Goldman Sachs and the Aftermath of the Sec Case

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Business & Management (SL) IA

Commentary on:
“How will Goldman Sachs regain its image and return to profitability after the SEC lawsuit?”

Candidate Name: Sabih Rahman
Yonkers High School
March 2011
Candidate Number: 001282365

Word Count:1497 words

Table of Contents:

Introduction…………………………………………………………………………………..…3

The SEC case and aftermath………………………………………………………………….4

How can Goldman regain its image...............................................................................5-6

Conclusion………………………………………………………………………………………7

Works Cited…………………………………………………………………………………...…8

SWOT Analysis………………………………………………………………………………….9

Document 1 (Goldman, Sachs & Co. Settlement with the SEC)…………………………10 Document 2 (SEC Charges Goldman Sachs with Fraud)………………………….....11-12

Document 3 (The Great American Bubble Machine by Matt Taibbi)…….…………..13-22 Document 4 (Goldman Kicks Off National Advertising Campaign)…………………23-24 Document 5,6 &7…………………………………………………………..not numbered PDF

Introduction

The Goldman Sachs Group, Inc. is a global investment banking and securities firm founded in 1869 which engages in investment banking, securities, investment management, and other financial services primarily with institutional clients. It also provides mergers and acquisitions advice, underwriting services, asset management, and prime brokerage to its clients, which include corporations, governments and individuals.

On April 16, 2010 the U.S. Securities and Exchange Commission (SEC) charged Goldman with fraud in a complicated transaction involving securities known as collateralized debt obligations (CDOs).The particular deal that was questioned involves a hedge fund manager named John Paulson regarding the CDO -ABACUS 2007-AC1.

The SEC case and aftermath
According to the SEC, one of Goldman's vice presidents, Fabrice Tourre, let hedge fund manager, John Paulson decide which mortgages were bundled into ABACUS. Paulson, who was betting on the failure of the mortgage market, deliberately chose low-quality mortgages that were likely to fail, the SEC alleges. Goldman then sold ABACUS to investors, mostly European banks (IKB and ABN Amro), without revealing Paulson's role in choosing the bonds. Instead Goldman said an "independent third party" -- ACA Management -- had chosen the portfolio. Within a year, most of the mortgages included in ABACUS were heading toward foreclosure, and with them ABACUS' value. Investors who bought the securities lost $1 billion while John Paulson made $1 billion. Goldman earned $15 million for creating ABACUS but lost $ 90 million in the long run and claims that it did inform the investors everything they required to know. On July 15, 2010 The SEC settled the case when Goldman agreed to pay a $550 million fine. After the settlement was announced stocks rose 9.3% but this cannot erased the 20% drop in prices when the case was first announced in April. The image of Goldman Sachs remains tarnished due to the case as proven by substantial drops in earnings. Total revenue dropped from $12.78 Billion in the first quarter 0f 2010to $8.84 billion in the second quarter due to a 23% drop in Investment banking revenues and a 36% decrease in Net revenue from Trading and Principal Investments in the same time period. Assets under management also decreased $38 billion to $802. This means that clientele no longer trust Goldman to manage their assets, underwriting services, investment management and other services. In order to survive, Goldman has to regain its image in Wall Street which was one of their largest strengths according to the SWOT analysis (in the appendix)

How can Goldman regain its image?

However, this is not the first time. Goldman Sachs has been accused of unethical business methods repeatedly throughout its history. After being accused of artificially creating the Internet bubble in the 1990s which wiped out $5 trillion from NASDAQ, it agreed to pay $110 million...
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