Global financial giant Goldman-Sachs is alternatively loved and feared among both the Wall Street and Main Street crowds. Its earnings potential is storied and long-standing. Concurrently, Goldman has found itself at the centre of controversy quite frequently during its 150-year history.
Some may say that is inevitable when you are one of the largest banks on the planet. Others say you do not get to be one of the largest banks on the planet without dipping your toes into troubled waters. We will trace the prehistory of Goldman-Sachs from its founding through present day to try to paint a more complete picture of this financial giant.
The Pre-History of Goldman-Sachs
The entity that would eventually become Goldman-Sachs began with a teacher called Marcus Goldman, who left his native Bavaria in 1848 to start a small shop in the United States. He launched a commercial paper trading business in New York in 1869, geared toward providing other small business with short-term capital to cover their growing pains and initial expenses. This broker business grew by fits and starts until his son-in-law Samuel Sachs joined up in 1882 – then it positively exploded.
The newly christened Goldman, Sachs & Co. began to explore business options outside of the commercial paper industry, delving into offshore debt and currency arbitrage. It also struck out against established market players by taking on the accounts that larger banks tended to ignore. Famously, Goldman, Sachs & Co. shepherded the fledgling Sears Roebuck company through its initial public offering in 1906. At the same time, the company began to make a name for itself as an investment bank, calling for stricter company financial reporting to make transactions more transparent and admonishing its client companies to buy back their own shares when they were undervalued.
The company began to make a name for itself as an investment bank, calling for stricter company financial reporting to make transactions more transparent
The business continued to grow throughout the first portion of the 20th century, ultimately creating the Goldman Sachs Trading Corporation to handle the new influx of business in the 1920s.
However, the end of the decade brought with it the 1929 Great Depression. The newly created trading arm was only propped up by the established commercial paper and investment banking services.
Goldman-Sachs ran into its first major public controversy during the Great Depression. The company was allegedly involved in a pyramid scheme that involved the creation of over-leveraged investment trusts. Walter Sachs was forced to sell his personal yacht to help keep the company afloat.
In the years following the Great Depression, non-family member Sidney Weinberg – who had taken the reins of the company during the market crash – pushed the company deeper into arbitrage dealings for both currency and securities. At the same time, Goldman-Sachs began to establish close contacts within the U.S. government, which would pay dividends when the company was called upon to provide financing services during both World War II and the Korean conflict.
The Revolution of the 1990s
Goldman-Sachs had been slowly accumulating power and prestige since its founding, and it became an initial public offering staple for large companies, like Ford, during the 1950s.
However, the evolution of Goldman-Sachs from big bank to global titan really consolidated from the 1970s through the 1990s.
During this period, Goldman-Sachs reached into an ever-growing satchel of commodity markets, overseas interests, and new financial partnerships. It also began to spin off certain non-core assets to increase its ability to speculate. The company had learned from its adventures in the 1920s with Goldman Sachs Trading Corporation, keeping risky investments away from the company’s financial base.
In the early 1990s, Goldman-Sachs consistently broke its own profitability records each year. In 1996, the company adjusted its corporate structure in preparation for its 1999 initial public offering. The offering raised a cool $7 billion in capital for the company, which it immediately reinvested in its business.
The Great Recession
In 2006, the U.S. housing market began a historic turnaround. For the first time in recent memory, the housing market began to lose value nationwide.
Behind the scenes, what might have been just a blip on the financial radar was quickly growing in size and scope. Pools of risky mortgage loans had been collected together by major financial institutions, and then derivatives based on that wafer-thin securities were issued. In addition, some financial institutions began to issue credit default swaps, or bets against default.
Goldman-Sachs provided the underwriting for many of those financial products. In fact, according to a 2016 settlement the company reached with the U.S. Department of Justice, Goldman-Sachs fraudulently underwrote and issued many of those mortgages despite knowing the risks involved.
Ultimately, Goldman-Sachs paid a total of $5.1 billion because of its conduct prior to the Great Recession. About $2.39 billion was paid in the form of civil penalties, while $1.8 billion went to loan forgiveness and housing relief. A further $875 million was doled out to various state and federal entities with claims against the company.
“This resolution holds Goldman-Sachs accountable for its serious misconduct in falsely assuring investors that securities it sold were backed by sound mortgages, when it knew that they were full of mortgages that were likely to fail,” said Acting Associate Attorney General Stuart Delery in a statement from the Department of Justice. “This $5 billion settlement includes a $1.8 billion commitment to help repair the damage to homeowners and communities that Goldman acknowledges resulted from its conduct, and it makes clear that no institution may inflict this type of harm on investors and the American public without serious consequences.”
The Future of Goldman-Sachs
Goldman-Sachs has hardly escaped controversy since that multibillion-dollar settlement, which was joined by similar settlements from its financial peers. It remains a perennially popular target of the Occupy Wall Street movement, despite that movement cresting in 2011. Most recently, it has drawn a good deal of attention for its forays into the notoriously volatile – and unregulated – cryptocurrency industry.
Market rumours began swirling about Goldman-Sachs’ interest in Bitcoin and other cryptocurrencies in early 2018 when it hired former Seven Eight Capital Vice President Justin Schmidt to look into the possibility of opening a Bitcoin trading desk. Large financial institutions are almost without exception sceptical of digital currencies, so Goldman-Sachs’ move was seen as a potential gamechanger.
Counter rumours have arisen that Goldman-Sachs is nixing its potential Bitcoin trading desk in the midst of a large drop-off in cryptocurrency prices, but those rumours have been pooh-poohed by Goldman-Sachs executives.
It is likely that perhaps the world’s most recognizable mega-bank will continue to stay on the forefront of financial controversy, as the profits continue to roll in. The company recorded a net profit of $2.35 billion in the second quarter.
“Despite the persistence of geopolitical and economic risks, the backdrop remains constructive as our clients continue to seek our advice and market-making services,” said Chief Financial Officer Marty Chavez during the company’s Q2 earnings conference call. “While it’s impossible to predict the future, we remain cautiously optimistic that many of the broader drivers underpinning the solid start to the year, healthy economic growth, positive investor sentiment and the emergence of new market trends can remain in place.”
Featured Image: WSJ