Goldman Sachs Customer Service Controversy - Research Paper Example

? GOLDMAN SACHS SERVICE CONTROVERSY INTRODUCTION Every company at one point or another faces a controverisial situation, however, when well solved or addressed the company can continue on a positive path. Goldman Sachs Group, Inc. is American investment banking and securities organization which was founded in the year 1848 by Marcus Goldman, a Bavarian school teacher who had immigrated to the United States (Weinberg 2000). He moved to Philadelphia after supporting himself as a salesman for a number of years in New Jersey and soon after the Civil War, he relocated to New York City where he started trading in promissory notes in the year 1869 (Pratley, 2011). Goldman was later on joined by his son-in-law where the firm expanded and grew into a general partnership to become Goldman, Sachs and Company. His son, Henry, was put in charge of the company’s domestic growth and Goldman, being committed to a diversified portfolio noticed a huge potential in a number of other developing industries (McGee 2010). Despite being difficult to market at the beginning these investments soon became profitable ventures only after the firm managed to convince companies to adopt stricter accounting as well as auditing procedures. Goldman, Sachs managed its very first IPO (Initial Public Offering) in the year 1906 when one of its clients, United Cigar Manufacturers announced its intention to expand (Butler 2010). Despite the fact that the Goldman, Sachs hand never managed a share offering in the course of its operation history, it became successful in marketing an estimated $4.5 million worth of the client’s stock and made United Cigar Manufacturers qualify for trading on the New York Stock Exchange. As explained by McGee (2010) in 1998 Goldman, Sachs began to consider going public and after selling an estimated 69 million shares it officially adopted the name The Goldman Sachs Group Inc. where it named Henry Paulson, Jr. the sole chairman and Chief Executive Officer Discussion As aforementioned, The Goldman Sachs Group, Inc. is a financial company responsible for assets management, investment banking and securities whose headquarters are in lower Manhattan in New York City. Some of the customer services offered by the organization include brokerage firms, underwriting companies, just to mention a few. Its main clients include governments, private individuals as well as corporations that transact with it. Very few controversies are associated with Goldman Sachs since it was founded. However, the most famous controversy involved the leaking information on inside trading, which was done by David Brown when the company was in takeover talks. This incident happened in 1986 and Robert Freeman, a senior partner of the company was also linked to the controversy. The company has also been accused that last year it boosted its quarter earning through changing substantial writedowns in its December financial reports. This section thus looks in details some of the controversies (Recomparison, 2011). As noted by Butler, (2010) though the company is seen as the most profitable investment bank in the world in addition to being an excellent money-making machine running rings around its rivals while rewarding its high fliers with multibillion-pound bonuses, Goldman Sachs has a tendency of attracting controversy to a level separating it from its competitors. The most recent controversy has been in April 2010, regarding betting against a package Goldman Sachs sold to their own investors, which is believed to have been the turning point for regulators not only in the United States but around the world. At that time, the firm was already under scrutiny for having awarded year end bonuses as well as payouts to its stuff for the financial year ending 2008 upon receipt of an estimated ?6.1 billion UK bailout from the United States government, being part of the bailout toward those financial institutions worst hit by the credit crunch. From the controversy, it is said that Goldman Sachs materially gave wrong information and omitted some information in a number of disclosure documents meant for a synthetic CDO product known as Abacus 2007-AC1 (McGee 2010). The firm is accused of having misled some of its investors thus ended up being pain a fee of $15 million USD for the formulation of the deal to begin with. The firm bet against a mortgage package that it had actually assisted in its structuring and went ahead to make money by betting on a mortgage investments it had sold to its customers McGee (2010) further point out that the Securities and Exchange Commission or the SEC is now suing the firm as well as one of its employees, Fabrice Tourre who is a Vice President of Goldman Sachs now located in London. Additionally, from the short investment in a hedge fund, it is pointed out that Paulson & Company earned about 1 billion dollar profit while those who bought the materials lost almost as much. Goldman Sachs in collaboration with the hedge fund managers, John Paulson developed a product that was sure to fail so that they both could take part in betting on the product and enrich themselves. Paulson chose amongst the worst mortgages globally which were put into a portfolio of Collataralised Debt Obligations (CDO) known as Abacus 2007 – AC1 and sold to investors by Goldman Sachs (McGee 2010). The firm never made a point of disclosing their deal with Paulson or any other fact to the investors and went ahead to bet against these products themselves. Goldman Sachs unfairly allowed a certain client participating in betting against the mortgage market to largely have an influence over the type of mortgage securities to put in the investment portfolio, yet in the process telling other investors that these securities had been selected by an independent, objective third party (McGee 2010). Even though the product was rather complex and new the conflicts and deception are considered old and simple. The deal apparently closed on April 26, 2007 where Paulson & Co. paid Goldman Sachs an estimated $15 million for structuring as well as marketing Abacus. Those criticizing Goldman Sachs argue that synthetic CDOs as well as other derivatives have grown and found their way across the globe where they are too disconnected from the real economy and worth trillion of dollars in value. The aforementioned hedge fund together with a German bank were key players in the deal, not a United States homebuilders or mortgage firm. In such cases critics consider these derivatives to be as much risk creators as risk mitigators. On the other hand, defenders of the firm argue that these products serve a useful purpose despite the fact that they are 2 or more steps removed from the original building or selling of houses. Speculators in this perspective aid a market function more efficiently as they tend to take the opposite side of a given trade thus allowing individuals such as home builders and farmers to utilize the so-called derivative investments to hedge the risks of their businesses CONCLUSION Since commencement, the firm has been involved in a few controversies in the recent past with the most known controversy being that of the giving nsider trading information by David Brown in the course of a takeover transaction. The Goldman Sachs versus SEC controversy is perhaps the very first of its kind where regulators have handled such as suit even though the charges are not criminal but civil. Incase of any penalty it will easily be absorbed by the company whose current assets amount to an estimated US$65 billion in equity. Goldman Sachs is currently faced with the loss of profitable British government work and President Obama has stated that he will prohibit any bill that does not incorporate derivative reform. REFERENCES Butler, J. W. Jr. (2010). Navigating Today’s Environment: the Directors ’ and Officers ’ Guide to Restructuring. Beard Books. McGee, S. (2010). Chasing Goldman Sachs: How the Masters of the Universe Melted Wall Street Down—and Why They’ll Take us to the Brink Again. New York, NY: Crown Publishing Group. Recomparison (2011): Goldman Sachs vs. J.P. Morgan Chase: Retrieved on 15th June, from http://recomparison.com/comparisons/100882/goldman-sachs-vs-j-p-morgan-chase/ Pratley, N (2011): Goldman Sachs finds itself in yet another scrape: Retrieved on 15th June, from: http://www.guardian.co.uk/business/2011/jun/02/goldman-sachs-in-yet-another-scrape Read More