Obliged: Goldman Sachs vs. The U.S. Securities and Exchange Commission
Synopsis of Case Study This case study highlights the public relations and external communications of financial services firm Goldman Sachs Group, Inc. prior to and amidst its 2010 lawsuit and eventual $550 million settlement with the U.S. Securities and Exchange Commission. Set against a backdrop of financial crisis, economic recession and increased government regulation of financial services firms, this case study underscores the importance of reputation management and the obligations of transparency in the face of public and legal scrutiny.
Case Study Summary Chronology Initial Setting / Backdrop A Financial Crisis for Financial Institutions (September 2008) Goldman Sachs announcement of record profits (June 2009) Announcement of Goldman s CSR Campaign 10,000 Small Business Initiative (November 2009) Financial Crisis Inquiry Commission Testimony by Goldman CEO and Chairman Lloyd Blankfein (January 2010) Case Study SEC Lawsuit Announced (April 16, 2010) Senate Permanent Subcommittee on Investigations Testimony (April 27, 2010) Goldman Sachs announces creation of Business Standards Committee (May 7, 2010) $550 million settlement with SEC, U.S. Senate passes Dodd-Frank financial reform bill (July 15, 2010)
A Financial Crisis for Financial Institutions 3/17/08 Fall of Bear Stearns, purchased by J.P. Morgan for $236 million 2008 9/15/08 Lehman Brothers files for bankruptcy, Bank of America buys Merrill Lynch 10/3/08 $700bn Federal bailout passed 3/16/09 AIG bonus scandal 2009 9/16/08 Government buys 80% of AIG 9/26/08 Washington Mutual largest bank failure in U.S. history 7/15/09 Goldman Sachs announces record bonuses and profit 12/11/08 Bernard Madoff arrested Figure by The Author Sources: The Wall Street Journal, The New York Times, Reuters, Bloomberg, www.sec.gov
A Brief Timeline End of the 1990s to 2005 Significant rise in house prices in the U.S. 2005-2006 Burst of housing bubble, home prices start falling, increase in home foreclosures
Housing Boom
Housing Bust
A Brief Timeline, Cont. 2008 September 8 Bailout of mortgage finance companies Fannie Mae and Freddie Mac September 15 Lehman Brothers files for bankruptcy October 3 President Bush signs the approximately $700 billion Troubled Asset Relief Program (TARP) in to law November 4 Barack Obama elected 44th U.S. President 2009 February 17 American Recovery and Reinvestment Act of 2009 ( Recovery Act, or, The Stimulus Package ) signed into law by President Obama May 20 Establishment of the Federal Crisis Inquiry Commission (FCIC) June Media reports that Goldman Sachs on pace to award record bonuses July 14 Goldman Sachs posts its richest quarterly profit in history, confirms earmarking of $11.4 billion in employee compensation November 17 Goldman Sachs initiates corporate social responsibility campaign, committing $500 million to its 10,000 Small Business Initiative (Sources: The New York Times, The Wall Street Journal, The Guardian, The Economist, Bloomberg, Reuters, www.sec.gov, www.gs.com, www.stlouisfed.org, www.treasury.gov)
History of U.S. Bailouts 1970 2008 -$347.5 billion 2008 -$1.7 trillion (Original Image Source: www. propublica.org; Aggregate financial information from www.cnn.com)
Goldman 2008 Compensation
A Brief Timeline, Cont. 2010 September 22 Goldman Sachs approved to become bank holding company, changing its primary regulator from the SEC to the Federal Reserve Board January 13 Goldman Sachs CEO Lloyd Blankfein testifies before the FCIC at its first hearing April 16 SEC files complaint against Goldman Sachs April 27 Goldman Sachs employees appear before US Senate Permanent Subcommittee on Investigations (PSI) hearing in Washington May 7 Goldman announces creation of Business Standards Committee to review business practices July 15, 2010 Goldman Sachs agrees to pay $550 Million to settle SEC charges related to ABACUS 2007-AC1 amounting to the largest fine levied on a Wall Street firm July 21, 2010 President signs financial reform bill Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank Act ) which creates new financial regulatory organizations and includes the Volcker Rule, a proposal to reform proprietary trading at brokerage firms (Sources: The New York Times, The Wall Street Journal, The Guardian, The Economist, Bloomberg, Reuters, www.sec.gov, www.gs.com, www.stlouisfed.org, www.treasury.gov)
A One Sentence News Release The SEC s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation. - Goldman Sachs news release dated April 16, 2010.
The U.S. Securities and Exchange Commission Primary regulator of securities firms in the U.S. The mission of the SEC is: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation Source: www.sec.gov, The investor s advocate, 2010.
Cartoon by Sean Delonas, New York Post, April 20, 2010.
Goldman Sachs Group, Inc. U.S. Government Publics SEC The Federal Reserve U.S. Congress U.S. Treasury Department Federal Crisis Inquiry Commission Protections Feedback Stakeholder Publics Tax-paying citizens Clients Shareholders / Investors The Economy Regulation (Securities Acts, SEC Enforcements) Legislation (Dodd-Frank Act, TARP) Figure by The Author
GS Revenue Mix
GS Stock Performance -Crisis
GS Stock Performance -Trial
Acknowledgements The Author wishes to thank Dr. Pierre Yared, Columbia University Business School Assistant Professor of Finance and economics for his guidance on this project obtained in a personal telephone interview with The Author on November 15, 2010.