein  

"I know I could slit my wrists and people would cheer,"

“We help companies to grow by helping them to raise capital. We have a social purpose”

$68m in 2007 alone, a record for any Wall Street CEO, to add to the more than $500m of Goldman stock he owns

6 months Stock Charts

Reason for the drop

• Fears of recession

• An ocean of unresolved litigation

• Worsening euro zone mess

• Hiring of a top criminal lawyer

• New FHCA Case

• 22 Aug 11 Share Price Dips 4.7% ( 104.25) Lowest since April 2009.

Legal Battles against Financial Crisis

• Civil Case of SEC in 2010 for misleading investors and then Congress

• Charged $1Billion for defrauding investors

• Fined $550 Million for Abacus

Goldman Sachs Really The Evil 'Death Star' Of Capitalism

• In April 2011, A Senate panel issued a scathing report that describes Goldman Sachs as a "case study" of the recklessness and greed on Wall Street that set off the 2008 financial crisis.

• The report that involved 2 years of investigation also blames the lending practices of big commercial banks for plunging the U.S. economy into a painful recession.

• The subcommittee singled out Goldman and Deutsche Bank as examples of Wall Street firms that reaped huge profits by marketing securities backed by subprime mortgages as safe investments to clients, even as the banks bet against these very same securities.

High Cost of Doing God’s Work

• The government has charged 17 banks including Goldman Sachs for selling bad mortgage securities to GSE on 1st September.

• In court filings the Federal Housing Finance Agency alleged that US$190 billion illiquid securities were sold to Fannie Mae and Freddie Mac, had to be bailed out by the government.

•Another part to the story is that the repayment of 10 million dollars of TARP were just 6 days after they sold illiquid assets to FHFA

High Cost of Doing God’s Work• FHCA Accused Goldman of 2 fraud charges

• Common law fraud • Aided and abetted Fraud

• Funded Mortgage Originators by encouraging property originators to inflate property values. Paid them big bucks for this

• Employees signed “ Self Registration Documents” to register securities for multiple issuance with SEC

•No of properties were stated as Owner Occupied but actually they were for investments. Increased the chances for delinquencies

High Cost of Doing God’s Work• The loan to value ratios were said to be 80% or less for these securities – more attractive to the investors.

•In reality it was just the appraised value given to the home that made the loan sound so cheap

• More over rating agencies were paid to give it the AAA status.

• Goldman – paid mortgage lenders to securities sub prime loans, incentivized their employees to sell more.

• Daniel Sparks told Congress he didn't expect a group of financial products to fail. Internal documents suggest he knew otherwise

Goldman v/s People

• Hiring of Reid Weingarten, one of America's top criminal defence lawyers

• Some major criminal case on its way

• Lloyd Blankfein not accepting that they shorted

To sum up

• Goldman managed the dubious honour of coming out of the financial crisis with the best financial returns and the worst public image. 

• Since the credit crisis subsided, Goldman has gone back to making money but has huge PR Problems now.

• The company was once the gold standard of investment banks, with an unimpeachable reputation.

• Goldman's primary interest always was in lining its own pockets and not those of its clients.

•  The former US treasury secretaries Hank Paulson and Robert Rubin were both Goldman bankers. But seems like this is not going to happen again for a very long time. 

Thank you

Aakriti KhoslaGoresh SharmaNalini Jain Rati Verma