Goldman Sachs History and Key Products - Term Paper Example

? Goldman Sachs Table of Contents Introduction to Goldman Sachs 3 A. Goldman Sachs History 3 B. Goldman Sachs Background 4 C. Role in the World of Investments 5 2. How Goldman Sachs Has Performed in the World of Investments 7 2.A. Products and Services Provided by Goldman Sachs to the Market 7 2.A.i. Key Products and Services 7 2.A.ii.Function of Products and Services in the World of Investments 8 2.A.iii. Goldman Sachs’ Role in IPOs 8 2.B. Goldman Sachs’ Influence on the Capital Markets 9 2.B.i. Positive Influences 9 2.B.ii. Debated Influences Among Investors and other Firms/Companies 10 3. Role of Goldman Sachs in China 11 3.A. Key Investment Areas in China 11 3.A.i. Key Areas of Interest of Goldman Sachs in China 11 3.A.ii. Successful Cases/Engagements in China 12 3.B. Valuing China’s Present Economic Situation 12 3.B.i. Current Investment Climate in China- Views 12 3.B.ii. Forecasts for Future Prospects in China 12 4. Conclusion 13 4.A. Goldman Sachs’ Performance in the World of Investments 13 4.B. Goldman Sachs’ Role in China 13 References 14 1. Introduction to Goldman Sachs 1.A. Goldman Sachs History Goldman Sachs is an American investment bank that has its roots in Manhattan in New York City, having been founded there in 1869, with its key competencies being in general investment banking, financial services, the management of investments, and securities. It leads the world in the management of mergers and acquisitions, the provision of services tied to underwriting, the management of assets, as well as prime brokerage services that it is able to provide to individuals, companies, and countries. Once unassailable and with a pristine reputation built over its lifetime, the bank had seen its reputation and standing in the banking community tarnished as a result of its actuations during the financial crisis that erupted from 2007 and whose after effects are still being felt up to the present day. From its founding by Marcus Goldman in 1869, the firm emerged by the early part of the 20th century as one of the premier banking entities in the US, with expertise and market leadership in the establishment of the market for initial public offerings or IPOs. It was during the time after that, however, that the firm evolved from a trading company to an investment banking entity. The firm further evolved and developed into the 1999’s, to the point where it was able to launch its IPO of its own shares in 1999, transferring about 12 percent ownership of the firm into the hands of the investing public. Throughout this time and after, key personnel in Goldman Sachs went on to become key public officials managing the nation’s finances, as well as key executives in some of the country’s and the world’s major financial institutions, including Merrill Lynch and Citigroup. On the other hand, the controversies surrounding the alleged role of Goldman Sachs in inducing the financial crisis in 2007 and of aggravating the crisis have largely resulted in the reputation and fortunes of the investment bank being heavily hit in recent years, putting into doubt even its future prospects as a going concern and as a bastion of the capitalist system (Answers Corporation, 2012; Google, 2012; Thomson Reuters, 2012; Goldman Sachs, 2012; Taibbi, 2011; Taibbi, 2009; Smith, 2012). 1.B. Goldman Sachs Background The key activities of Goldman Sachs worldwide revolve around the management of investments, investment banking and securities management, as well as the provision of related financial services to countries, rich people, individuals, as well as corporations and other related entities. Its four business segments reflect its core businesses, which are Investment Management, Lending and Investing, Investment Banking, and Institutional Client Services. It has presence in key financial centers all over the world by way of vital offices, while being present likewise in a total of 30 countries Its key officers are the following (Google, 2012; Reuters Thomson, 2012): Lloyd C. Blankfein Chairman of the Board, Chief Executive Officer Gary D. Cohn President, Chief Operating Officer, Director J. Michael Evans Vice Chairman, Global Head - Growth Markets Mark Schwartz Vice Chairman, Chairman of Goldman Sachs, Asia Pacific Michael S. Sherwood Vice Chairman, Co-Chief Executive Officer - International John S. Weinberg Vice Chairman David A. Viniar Non-Independent Director Gregory K. Palm Executive Vice President, General Counsel, Co-Head - Legal Department Alan M. Cohen Executive Vice President, Global Head - Compliance Edith W. Cooper Executive Vice President, Global Head - Human Capital Management Table Source: Google, 2012 In the key area of investment banking, Goldman Sachs excels in a number of areas, including such services of an advisory nature relating to mergers and acquisitions, management of risks, divestments, restructuring, defense of corporations, and spin-off efforts, among others. It also provides underwriting services such as the provision of services tied to initial public offerings, a core traditional strength of the investment bank, as well as other services such as private placements, and the offering of various other financial instruments, such as securities (Reuters Thomson, 2012; Google, 2012). 1.C. Role in the World of Investments As discussed above, the role that Goldman Sachs has come to play in the world of investments is key and myriad, reflecting the evolution of the firm into one of the US and the world’s most important financial services company, able to advise not just the biggest corporations but also governments, and the richest private individuals on the planet. In being a financial services and investment banking organization, it has many competitors, many of whom also have global clout, just like Goldman Sachs. On the other hand, among them, Goldman Sachs stands out for its long history, its large market share in key activities such as investment management and the provision of advisory services for mergers and acquisitions, and arguably its share of controversies and brush ins with the law. Much has been said in the literature on the latter, especially in light of the recent financial crisis and how Goldman Sachs has been pointed to as one of those firms who not only profited from the crisis, but also helped induce it into being in the first place. Moreover, though it received bailout funds from the government, by 2009 it had been able to get to a position where it was ready and willing to return that money. Moreover, as part of that crisis controversy, and stemming and following from that, the company became embroiled in a series of settlements for accusations of insider trading as well as fraud in some of its dealing, with the settlements pegged at millions of dollars, even as the firm was also largely dinged by the US legislature and the popular press. The lawsuits included the one by the SEC in 2010, which Goldman Sachs settled for about $550 million, where the instruments in question were tied to those with Abacus mortgages. More recently, Goldman Sachs also settled stock insider trading charges to the tune of $22 million, which though small, reinforces the perception of continuing irregularities at the investment bank. All that aside, what cannot be denied is that the bank continues to remain a vital force in the financial world in the US and the rest of the world, and that even with the continuing crises of confidence that vital role remains intact and relied upon by the world at large (The New York Times Company, 2012; Answers Corporation, 2012; Google, 2012; Thomson Reuters, 2012; Goldman Sachs, 2012; Taibbi, 2011; Taibbi, 2009; Smith, 2012). Compared alongside its peers in the world of investments, Goldman Sachs punches within its weight in terms of market capitalization, in comparison to the likes of Morgan Stanley, Citigroup, and JP Morgan Chase (Google, 2012): Valuation Company name Price Mkt Cap GS Goldman Sachs Gro... 118.50 56.81B STT State Street Corp... 45.29 21.05B JPM JPMorgan Chase & Co. 41.04 155.94B C Citigroup Inc. 36.44 106.86B IDCBF INDUSTRIAL & COML... 0.670 58.15B MS Morgan Stanley 16.70 32.98B MFGLQ MF Global Holding... 0.0369 6.08M UBS UBS AG (USA) 15.26 57.16B IBKR Interactive Broke... 14.65 695.71M SMFG Sumitomo Mitsui F... 5.98 42.28B FRC First Republic Bank 34.21 4.47B Table Source: Google, 2012 It is worth noting that by the bank’s own reported revenues, the investment banking revenues have come to occupy a smaller piece of the total revenue pie at the bank, with total revenues for that business steady for the past three years at about $4.5 billion on average, on par with the mean revenues over the past three years for lending and investing, as well as with mean revenues for the management of investments. Where Goldman Sachs’ role in the world of investments has come to really matter is in institutional client services, where the company is able to offer a full array of services to differing clients, that include countries, as well as corporations and investment funds. The emphasis on this largest group is on clients that are tied to institutions. The services are tied to the provision and facilitation of transactions in different products, such as currency and their trades, commodities, and fixed income products. This group is also responsible for carrying transactions and trades in stocks, futures, and options. This group is worth about $32.7 billion in revenues in 2009, $21.8 billion in 2010, and $17.28 billion dollars in 2011, accounting for the biggest portion of total revenues for the investment bank in each of those three years (The New York Times Company, 2012). 2. How Goldman Sachs Has Performed in the World of Investments 2.A. Products and Services Provided by Goldman Sachs to the Market 2.A.i. Key Products and Services As discussed earlier, the company’s products and services are organized along four business lines, namely, investment banking, institutional client services, lending and investing, and investment management (Goldman Sachs, 2012; Thomson Reuters, 2012; Google, 2012). In the area of investment banking, the services portfolio has the following elements: mergers and acquisitions advisory services; divestments; defense actions for corporations; the management of risks; spinoffs, restructuring of organizations; the underwriting of placements in private and public; and derivatives tied to these services. The institutional client services business segment, as has been discussed earlier, deals with the facilitation of transactions involving stocks, futures, derivatives, options, and the provision of markets for fixed income products, currencies, commodities and other financial products for institutional entities/clients. As earlier discussed, this is the biggest set of services and products for the firm, in terms of the share of revenues of this business segment to total revenues for Goldman Sachs. In the past three years, this business segment comprised the largest single segment in terms of contribution to total revenues for the investment bank. Investing and lending as a business segment, meanwhile, is about loans provision as well as the provision of financing to chosen clients. This business segment also takes care of managing the company’s investments in different industries, through its participation in the management of its funds in the equities market for instance. Investment management is essentially a business segment catering to the advisory needs of clients for sound investment decisions (Goldman Sachs, 2012). 2.A.ii.Function of Products and Services in the World of Investments As the previous discussion has covered with some depth, the different products and services on offer at Goldman Sachs are of the nature of advisory services in so far as investment banking is concerned, especially in the case of mergers and acquisitions, and of the nature of investing activities in the case of the business segment in charge of lending and investing. In the business segment institutional client services, the function of the services is to allow large institutions to have an avenue to execute trades and to have markets to which they can float, trade and buy various financial products, as have been discussed above. Investment management as a business segment, meanwhile, likewise offers a range of investment management advisory services to large corporations and countries, as well as rich private persons (The New York Times Company, 2012; Answers Corporation, 2012; Google, 2012; Thomson Reuters, 2012; Goldman Sachs, 2012; Taibbi, 2011; Taibbi, 2009; Smith, 2012). 2.A.iii. Goldman Sachs’ Role in IPOs IPO advisory services has been a traditional strength of Goldman Sachs, stretching back to the phase of the company’s history from 1930 onwards, when it was among the first to pioneer the creation of the IPO market in the United States, as well as among the elite investment banking entities with the clout and the reputation to take on the most important IPO offering in the United States and other parts of the world historically as well. It is worth noting that IPO services are listed among the key services on offer at the bank, under investment banking, where private placements are the alternatives most preferred (Thomson Reuters, 2012; Goldman Sachs, 2012; Taibbi, 2009). Meanwhile, the bank has been dinged recently for the way it has caused many problems to the financial system as a result of its less than scrupulous handling of the IPO frenzy during the dotcom era of the early years of the Internet boom. There were also other allegations made with regard to the integrity of the IPOs under Goldman Sachs’ watch, that persist up to the present. Those allegations include price manipulation to drive up the share prices just after the IPO launch so that Goldman Sachs may benefit from the share price rise in terms of improved reputation and financial gain (Taibbi, 2009). 2.B. Goldman Sachs’ Influence on the Capital Markets 2.B.i. Positive Influences The company’s long tradition of excellence in finance, investment banking, and the provision of services to countries and clients relating to the management of investments are testaments to the public good that the company is capable of producing, and has delivered to the public through the years. The provision of IPO advisory services together with private placement advisory services enable many companies to gain funding and monies to power their further progress and development, benefitting not just shareholders and other direct financial stakeholders, but also society in general. This is true for those IPOs that Goldman Sachs advised on, where the companies involved had very positive impacts and influences on the society in general. It can be said to, that the reputation and the kinds of services that were offered by Goldman Sachs, by crossing borders, facilitated the development of rigorous global standards for those services that Goldman Sachs offered across different geographic and political borders. Moreover, by facilitating the global movement of capital, Goldman Sachs allowed for the liquidity and the money that is in abundance in some parts of the developed world, such as the United States and Europe, to flow to those parts of the world where liquidity and financing is in shorter supply. That it is present in more than 30 countries, and has operations in the key financial centers of the world, is assurance that Goldman Sachs positively impacts the global financial order through its presence, and through the standards that the presence implies for different key aspects of the financial system (The New York Times Company, 2012; Answers Corporation, 2012; Google, 2012; Thomson Reuters, 2012; Goldman Sachs, 2012; Taibbi, 2011; Taibbi, 2009; Smith, 2012). 2.B.ii. Debated Influences Among Investors and other Firms/Companies There are aspects of the role of Goldman Sachs in the various financial transactions all over the world that have come to be questioned for their scrupulousness and their overall impact to society. The recent financial crisis has brought to the surface the alleged negative influence of Goldman Sachs to the global financial order, through transactions that were deemed either fraudulent or working against the general public good. The crisis also brought to the surface historical negative assessments of the role of Goldman Sachs, via its participation in several major anomalous transactions throughout its long history. Its record fines and settlements in the most recent past, together with records of past misdeeds, pepper the investment bank’s long history and arguably tarnishes the company’s credibility in ways that make full recovery impossible. Moreover, the continuing findings of unscrupulous behavior extending all the way to the present gives pause to investors and to the general banking community, and gives credence to the doubts and the misgivings of the general community regarding the lack of trustworthiness of firms such as Goldman Sachs. This absence of trustworthiness translates to a greater need for oversight and for regulations, to make sure that someone with authority is policing companies like Goldman Sachs. The other take is that as private concerns whose primary motivations are profit, It is arguable whether Goldman Sachs and its peers are capable of the kind of upright behavior and moral behavior that redounds to the benefit of the general investing public and the national and world economies in general. The debate is that because Goldman Sachs is a for profit enterprise, its need for profit will always result in its overstepping the bounds set by decency and by law, where needed (The New York Times Company, 2012; Answers Corporation, 2012; Google, 2012; Thomson Reuters, 2012; Goldman Sachs, 2012; Taibbi, 2011; Taibbi, 2009; Smith, 2012).. 3. Role of Goldman Sachs in China 3.A. Key Investment Areas in China 3.A.i. Key Areas of Interest of Goldman Sachs in China The historical strategy of Goldman Sachs in China reveals the key areas of interest for the firm as far as the nation’s capital and financial markets are concerned. That strategy has revolved around the setting up of a local brokerage concern which it essentially controlled, and with which it aimed to undertake an underwriting business for new share issues in the domestic market, working for firms that wish to go public or to source funding via private placements. These are traditional strengths of Goldman Sachs, which it wished to flex in the China market. The setting up of the local brokerage house was meant to circumvent tight restrictions set by the Chinese government relating to who gets to enter its financial market services sector, and how foreign companies like Goldman Sachs are able to provide those services. The overall prognosis is that this venture by Goldman Sachs into China has not had the kind of success one would expect relative to the vast opportunities that are present in the country. This is owing to the government’s imposed restrictions. Even in 2012, with the vast opportunities for underwriting present, the company’s share of that total underwriting business had been limited at best, amounting to just $100 million for the first six months. Meanwhile, while the company has handled close to $60 billion dollars of deals since 2010 on behalf of China, most of that came from deals involving foreign companies wishing to do deals into China, and not the other way around. That said, the key areas of interest are clear. Those are the same areas where Goldman Sachs thrives in the US and elsewhere. The presence of more than 300 staff in China testifies to the seriousness of that interest to grow the business in China moving forward (Goldman Sachs, 2012; Foley, 2012). 3.A.ii. Successful Cases/Engagements in China As discussed earlier, the thriving business of Goldman Sachs with China occurs on the side of foreign entities going into China and doing financial deals, to the tune of about $60 billion during the past three years. This is substantial business that represent some success on the part of Goldman Sachs. For instance, Goldman Sachs is engaged with Nexen in Canada for a deal that will see it taking over the Chinese oil company CNOOC, valued at about $15 billion (Foley, 2012). 3.B. Valuing China’s Present Economic Situation 3.B.i. Current Investment Climate in China- Views The current prognosis for the China’s economy points to an immediate future characterized by slowing growth and a host of other economic structural problems. This is the assessment not just of Goldman Sachs but by peers such as UBS as well. This, even as Goldman Sachs insists that the slowing levels of growth in the country does not take away from the eminent position of China among the BRIC nations. Simply put, while growth is decelerating, China remains the best among the BRIC nations in terms of economic prospects moving forward, as well as level of economic development already achieved (Rapoza, 2012; Scott, 2012). 3.B.ii. Forecasts for Future Prospects in China The forecasts for future prospects in China, in terms of potential for Goldman Sachs business growth relative to economic fundamentals and regulations, are challenging at best. The prospects lie with Goldman Sachs being able to participate in projects where the proponents are foreign firms going into China, as it has been successfully doing in the past few years. The prospects within China, meanwhile, will remain to be thin, given the tight regulatory environment and the limited success of its Chinese operations (Rapoza, 2012; Scott, 2012; Foley, 2012). 4. Conclusion 4.A. Goldman Sachs’ Performance in the World of Investments A powerhouse in the world of global finance, Goldman Sachs has been so far able to weather the worst of the financial crisis, able to get back on its feet and in a position to fully give back the bailout funding it received. On the other hand, it continues to suffer from the fallout of the crisis and the allegations of how it has continued to profit from its unscrupulous practices. The large settlements it had to pay in its recent history reflects the extent of the damage to its reputation and to its credibility with the US and the rest of the world. That said, it remains to be seen just how far the controversies will drag down the company moving forward (The New York Times Company, 2012; Answers Corporation, 2012; Google, 2012; Thomson Reuters, 2012; Goldman Sachs, 2012; Taibbi, 2011; Taibbi, 2009; Smith, 2012). 4.B. Goldman Sachs’ Role in China There are two sides to the China business of Goldman Sachs. The domestic business, run through its brokerage firm that has local roots and that has a substantial operation and staffing in the mainland, suffers from the tight regulations imposed on it by the Chinese authorities and from the lack of quality underwriting opportunities that it can get into. The other side is the business of getting foreign firms into China for investment and related deals, where Goldman Sachs has had more success in the past few years. This latter half continues to hold promise, even in the face of China’s slowing economy (Rapoza, 2012; Scott, 2012; Foley, 2012). References Answers Corporation (2012). Goldman Sachs. Answers.com. Retrieved from http://www.answers.com/topic/goldman-sachs Foley, J. (2012). Goldman Sachs: Still on the Wrong Side of China’s Great Wall. Slate. Retrieved from http://www.slate.com/blogs/breakingviews/2012/08/21/goldman_still_on_the_wrong_side_of_china_s_great_wall_.html Google (2012). Goldman Sachs Group Inc. Google Finance. Retrieved from http://www.google.com/finance?cid=663137 Goldman Sachs (2012). At a Glance. GoldmanSachs.com. Retrieved from http://www.goldmansachs.com/who-we-are/at-a-glance/index.html Rapoza, K. (2012). Goldman Sachs’ Jim O’Neill: China Best BRIC. Forbes.com. Retrieved from http://www.forbes.com/sites/kenrapoza/2012/09/29/goldman-sachs-jim-oneill-china-best-bric/ Scott, A. (2012). UBS, Goldman Join Chorus of Gloom on China. The Wall Street Journal China Realtime Report. Retrieved from http://blogs.wsj.com/chinarealtime/2012/09/07/ubs-goldman-join-chorus-of-gloom-on-china/ Smith, D. (2012). Into The Belly Of The Beast (Part I - How Goldman Sachs Became The Most Hated Bank On Earth). Economy Watch. Retrieved from http://www.economywatch.com/economy-business-and-finance-news/into-the-belly-of-the-beast-part-one.26-01.html?page=full Taibbi, M. (2009). The Great American Bubble Machine. Rolling Stone. Retrieved from http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405 Taibbi, M. (2011). The People vs. Goldman Sachs. Rolling Stone. Retrieved from http://www.rollingstone.com/politics/news/the-people-vs-goldman-sachs-20110511 The New York Times Company (2012). Goldman Sachs Group Inc. The New York Times. Retrieved from http://topics.nytimes.com/top/news/business/companies/goldman_sachs_group_inc/index.html Thomson- Reuters (2012). Goldman Sachs Group Inc (GS). Reuters.com. Retrieved from http://www.reuters.com/finance/stocks/companyProfile?rpc=66&symbol=GS Read More