By Philip Mattera
Goldman Sachs, once lionized as the premier “money machine” of Wall Street has in the past few years become synonymous with greed and duplicity. A firm that long prided itself on putting the interests of its clients first was revealed to have repeatedly sold securities that it fully expected to plunge in value. Rolling Stone reporter Matt Taibbi’s depiction of Goldman as “a giant vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money” and Greg Smith’s reference to Goldman as “toxic and destructive” in a New York Times op-ed announcing his departure from the firm are two of the most frequently quoted phrases about the financial crisis.
This reputation had faded away by late 2016, when various Goldman alumni were named to key positions in the Trump Administraion.
A surge in the 1980s
Although it had been founded in the 1860s and managed its first initial public offering in 1906, Goldman did not become a top player on Wall Street until the 1980s. It was during that decade that Goldman emerged as a significant force in block trading, risk arbitrage, underwriting and mergers (though it declined to back raiders). While other investment houses went public, Goldman remained a private partnership, thanks in part to a $500 million equity investment by Japan’s Sumitomo Bank in 1986.
The 1980s also saw some tarnishing of the company’s reputation, which aside from some legal problems related to the Penn Central bankruptcy, was considered sterling. Robert Freeman, head of arbitrage at Goldman, was implicated in an insider trading scandal and in 1989 pleaded guilty to one count of fraud. In the early 1990s, Goldman experienced huge trading losses linked to rising interest rates, management missteps and an investigation by Britain’s Serious Fraud Office of the firm’s links to controversial media magnate Robert Maxwell.
In 1999 Goldman finally went public, further enriching top executives such as CEO Hank Paulson, who saw his personal net worth rise to more than $300 million. Yet Goldman avoided the merger mania to which many of its competitors succumbed.
During the first half of the 2000s, there were more ethical lapses at Goldman:
- In 2002 it was fined $1.65 million by the industry regulatory body NASD (now FINRA) for failing to preserve e-mail communications.
- In 2003 it paid $110 million as its share of a global settlement by ten firms with federal, state and industry regulators concerning alleged conflicts of interest between their research and investment banking activities.
- That same year, it had to pay $9.3 million in fines and disgorgement of profits in connection with federal allegations that it failed to properly oversee a former employee who had been charged with insider trading and perjury.
- In 2004 Goldman was one of four firms each fined $5 million by NASD for rule violations relating to trading in high-yield corporate bonds; Goldman also had to make restitution payments of about $344,000.
- In 2005 the U.S. Securities and Exchange Commission (SEC) announced that Goldman would pay a civil penalty of $40 million to resolve allegations that it violated rules relating to the allocation of stock to institutional customers in initial public offerings.
- That same year, it paid a fine of $125,000 to NASD for violating rules relating to the sale of restricted securities during initial public offerings. Shortly thereafter, it was fined $140,000 by NASD for late and/or inaccurate reporting of municipal securities transactions.
- In 2006 Goldman was one of 15 financial services companies that were fined a total of $13 million in connection with SEC charges that they violated rules relating to auction-rate securities. In another case relating to auction-rate securities brought by the New York State Attorney General, Goldman was fined $22.5 million in 2008.
When the financial crisis erupted in 2008, Goldman and Morgan Stanley gave in to pressure from federal regulators to convert themselves into bank holding companies. Becoming subject to the oversight of the Federal Reserve was a dramatic move for the two firms, but it was not as radical as the changes that befell their competitors: the purchase of Merrill Lynch and Bear Stearns by commercial banks (Bank of America and JPMorgan Chase, respectively) and the dismantling of Lehman Brothers. Goldman also propped itself up by negotiating a deal in which Warren Buffett’s Berkshire Hathaway invested $5 billion in the firm in exchange for a 10 percent stake. Buffett’s holding took the form of preferred stock paying a generous 10 percent dividend. Goldman also received $10 billion from the federal government’s Troubled Assets Relief Program (TARP). During this period, Goldman profited from subprime mortgages through its ownership of Litton Loan Servicing, which it sold in 2011 in the wake of numerous abuse allegations.
The forced restructuring of Wall Street took place largely under the direction of Treasury Secretary Hank Paulson, who left Goldman in 2006 to take the post at the request of President George W. Bush. Although Paulson was required to liquidate his sizeable Goldman holdings before moving to Treasury, his actions during the 2008 crisis were widely criticized as working to the benefit of his former firm. Chief among these was the allegation that he allowed Lehman Brothers to collapse while taking pains to bail out insurance giant A.I.G., which had extensive dealings with Goldman and which used its federal support to pay off its obligations at 100 cents on the dollar. In the case of Goldman, this amounted to $12.9 billion. The tendency of Paulson to recruit other Goldman alumni for his crisis team prompted the nickname “Government Sachs.” It later came out that Paulson was in frequent contact with Lloyd Blankfein, his successor at Goldman, during the height of the crisis.
During this difficult period, ProPublica and the Los Angeles Times put more pressure on Goldman by revealing that the firm had advised some of its big clients to place investment bets against California bonds right after collecting hefty fees from the state for underwriting some of those bonds.
Goldman, famed for its lavish bonuses, chafed at the limitations on executive compensation that were part of TARP and successfully pushed for permission to repay the federal loan, while it and other banks continued to enjoy essentially interest-free borrowing from the Federal Reserve.
In May 2009 Goldman agreed to provide about $50 million in relief to holders of subprime-mortgages in Massachusetts to remove itself from the state attorney general’s investigation of abuses relating to the origination and securitization of subprime loans.
Goldman, however, became a symbol of the excesses that led up to the financial meltdown. The Taibbi quote was the most colorful of many unflattering depictions of the firm.
Blankfein initially responded to the criticism by making the far-fetched claim that Goldman was doing “god’s work.” When that did not go over well, he issued an apology for the firm’s mistakes and vowed to spend $500 million to help thousands of small businesses recover from the recession. That did little to rectify the situation. In the 10-K filing it issued in March 2010, Goldman added to the usual risk factors “adverse publicity,” which it said could “adversely impact the morale and performance of our employees, which in turn could seriously harm our businesses and results of operations.”
The adverse publicity soon escalated. In April 2010 the SEC accused Goldman of having committed securities fraud when it sold mortgage-related securities to investors without telling them that the investment vehicle, called Abacus, had been designed in consultation with hedge fund manager John Paulson (no relation to Hank Paulson), who chose securities he expected to decline in value and had shorted the portfolio. The Goldman product did indeed fall in value, causing institutional customers to lose more than $1 billion and Paulson to make a bundle. Paulson was not charged, but the SEC did name Fabrice Tourre, the Goldman vice president who helped create and sell the securities. (A federal jury later found him guilty of deceiving investors.)
Goldman initially defended its actions and claimed that it lost money on Abacus, but a Senate subcommittee later released e-mail messages between Goldman executive discussing how they expected to make “serious money” by shorting the housing market. The uproar continued as evidence emerged that Goldman had devised not one but a series of complex deals to profit from the collapse of the home mortgage values. A group of Goldman officials, including Tourre, were hauled before that Senate subcommittee and questioned for ten hours. A couple of months later, Goldman executives were grilled by the Financial Crisis Inquiry Committee, whose chairman Phil Angelides suggested that the firm had helped drive down mortgage securities prices in order to benefit from its short position.
In July 2010 the SEC announced that Goldman would pay $550 million to settle the Abacus charges. That sum included a payment of $300 million to the U.S. Treasury and a distribution of $250 million to investors that had suffered losses in the deal. The settlement also required Goldman to “reform its business practices” but did not oblige the firm to admit to wrongdoing. The Abacus scandal also led to a £17.5 million fine imposed by Britain's Financial Services Authority and a federal investor lawsuit that is pending.
In January 2011 Goldman announced that an internal review of its policies in the wake of the SEC settlement had found that only limited changes were necessary. Others apparently saw matters differently:
- In November 2010 FINRA fined Goldman $650,000 for failing to disclose that two of its registered representatives, including Fabrice Tourre, had been notified by the SEC that they were under investigation.
- In March 2011 the SEC announced that it was bringing insider trading charges against former Goldman director Rajat Gupta. He was accused of providing illegal tips, including one about Warren Buffet’s $5 billion investment in Goldman in 2008, to hedge fund manager Raj Rajaratnam. (Gupta was later convicted and sentenced to two years in prison.)
- In September 2011 the Federal Housing Finance Agency sued Goldman and 16 other financial institutions for violations of federal securities law in the sale of mortgaged-backed securities to Fannie Mae and Freddie Mac. In August 2014 the agency announced that Goldman would pay $3.15 billion to settle its role in the case (through bond repurchases).
- In March 2012 the Commodities Futures Trading Commission announced that Goldman would pay $7 million to settle charges that it failed to diligently supervise trading accounts in the period from May 2007 to December 2009. Later that year, the CFTC fined Goldman $1.5 million for failing to properly supervise a trader who fabricated large positions to try to cover up losses.
- Also in March 2012 a Goldman executive director named Greg Smith published an op-ed in the New York Times announcing his departure from what he called a “toxic and destructive” environment at the firm, saying he could “no longer in good conscience identify with what it stands for.”
- In April 2012 the SEC and FINRA fined Goldman $22 million for failing to prevent its employees from passing illegal stock tips to major customers.
- In July 2012 a federal appeals court rejected an effort by Goldman to overturn a $20.5 million arbitrator’s award to investors in the failed hedge fund Bayou Group who had accused Goldman of helping to perpetuate a Ponzi scheme.
- That same month, Goldman agreed to pay $26.6 million to settle a suit brought by the Public Employee’s Retirement System of Mississippi accusing it of defrauding investors in a 2006 offering of mortgage-backed securities.
- In September 2012 the SEC charged Goldman and one of its former investment bankers with “pay-to-play” violations involving undisclosed campaign contributions to then-Massachusetts state treasurer Timothy Cahill while he was a candidate for governor. Goldman settled its charges by agreeing to pay $12.1 million in disgorgement and penalties.
Some good news for Goldman came in August 2012, when the Justice Department decided it would not proceed with a criminal investigation of the firm’s actions during the financial crisis and the SEC dropped an investigation of the firm’s role in a $1.3 billion subprime mortgage deal.
In January 2013 the Federal Reserve annnounced that Goldman and Morgan Stanley would together pay $557 million to settle allegations of foreclosure abuses by their loan servicing operations (Goldman's share was $330 million).
In March 2013 the Fed cited "weaknesses" in Goldman's capital plan and ordered it to submit a new proposal.
In December 2014 FINRA fined Goldman $5 million as part of a case against ten investment banks for allowing their stock analysts to solicit business and offer favorable research coverage in connection with a planned initial public offering of Toys R Us in 2010.
In April 2016 the Justice Department announced that Goldman would pay $5.06 billion to settle allegations relating to the sale of toxic securities between 2005 and 2007.
In August 2016 the Federal Reserve imposed a $36.3 million penalty on Goldman in connection with a case involving a leak of confidential government information.
In December 2016 the Commodity Futures Trading Commission fined Goldman $120 million for attempted manipulation of the foreign exchange market.
After the attacks on the World Trade Center in September 2001, Goldman Sachs began moving jobs out of lower Manhattan, mainly to a tower across the Hudson River in Jersey City for which it got a $164 million subsidy. Yet by late 2003 things in the financial district had stabilized to the point that Goldman decided to build a new $2 billion headquarters across the street from Ground Zero. The firm told New York officials that it expected substantial subsidies, expressing particular interest in the triple-tax-exempt Liberty Bond program that Congress had created to help reinvigorate the city’s economy.
The original plan was for the company to make use of $1 billion in such bonds, but after Goldman suggested that it might cancel the project because of its unhappiness with a proposed traffic tunnel by the site, the deal was sweetened. Goldman was then granted $1.65 billion in Liberty Bonds (more than a fifth of the $8 billion in total bonds Congress authorized) plus a $25 million Community Development Block Grant and up to $150 million in new city and state tax credits.
In September 2010 three women who formerly worked at Goldman brought suit in federal court alleging rampant gender discrimination at the firm with regard to pay and promotion. The suit, which sought class action status, described lewd macho behavior by male Goldman employees. The firm sought to derail the litigation by arguing that the plaintiffs were subject to an arbitration clause in their employment agreements. A federal judge disagreed, and the case is pending.
Other Information Sources
Violation Tracker summary page
Watchdog Groups and Campaigns
Key Books and Reports
Cracks in the Pipeline: Restoring Efficiency to Wall Street and Value to Main Street by Wallace C. Turbeville (Demos, December 2012).
Goldman Sachs: The Culture of Success by Lisa Endlich (Knopf, 1999).
Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan (Doubleday, 2011).
Take and Give: The Crimes and Philanthropy of Bank of America, Wells Fargo, Goldman Sachs and JPMorgan Chase by Sean Dobson (National Committee for Responsive Philanthropy, January 2013).
The Partnership: The Making of Goldman Sachs by Charles D. Ellis (Penguin, 2008).
The Predators’ Creditors: How the Biggest Banks are Bankrolling the Payday Loan Industry by Kevin Connor and Matthew Skomarovsky (National People’s Action and Public Accountability Initiative, September 2010).
Why I Left Goldman Sachs: A Wall Street Story by Greg Smith (Grand Central Publishing, 2012).
Last updated February 4, 2017